Free transferability of shares during the year satisfied the public-interest test; continuous transferability was unnecessary under section 23A.

Shares carrying at least 25% of the voting power satisfied the statutory test if they were freely transferable at any time during the previous year; continuous free transferability throughout the year was not required, and actual transfers were unnecessary. The phrase "in the course of such previous year" was treated as qualifying the stock exchange limb, not the free-transferability limb. On that construction, the company met the Explanation to section 23A(1) of the Indian Income-tax Act, 1922 and was treated as one in which the public were substantially interested, so section 23A did not apply.

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Issues: Whether shares carrying not less than twenty-five per cent of the voting power had to be freely transferable throughout the previous year, or whether free transferability at any time during the previous year was sufficient, for the company to be treated as one in which the public were substantially interested under the Explanation to section 23A(1) of the Indian Income-tax Act, 1922.

Analysis: The Explanation prescribed two distinct criteria: first, that shares carrying not less than twenty-five per cent of the voting power be allotted unconditionally to, or acquired unconditionally by, and beneficially held at the end of the previous year by the public; and secondly, that such shares either be dealt with on a stock exchange during the previous year or be in fact freely transferable by the holders to other members of the public. The phrase "in the course of such previous year" was held to qualify only the stock exchange dealings limb and not the free transferability limb. Even if the phrase were assumed to apply to both limbs, it meant at any time during the previous year and not throughout the previous year. Since the restriction on transfer was removed before the close of the previous year, the shares acquired the attribute of free transferability during that year. Actual transfer was not required to establish transferability.

Conclusion: The company satisfied the Explanation to section 23A(1) and was a company in which the public were substantially interested; section 23A was not attracted. The question was answered in favour of the assessee.

Final Conclusion: Free transferability of the relevant shares at any time during the previous year is sufficient to satisfy the statutory test, and the revenue could not invoke section 23A against the company on the facts found.

Ratio Decidendi: For the purposes of the Explanation to section 23A(1), the requirement that shares be freely transferable is satisfied if that attribute exists at any time during the previous year; it need not subsist throughout the year, and actual transfer is unnecessary.

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