Free transferability of shares is not negated by a reasonable director veto on registration under section 23A.

A clause empowering directors to refuse registration of a proposed share transfer did not, by itself, destroy the free transferability required under the Explanation to section 23A of the Indian Income-tax Act, 1922. The statutory test focused on whether shares were in fact freely transferable to members of the public, and a reasonable, fiduciary control exercised in the company's interests was not treated as an absolute or arbitrary restraint. In the absence of abuse of that power or other actual restrictions in the articles, the company remained one in which the public were substantially interested, and the issue was answered in favour of the assessee.

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Issues: Whether a public company whose articles empowered directors to refuse registration of any proposed transfer of shares could still be regarded as a company in which the public were substantially interested within the meaning of section 23A of the Indian Income-tax Act, 1922.

Analysis: The statutory test turned on whether the shares were in fact freely transferable to members of the public. The mere existence of an article authorising directors to decline registration did not, by itself, destroy free transferability. Such a power was treated as a fiduciary and reasonable control exercised in the interests of the company, not as an absolute or arbitrary restraint on transfer. In the absence of material showing abuse of the power or other articles imposing actual restrictions, the shares continued to possess the legal quality of free transferability contemplated by the Explanation to section 23A.

Conclusion: The presence of the transfer-restriction article did not prevent the assessee-company from being treated as one in which the public were substantially interested. The question was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: A clause conferring on directors a reasonable, fiduciary power to refuse registration of a transfer does not, by itself, negate the free transferability of shares for the purpose of section 23A of the Indian Income-tax Act, 1922.

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