Free transferability of shares under section 23A depends on actual restriction, not merely a refusal clause in the articles.

A transfer restriction clause in company articles does not, by itself, destroy the statutory concept of free transferability of shares for section 23A purposes unless there is evidence that the power to refuse registration was actually exercised so as to eliminate genuine transferability. On the facts discussed, there was no material showing practical restriction of transfers or cogent proof that a concerted group controlled the company. Mere holding of more than 75% of the shares by two public companies in which the public were substantially interested was therefore insufficient, without more, to attract section 23A.

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Issues: Whether section 23A of the Indian Income-tax Act, 1922 was rightly invoked against the assessee-company on the footing that its shares were not freely transferable and that it was not a company in which the public were substantially interested.

Analysis: The relevant inquiry was whether the mere existence of an articles clause empowering directors to refuse registration of transfers without assigning reasons was enough to destroy free transferability of shares. The Court followed the later view that such a clause, by itself, does not affect the statutory conception of free transferability unless there is evidence that the power was actually exercised so as to eliminate that element. On the facts, there was no material to show that the directors had in practice restricted transfers. The Court also found no cogent material to support the Revenue's contention that a group acting in concert controlled the assessee-company. The holding of more than 75 per cent of the shares by two public companies in which the public were substantially interested was therefore insufficient, by itself, to attract section 23A.

Conclusion: Section 23A was not rightly invoked and the assessee-company was entitled to succeed.

Ratio Decidendi: A transfer restriction clause in the articles does not negate free transferability of shares for section 23A unless it is shown that the power was actually used to eliminate genuine transferability; mere substantial shareholding by public companies is insufficient to attract the provision in the absence of material showing control by a concerted group.

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