Free transferability of shares depends on overall factual transferability, and appellate power cannot extend to shareholder reassessment directions.

For section 23-A, the test of whether shares are in fact freely transferable turns on the total factual transferability of the shares, not merely on actual transfers within the relevant year or the presence of a director-controlled transfer restriction; on that approach, the issue was decided for the assessee. The Tribunal also lacked jurisdiction to direct reassessment of shareholders under section 34(3), because that provision only lifts the limitation period and does not enlarge appellate power beyond matters arising in the appeal; that question too was answered for the assessee.

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Issues: (i) Whether, on a proper construction of the articles of association and the surrounding facts, the shares of the company were in fact freely transferable by the holders to other members of the public so as to avoid an order under section 23-A of the Income-tax Act, 1922; (ii) Whether the Tribunal was legally competent to issue a direction under section 34(3) to reassess shareholders as a consequence of the section 23-A proceedings.

Issue (i): Whether, on a proper construction of the articles of association and the surrounding facts, the shares of the company were in fact freely transferable by the holders to other members of the public so as to avoid an order under section 23-A of the Income-tax Act, 1922.

Analysis: The expression "in fact freely transferable" was construed as referring to the factual transferability of shares and not merely to actual transfers within the relevant previous year. Transfers before and after that period could be relevant as evidence. The existence of a clause conferring discretion on the directors to refuse transfer was not by itself conclusive that the shares were not freely transferable. The proper inquiry was whether, on the totality of facts, there was a real tendency for shares to be transferred freely among members of the public, subject only to reasonable restrictions.

Conclusion: The question had to be reconsidered on the facts, and the Tribunal's view that the company was not shown to be one in which the public were substantially interested could not stand on the footing adopted by it; the issue was answered in favour of the assessee.

Issue (ii): Whether the Tribunal was legally competent to issue a direction under section 34(3) to reassess shareholders as a consequence of the section 23-A proceedings.

Analysis: The second proviso to section 34(3) was held to operate only to lift the time-limit in appropriate cases and not to enlarge the Tribunal's jurisdiction. The Tribunal's appellate power was confined by section 33(4) to matters arising in the appeal, and it could not travel beyond the subject-matter before it to issue directions touching shareholder assessments that were not themselves in appeal.

Conclusion: The direction under section 34(3) was without jurisdiction and was answered in favour of the assessee.

Final Conclusion: Both referred questions were decided in favour of the assessee, and the departmental contention failed in full.

Ratio Decidendi: For section 23-A, the test of whether shares are in fact freely transferable depends on the overall factual transferability of the shares, not merely on actual transfers within the relevant year or on the presence of a transfer-control clause; and a Tribunal cannot use section 34(3) to enlarge its appellate jurisdiction beyond the subject-matter of the appeal.

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