Public shareholding and free transferability determine when section 23A does not apply to a company.

A company falls outside section 23A of the Indian Income-tax Act, 1922 where the public beneficially holds more than 25% of the voting power and the shares are in fact freely transferable. The relevant test examines both public shareholding and the absence of any general restraint on transferability. Article 55, which merely empowered directors to refuse registration in special cases, was treated as a limited protective power customary in public companies and not a general restriction. Actual dealings also showed that transfers were normally effected. On that basis, the company was treated as one in which the public were substantially interested, and section 23A did not apply.

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Issues: Whether the assessee-company was a company in which the public were substantially interested so as to fall outside the operation of section 23A of the Indian Income-tax Act, 1922, having regard to the extent of public shareholding and the free transferability of its shares.

Analysis: The applicable test was whether more than 25 per cent of the voting power was unconditionally and beneficially held by the public and whether the shares were in fact freely transferable by the holders to other members of the public. The earlier finding that the relevant shares held by the controlling group and their relatives were not all to be excluded had already established that the public held more than the statutory minimum. On the further issue, article 55 of the articles of association did not impose a general restriction on transferability. It merely empowered the directors to refuse registration in special cases, a power standard in public companies and not enough by itself to destroy free transferability. The actual course of dealings also showed that transfers had been freely effected except in rare exceptional cases.

Conclusion: The assessee-company satisfied the statutory test of a company in which the public were substantially interested, and section 23A did not apply. The answer was in the negative and against the Revenue.

Ratio Decidendi: A public company is outside section 23A where the public beneficially holds the requisite voting power and the articles contain no general restraint on transferability, while a limited directorial power to refuse registration in exceptional cases does not by itself negate free transferability.

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