Shree Krishna Agency Ltd. Vs.
Commissioner of Income Tax Central, Calcutta  INSC 212 (24 August 1971)
CITATION: 1972 AIR 156 1972 SCR (1) 465 1971
SCC (3) 526
CITATOR INFO :
R 1973 SC1030 (5)
Income-tax Act, 1922, s. 23A(9)-Explanation
(1) cl. (ii)Free--transferability of shares--Directors having absolute
discretion to refuse to register transfer of shares without giving any
reasons-Shares whether freely transferable-Public whether substantially
interested in company.
The assessee was a public limited company.,
Under Art. 37 of its. Articles of Association the Directors could at any time
in their discretion -and without assigning any reason decline to register any
proposed transfer -of shares. The question in income-tax proceedings relating
to the assessment years 1952-53 and 1954-55 was whether on a true
interpretation of Art. 37 the assessee company could be regarded as one in
which the public -were substantially interested within the meaning of the third
proviso to S. 23A(1) of the Income-tax Act, 1922. In reference the High Court
answered the question in favour of the revenue on the view that the shares of
the company were not freely transferable and therefore it was not a company in
which the public were substantially interested. In the assessee's appeal by
HELD : Article 37 could not by any stretch of
reasoning be regarded by itself to be a restriction on the transfer of shares
by one shareholder to another. Free transferability of shares is a normal and
common feature ,of limited companies.. Indeed there would hardly be any public
company in the memorandum of articles of which an article similar to Art. 37.
will not be found. This article appears even in the standard Articles of
Association prescribed under the Companies Act itself. The purpose is ,only to
give power to the Directors for declining to register the transfer -of a share
when the paramount interest of the company so require.
There may be cases where it can be shown that
the Directors have been exercising -the power very freely and have virtually
eliminated the element of free -transferability.
In such cases it may be possible to hold that
in fact the shares were not freely transferable. But in -the present case there
was no evidence of the Directors having acted in the aforesaid manner nor was
-there any restriction in the other Articles of Association interfering with
-the free transfer of shares by one shareholder to another., The High Court was
therefore in error in holding that the mere existence of an article like Art.
37 would affect the free transferability of the shares within the meaning of
the Explanation (1) to s. 23A(9) of the Act. [372 C-F] East India Corporation
Ltd. v. Commissioner of income-tax, Mad?-as, 61 I.T.R. 16 and Raghuvanshi Mills
Ltd. v. Commissioner of Income-tax, Bombay, 74 I.T.R. 823, approved.
Commissioner of Income-tax, West Bengal v.
Tona litte Co. Ltd. 48 -I.T.R. 902, disapproved.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 1837 and 1838 of 1968.
369 Appeals from the judgment and order dated
February 10, 1965 and July 17, 1967 of the Calcutta High Court in Income-tax
Reference Nos. 274 of 1961 and 114 of 1963 respectively.
D. Pal, R. K. Choudhry, N. R. Khaitan,
Krishna Sen and B. P. Maheshwari, for the appellant (in both the appeals).
B. Sen, R. N. Sachthey and B. D. Sharma, for
the respondent (in-both the appeals).
The Judgment of the Court was delivered by
Grover, J. These appeals by certificate from a judgment of the Calcutta High
Court arise out of Income Tax References in which the main point involved was
whether the assessee company could be regarded as one in which the public are
substantially interested within the meaning of the Explanation in s. 23A of the
Indian Income Tax Act,1922, hereinafter called the "Act".
The appeals relate to the assessment years
1952-53 and 1954
55. The assessee is a public company
incorporated under the Indian Companies Act, 1913. Article 37 of its Articles
of' Association provided as follows "The Directors may at any time in
their absolute and uncontrolled discretion and without assigning any reason
decline to register any proposed transfer of shares." The Income Tax
Officer held that the assessee was a company in which the public were not substantially
interested within the meaning of the Explanation in s. 23A of the Act.
Accordingly he applied the provisions of that
section. The assessee appealed to, the Appellate Assistant Commissioner.
The appeal relating to the assessment year
1952-53 was dismissed but with regard to the subsequent year it was alqowed.
The Appellate Tribunal upheld the contention that Article 37 of its Articles of
Association did not operate as a bar to the free transferability of the shares
and therefore it was a company in which the public were substantially
interested within the meaning of the Explanation in s. 23A of the Act.
Thereupon the Tribunal was moved by the Commissioner of Income tax for stating
the case and referring the following question of law which was referred by it
to the High Court in the case relating to the assessment year 1952-53 :
"Whether on a true interpretation of
Article 37 of the Articles of Association, the assessee Company can be regarded
as one in which the public are substantially interested within the meaning of
the third proviso to section 23A(1)".
3 7 0 A similar question was referred in the
case relating to the assessment year 1954-55. The High Court following a
judgment of the same court in Commissioner of Income tax, West Bengal v. Tona
-Jute Co. Ltd.,(") answered the questions referred against the assessee
and in favour of the Revenue. In that case the Calcutta High Court had
expressed the view that a public company whose Directors had absolute
discretion to refuse to register the transfer of any share to any person whom
it shall in their opinion be undesirable in the interest of the company to
admit to membership and were not obliged to give any reason for refusal to
register was not -a company the shares of which were freely transferable to
other members of the public, within the meaning of the Explanation in s. 23A of
Section 23A of the Act confers power to
assess companies to super tax on undistributed income in certain cases. Subsection
(9) inter alia provides that nothing contained in the section shall :apply to
any company in which the public are substantially interested. Explanation (1)
which was so renumbered by s. 7 of the Finance Act of 1957 to the extent it is
material is as follows :
"For the purposes of this section, a
company shall be deemed to be a company in which the public are substantially
(b) if it is not a private company as defined
in the Indian Companies Act, 1913, (VII of 1913), and
(ii) the said shares were at any time during
the previous year the subject of dealing in any recognised stock exchange in
India or were freely transferable by the holder to other members of the public;
The Calcutta High Court referred to the
relevant provisions of the Indian Companies Act 1913 according to which unless
the Article provided otherwise the shareholder had a free right to transfer his
shares to whomsoever he liked. But it was considered that where the Articles
contained a power under which -the Directors could decline to register any
transfer of shares the Tight of free transfer was cut down by that Article and
this affected -the question of free transferability of the shares. Moreover the
(1) 48 I.T.R. 902.
371 transfer of shares was not complete until
the registration of the name of the transferee and if such a registration could
not be insisted on as a matter of right it could not be said that the shares
were freely transferable. The Madras High Court in East India Corporation Ltd.
v. Commissioner of Income-tax, Madras(1) and the Bombay High Court in
Raghuvanshi Mills Ltd., v. Commissioner of Incometax, Bombay(1) took the
contrary view and dissented from the opinion expressed in the Calcutta case
that in the presence of an Article similar to Article 37 of the Articles of
Association of the assessee the shares would not be freely transferable within
the meaning of clause (ii) to Explanation 1 in s. 23A (9) of the Act. It may be
mentioned that before its amendment, by the Finance Act 1955 the corresponding
provision appeared in the Explanation in s. 23A(1) after,-the third proviso.
But instead of the word "were" the word "are" was employed.
The question, therefore, which has to be examined is whether the shares could
be regarded as freely transferable to other members of the public, In our
opinion the following observations in the East India Corporation case represent
the correct view about the meaning of the word "transferable" :
" "Transferable", ex facie, is
not to be equated to "transferred". The word imports a quality, a
legal effect arising out of or inherent in the character and nature of the
shares themselves. This quality does not stand by itself, for the section says
"are in fact freely transferable". We have to give effect to each of
these words, and if we did so, transferability is qualified by the fact which
in the context, to out minds, means a factual tendency which is unrestricted
and which ensures transferability. In other words, we understand by the words
"are in fact freely transferable" not that there should necessarily
be actual transfers of shares; but a factual tendency towards free transfer of
shares, subject, of course, to reasonable restrictions by holders to other
members of the public." The Directors have certainly been given a
discretion by Article 37 to decline to register any proposed transfer of shares
but that does not mean that the shares cease to be transferable. The said
Article does not confer any uncontrolled or unrestricted discretion upon the
Directors to refuse to register the transfer of shares in a given case. In
other words the Directors cannot act arbitrarily or capriciously. It is well
known that the power conferred by such an. Article is of a fiduciary nature which
has to be exercised by the (1) 61 I.T.R. 16.
(2) 74 I.T.R. 823.
3 72 Directors in the best interests of the
company for preventing any undesirable person becoming a member if that is
likely to be prejudicial to the company. It is a power which has to be reasonably
exercised for protecting the interests of the company. It cannot be assumed
that the discretion conferred on the Directors will be abused for ulterior
purposes. The discretion which has been conferred for being exercised in the
interest of the.company cannot take away the tendency of the free
transferability of the shares in the absence of cogent material or other
factors from which it can be inferred that the shares were not capable of being
freely transferred. Article 37 can by no stretch of reasoning be regarded by
itself to be a restriction on the transfer of shares by one shareholder to
another. Free transferability of shares is a normal and common feature of
limited companies. Indeed there would hardly be any public company in the
memorandum of articles of which an article similar to Article 37 will not be
This article appears even in the standard
Articles of Association prescribed under the Companies Act itself. The
purposes, as has been noticed before, is only to give power to the Directors
for declining to register the transfer of a share when the paramount interests
of the company so require. There may be cases where it can be shown that the
Directors have been exercising that power very freely and have virtually
eliminated the; element of free transferability. In such cases it may be
possible to hold that in fact the shares were not freely transferable. But in
the Pr--sent case there is no evidence of the Directors having acted in the
aforesaid manner nor is there any restriction in the other Articles of
Association interfering with the free transfer of shares by one shareholder to
another. We are unable, therefore, to uphold the judgment of the Calcutta High
Court that the mere existence of an article like Article 37 would affect the
free transferability of the shares within the meaning of the Explanation.
In the result the appeals are allowed and the
decision of the High Court is set aside. The question referred in each case is
answered in favour of the assessee and against the Revenue. The assessee shall
be entitled to one set of costs in this Court.
G.C. Appeal allowed.