Law:

Section:

Section 104 of the Income-tax Act, 1961 [Corresponding to section 23A of the Indian Income-tax Act, 1922] - Additional income tax on undistributed profits of certain company - Assessment year 1954-55 - Whether in testing whether a company is one in which public are substantially interested, transfers of shares even subsequent to relevant previous year could be taken into account like transfer of shares during and prior to that period - Held, yes - Whether where on proper construction of articles of association of assessee-company, it was found that shares were in fact freely transferable by holders to other members of public so as not to become liable to order under section 23A of 1922 Act, direction issued by Tribunal under section 34(3) of 1922 Act to reassess shareholders as a consequence of proceedings under section 23A of 1922 Act was invalid and liable to be set aside - Held, yes FACTS The assessee, a private limited company was converted into a public limited company on 25-8-1948. For the assessment year 1954-55, the ITO found that it was not a company in which the public were substantially interested and directed that the undistributed portion of the assessable income of the assessee during the previous year as computed should be deemed to have been distributed as dividends among the shareholders. On appeal AAC reversed the order by holding that as one of the shareholders of the company, was a company in which the public were substantially interested, it should be held that more than 25 per cent, of the voting power was held by that company. He further held that clause 13 of the articles of the assessee which vested in the directors discretion in the matter of transfer of shares and was but a common feature found in the articles of what are undoubtedly public limited companies in which the public are substantially interested, did not justify the ITO's finding that transfer of shares was severely restricted, and, therefore, the shares of the assessee-company were not in fact freely transferable. The AAC opined that the general restriction found in clause 13 was only in the nature of a 'de jure' restriction and could not disentitle the assessee to urge…

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