SHREE KRISHNA AGENCY LTD. versus COMMISSIONER OF INCOME TAX CENTRAL, CALCUTTA

Citation: [1972] 1 S.C.R. 368 · Decided: 24-08-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Appeal(s) allowed

Judgment (excerpt)

368 
SHREE KRISHNA AGENCY LTD. 
v. 
COMMISSIONER OF INCOME TAX CENTRAL, CALCUTTA 
August 24, 1971 
[K. S. HEGDE AND A. N. GROVER, JJ.] 
Income-tax Act, 1922, s. 23A(9')-Exp/nnation (!) 
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 
s:1bstantially 
interestea 
in 
company. 
The assessee was a public limited company. 
Under Art. 3 7 of its 
Articles of i\ssociation the Directors could at any time in their disc.:retlon 
and without assigning any reason decline to register any proposed transfer 
-of shares. 
The question in Income-tax proceedings relating to the assess-
ment years 1952-53 and 1954-55 was whether on a true interpretation of 
Art. 3 7 the assessee company could be regarde.d as one in which the public 
were substantially interested within the meaning of the third proviso to 
s. 23A(l) of the Income-tax Act, 1922. In reference the High Court 
ans\.\'·ered tihe question in favour of the revenue Oll 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'B appeal by special leave, 
HELD : Artide 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 nor1nal 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 fougd. 
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 tran•fer 
,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 fre_e transferability of the shares within the mean~ 
ing of the Explanation (1) to s. 23A(9) of the Act. [372 C-F] 
East India Corporation Ltd. v. Commissioner of Income-tax, 
Madras, 
61 I.T.R. 16 and Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, 
Bombay, 74 l.T.R. 823, approved. 
Commissioner of lncom•-tax, West Bengal v. Tona lute Co. 
Ltd. 48 
A 
B 
c 
D 
E 
1. T. R. 902, disapproved. 
H 
CIVIL APPELLATE JURISDICTION : 
Civil Appeals Nos. 1837 
and 1838 of 1968. 
A 
B 
c 
D 
E 
SHREE KRISHNA AGENCY v. C.I.T. (Grover, J.) 
369 
Appeals from the judgment and order dated February 10, 196S 
and July 17, 1967 of the Calcutta High Court in !ncome-tax 
Reference Nos. 274 of 1961 and 114 of 1963 respectively. 
D. Pal, R. K. Chaudhry, N. R. Khaitan, Krishna Sen and 
B. P. Maheshwari, for the appellant (m 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 ?f 
the Calcutta High Court arise out of Income Tax References m 
which the main point involved was whether the assessee company 
could be regarded as one in which the public ~re substantially 
interested within the meaning of the Explanat10n m 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 mean-
ing of the Explanation in s. 23A of the Act. 
Accordingly he 

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