1. These als have been filed by Hyderabad Steel Wire Products of Hyderabad against the common order of the Commissioner (Appeals) for the assessment years 1979-80 and 1980-81.
2. The assessee is a company in liquidation and had income of Rs. 1,090 for the assessment year 1979-80 and Rs. 2,240 for the assessment year 1980-81 as income from other sources. There is no dispute about the extent of income liable to be taxed. The dispute relates to the rate of tax to be applied. The assessee-company was a company, which was treated as a company in which public were substantially interested for the purposes of the rate to be applied. However, the ITO took the view that it should be treated as one in which public are not substantially interested, following the reasoning for the assessment year 1978-79. It appears that the assessee had acquiesced to such treatment for the assessment year 1978-79 in view of smallness of the tax effect. For these years, the assessee contended that such treatment was wrong. The first appellate authority found that the assessee-company, being under voluntary liquidation, was governed by Section 536 of the Companies Act, 1956, which had laid down that the transfer of shares made after the commencement of the winding up, will be void unless such transfer is effected with the sanction of the liquidator. This, according to the first appellate authority, made the company one whose shares were not freely transferable. The first appellate authority had made a grievance of the fact that the assessee had not produced memorandum and articles of association and the winding up order in the case of the company and that such non-production justified the treatment accorded. The assessee is in second appeal. It is claimed that memorandum and articles of association were matters of record and would have been produced, if given time. He filed copies of memorandum and articles of association.
The relevant articles are the same as for public companies, no doubt reserving the usual rights of the board of directors to decline registration of any transfer especially those shares in which the company had a lien or where any member executing the transfer is either alone or jointly with any other person or persons indebted to the company or where part of the share capital remains unpaid or the transfer does not meet the approval of the board. Clause 30 incorporates this provision, which is a usual one. The learned representative pointed out to the list of shareholders as on the date of liquidation, which had not undergone any change. There are as many as 320 shareholders and the shares are very widely held. It was for this reason that it was treated as a company in which public were substantially interested prior to liquidation. He pointed out to the decisions of the Supreme Court in Shree Krishna Agency Ltd. v. CIT  82 ITR 372 and Pilani Investment Corporation Ltd. v. CIT  89 ITR 53. In both these cases, the above restriction was not considered to be an impediment to the inference that the shares are freely transferable unless there was evidence to show that they were actually not so freely transferable. He pointed out that there was no such evidence in the assessee's case. Section 518 of the Companies Act only ensures a similar power on behalf of the liquidator so that the obligation of the contributories (shareholders) does not get defeated so as to prejudice the rights of the creditors and other shareholders.
It was contended that the liquidator had a fiduciary responsibility and that he could not arbitrarily use the powers to reject bonafide transfers. It was contended that there was no case for denying the assessee's claim.
3. The learned departmental representative pointed out that it cannot be assumed that the decision cited by the learned representative would altogether ignore the restrictive nature of the articles in all cases.
He claimed that such power under the articles should be read with the statutory power under Section 536, which provided clearly that any transfer, without the sanction of the liquidator, would altogether be void. The statutory bar, according to him, could not be ignored. He also referred to the decision of the Bombay High Court in the case of CIT v. Indian Hotels Co. Ltd.  141 ITR 343, where it was held that even a public trustee cannot be treated as a member of the public and that the shares held by such public trustee has to be treated as shares held by an individual for reckoning the extent of control. This decision, according to him, supported his contention that liquidator should be considered to be a single individual controlling the affairs of the company. He argued that even by this test alone, the assessee is bound to fail. He further stressed the point that there was only a single liquidator in the assessee's case.
4. We have carefully considered the facts as well as the arguments. The assessee is a company where the shares are very widely held. It is for this reason that it is a public company in which public are substantially interested. Even a cursory look at the list of shareholders would show that the assessee would be entitled to the claim with reference to such list. The revenue would, however, like to canvass that in view of article 30, giving the board of directors an absolute and uncontrolled discretion, to refuse any transfer of shares, the shares could not be held to be 'freely transferable by the holders to the other members of the public' within the meaning of Section 2(18)(b)(B)(ii) of the Income-tax Act, 1961 ('the Act'). The impugned article 30 reads as under : The Board may, at their own absolute and uncontrolled discretion, decline to register or acknowledge any transfer of shares and in particular may so decline in any case in which the company has a lien upon the shares or any of them, or whilst any member executing the transfer is, either alone or jointly with any other person or persons, indebted to the company on any account whatsoever, or whilst any moneys in respect of the shares desired to be transferred or any of them remain unpaid or unless the transferee is approved by the Board. The registration of a transfer shall be conclusive evidence of the approval by the Directors of the transferee.
However, as observed by the Supreme Court on more than one occasion, such clause is normal in the articles of association of any public company and is not intended to justify any arbitrary action on the part of the board of directors. The intention is to keep out shareholders, who are undesirable in the interest of the company and the existing shareholders. In the case of Shree Krishna Agency Ltd. (supra), there was a similar 'absolute and uncontrolled discretion and without assigning any reason' to decline any proposed transfer of shares.
Similarly, in the case of Pilani Investment Corpn. Ltd. (supra) also, there could be refusal of transfer, 'without assigning any reason' by the board of directors. In both these cases, it was pointed out that the power conferred by such articles was of fiduciary nature and had to be exercised by the directors in the best interest of the company for preventing any undesirable person becoming a member to the prejudice of the company. It was a power to be reasonably exercised for the protection of the interests of the company. It was a normal and common feature of such limited companies and the existence of this provision by itself cannot vitiate the claim of transfer of any shares unless there is evidence to show that the directors had acted 'in concert' and had in fact eliminated 'the element of transferability of shares'. In view of the two Supreme Court decisions, it is not necessary to discuss the matter further. The impugned article, with reference to which the learned departmental representative tried to justify the decision of the authorities below, cannot support the revenue's case. The learned departmental representative, however, claimed that the above article has to be read along with Section 536. The company is under voluntary liquidation. Section 536(1) which is as under would, therefore, apply : In the case of a voluntary winding up, any transfer of shares in the company, not being a transfer made to or with the sanction of the liquidator and any alteration in the status of the members of the company, made after the commencement of the winding up, shall be void.
The object of the above provision is to prevent improper disposition of liability in respect of partly paid-up shares of contributories, so that the assets otherwise available for distribution do not get improperly reduced. The object is not to ignore bona fide transfers, where the rights of the creditors other than the shareholders do not get affected. It is stated on behalf of the assessee that there had been no transfers subsequent to liquidation in these years. What ordinarily happens is that the list of contributories gets frozen subject to authorised alteration. If the company was a public company both under the Companies Act and for income-tax purposes prior to liquidation, it stands to reason that it would continue to be so unless of course, the liquidator had used his power to recognise the transfers which in effect made the list of shareholders into a different one attracting the application of Section 2(18)(b)(B)(iii), resulting in more than 50 per cent of the voting power being controlled by 5 or less persons. In absence of such position, the stand taken by the authorities is academic especially because it is not the case that there was any transfer, whether sanctioned or not sanctioned, by the liquidator.
5. As for the argument that the fact that the liquidator is in charge of the company's affairs and, therefore, should be taken to be a single person controlling the affairs of the company ; this argument, in our opinion, is too naive. The liquidator is only a holder of office. The number of liquidators makes no difference to this position as each liquidator may have different functions entrusted to them even when there is more than one liquidator. Hence, the number of liquidators is absolutely of no relevance for considering the applicability of provisions of Clause (18) of Section 2 of the Act defining a company in which public are substantially interested. The position of a liquidator was explained by the Supreme Court in the case of Jayantilal & Co. v.Gupta, ITO  1 Comp. LJ 230 (SC) in the following words : The property of the company does not vest in the liquidator ; it continues to remain vested in the company. On the appointment of a liquidator, all the powers of the Board of Directors and of the managing and wholetime directors, managing agents, secretaries and treasurers cease (section 491) and the liquidator may exercise the powers mentioned in Section 512, including the power to do such things, as may be necessary for winding up the affairs of the company and distributing its assets. The liquidator appointed in a members' winding up is merely an agent of the company to administer the property of the company for purposes prescribed by the statute.
In distributing the assets including accumulated profits, the liquidator acts merely as an agent or administrator for and on behalf of the company.
The liquidator merely exercises the power of the board of directors and secretaries and treasurers and other incidental powers necessary for winding up of the company besides those relating to winding up under the Companies Act. What is superseded is the management of the company but not the ownership of the shares. In fact, Section 496 of the Companies Act makes it clear that the liquidator is under obligation to call general meeting as at the end of each year within three months of such end and account his acts and dealings before such meeting. In fact, if he fails to do so, he is liable for a fine under Sub-section (2) of Section 496. Final accounts have also to be presented to a general meeting under Section 497 of the Companies Act. Hence, there is no justification for the confusion as between the position of the shareholders and the liquidator.
The learned departmental representative placed great reliance on the decision of the Bombay High Court in the case of Indian Hotels Ltd. (supra) for the proposition that even a public trustee is treated as a single shareholder. However, the facts, in our opinion, are clearly distinguishable. In that case, the public trustee held the shares and was, in law, owner thereof. Liquidator is a mere holder of office, being accountable to the shareholders in a general meeting. It cannot be said that he is a single individual controlling the affairs of the company merely because he happens to administer such affairs on behalf of the shareholders and creditors.
6. In the result, the appeals are allowed. The assessee will be entitled to be taxed as a company in which public are substantially interested.