Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 12274 of 2016, Judgment Date: Jan 04, 2017


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL NO. 12274 OF 2016
                 (ARISING OUT OF SLP (C) NO. 22059 OF 2015)

GOPAL AND SONS (HUF)                                   .....APPELLANT(S) 
CIT KOLKATA-XI                                        .....RESPONDENT(S)           

                               J U D G M E N T


                 The appellant/assessee, in the instant appeal,  has  raised
following question of law for determination:
“Whether in view of the settled principle that HUF cannot  be  a  registered
shareholder in a company and hence could not have been both  registered  and
beneficial shareholder, loan/advances received by HUF  could  be  deemed  as
dividend within the meaning of Section 2(22)(e) of the Income Tax Act,  1961
especially in view of the term “concern” as defined in the Section itself?”

The aforesaid question has arisen, which pertains to Assessment  Year  2006-
07, under the following circumstances:

The assessee herein had filed the return in respect of the  said  Assessment
Year declaring his total income at Rs. 1,62,745/-.   The  Assessing  Officer
(for short, 'AO') carried out  the  assessment  resulting  into  passing  of
assessment orders dated 31st December, 2008 whereby the net  income  of  the
assessee  was  calculated  at  Rs.  1,30,31,280/-.   Obviously,  number   of
additions were made which contributed to the enhancement of  income  to  the
aforesaid figure, in  contrast  with  the  paltry  income  declared  by  the
assessee.  Here, we are concerned only with one addition which was  made  on
account of deemed dividend within the meaning of  Section  2(22)(e)  of  the
Income Tax Act, 1961 (hereinafter referred to as the 'Act').  Suffice it  to
state that  other  additions  were  deleted  by  the  Income  Tax  Appellate
Tribunal (ITAT) and the  position  affirmed  by  the  High  Court,  but  the
Revenue has not challenged those deletions.

Insofar as addition under Section 2(22)(e) of the Act is  concerned,  a  sum
of Rs. 1,20,10,988/- was added on this account.  The  assessee  is  a  Hindu
Undivided Family (HUF).  During the previous year to  the  Assessment  Year,
the assessee had received certain advances from one  M/s.  G.S.  Fertilizers
(P) Ltd. (hereinafter referred to as the 'Company').   The  Company  is  the
manufacturer and distributor of various grades of NPK Fertilizers and  other
agricultural inputs. In the audit report and annual return for the  relevant
period, which was filed by it before the Registrar of  Companies  (ROC),  it
was found that the subscribed share capital of  the  said  Company  was  Rs.
1,05,75,000/- (i.e., 10,57,500 shares of  Rs.  10/-  each).   Out  of  this,
3,92,500 number of shares were subscribed by the assessee which  represented
37.12% of the total shareholding of the Company.  From  this  fact,  the  AO
concluded that the assessee was  both  the  registered  shareholder  of  the
Company and also the beneficial owner of shares,  as  it  was  holding  more
than 10% of voting power.  On this basis, after noticing  that  the  audited
accounts of the Company was  showing  a  balance  of  Rs.  1,20,10,988/-  as
“Reserve & Surplus” as on 31st March, 2006, this amount was included in  the
income of the assessee as deemed dividend.

In the appeal filed by the assessee, the aforesaid addition was affirmed  by
the Commissioner of Income Tax  (Appeals)  (for  short  'CIT(A)').   Though,
this addition was questioned by the assessee on various  grounds,  we  would
take note of the submission which is advanced before us as the challenge  is
confined only on the basis of said  submission.   The  assessee  had  argued
that being a  HUF,  it  was  neither  the  beneficial  shareholder  nor  the
registered shareholder.   It was further argued that the Company had  issued
shares in the name of Shri Gopal Kumar Sanei, Karta of the HUF, and  not  in
the name of the assessee/HUF as shares could not be directly allotted  to  a
HUF.    On that basis, it was submitted that provisions of Section  2(22)(e)
of the Act cannot be attracted.

      We would like to reproduce that portion of  Section  2(22)(e)  of  the
Act at this stage, which is relevant for the instant appeal:

“S.2(22) of the Income Tax:- Dividend includes:
xxx   xxx   xxx
(e)   any payment by a company, not being a company in which the public  are
substantially interested, of any sum (whether as representing a part of  the
assets of the company or otherwise) [made after the 31st day of  May,  1987,
by way of advance or loan to a  shareholder,  being  a  person  who  is  the
beneficial owner of shares (not being shares entitled to  a  fixed  rate  of
dividend whether with or without a right to participate in profits)  holding
not less than ten per cent of the voting power, or to any concern  in  which
such shareholder is a member or a partner and in which he has a  substantial
interest (hereafter in this clause referred to as  the  said  concern)]   or
any payment by any such company on behalf, or for  the  individual  benefit,
of any such shareholder, to the extent to which the company in  either  case
possesses accumulated profits;

but “dividend” does not include—

xxx   xxx   xxx

Explanation 3.— For the purposes of this clause,

(a)   “concern” means a Hindu undivided family, or a firm or an  association
of persons or a body of individuals or a company;

(b)   a person shall be deemed to have a substantial interest in a  concern,
other than a company, if he is,  at  any  time  during  the  previous  year,
beneficially entitled to not less than twenty per  cent  of  the  income  of
such concern.”

Taking note of the aforesaid provision, the CIT(A)  rejected  the  aforesaid
contention of the assessee.  The CIT(A) found  that  examination  of  annual
returns of the Company with Registrar of  Company  (ROC)  for  the  relevant
year showed that even if shares were issued by the Company in  the  name  of
Shri. Gopal Kumar Sanei, Karta of HUF,  but the  Company  had  recorded  the
name of the assessee/HUF as  shareholders  of  the  Company.   It  was  also
recorded that the assessee as shareholder was having 37.12%  share  holding.
That was on the basis of shareholder register  maintained  by  the  Company.
Taking aid of the provisions of the Companies Act, the CIT(A) observed  that
a shareholder is a person whose name is recorded  in  the  register  of  the
shareholders maintained by the Company and, therefore, it  is  the  assessee
which was registered shareholder.  The CIT(A)  also  opined  that  the  only
requirement to attract the provisions of Section  2(22)(e)  of  the  Act  is
that the shareholder should be beneficial shareholder.  On this  basis,  the
addition made by the AO was upheld.

Undeterred, the assessee approached the next higher  forum,  i.e.,  ITAT  in
the form of appeal under Section 253 of the Act.   In  this  endeavour,  the
assessee succeeded as appeal of the assessee was allowed  holding  that  the
ingredients  of  Section  2(22)(e)  of  the  Act  were  not  satisfied  and,
therefore, addition of the aforesaid nature could not be made.
                 For  this  purpose,  the  ITAT  referred  to  the  judgment
rendered by its Mumbai Bench in the case of Binal Sevantilal  Koradia  (HUF)
Vs. Department of Income Tax[1].  In fact, the only  exercise  done  by  the
ITAT in the said order was to quote from the  aforesaid  judgment  with  the
observations that the issue is squarely covered by the  said  decision.   In
Koradia (HUF), it was held by the Tribunal that HUF cannot  be  said  to  be
shareholder  or  a  beneficial  shareholder.   Since  these  are  the   twin
conditions to attract the provisions of Section 2(22)(e) of  the  Act,  both
have to be satisfied. As per the ITAT,  since  HUF,  in  law,  cannot  be  a
registered shareholder or a beneficial shareholder,  provisions  of  Section
2(22)(e) would not be attracted.

As noticed above, the High Court, in the impugned judgment rendered  in  the
appeal preferred by the Revenue, has reversed  the  judgment  of  the  ITAT,
thereby restoring the addition which was made by the AO.  The order  of  the
High Court reveals that it has done nothing but to extract the  language  of
Section 2(22)(e) of the Act and sustained the addition made by AO  with  one
line observation, viz., 'the assessee did not dispute that the  Karta  is  a
member of HUF which has taken the loan from the Company and, therefore,  the
case is squarely within the provisions of Section  2(22)(e)  of  the  Income
Tax Act'.

The arguments before us remain the same. Mr. S.B. Upadhyay,  learned  senior
counsel appearing for the assessee,  argued  that  the  ITAT  had  correctly
explained the legal position that HUF cannot be either beneficial  owner  or
registered owner of the shares and, therefore, no  addition  could  be  made
under Section 2(22)(e) of the Act.  For  buttressing  this  submission,  the
learned counsel relied upon the following observations in judgment  of  this
Court in CIT, Andhra Pradesh Vs. C.P. Sarathy Mudaliar[2]:

“....It is well settled that an HUF cannot be a shareholder  of  a  company.
The shareholder of a company is the individual  who  is  registered  as  the
shareholder ion the books of the company.  The HUF,  the  assessee  in  this
case, was not registered as a shareholder in books of the company nor  could
it have been so registered.  Hence there is no  gain-saying  the  fact  that
the HUF was not the shareholder of the company.”

Learned Additional Solicitor General, on the other hand, after  reading  the
relevant portions of the orders of AO and  CIT(A),  submitted  that  on  the
facts of this case, the Revenue was justified in making the addition.

Section 2(22)(e) of the Act creates a fiction, thereby bringing  any  amount
paid otherwise than as a dividend into the net  of  dividend  under  certain
circumstances.  It gives an artificial definition of  'dividend'.   It  does
not take into account that dividend which is actually declared or  received.
 The dividend taken note of by this provision is a deemed dividend  and  not
a real dividend.  Loan or payment made by the company to its shareholder  is
actually not a dividend.  In fact, such a loan to a shareholder  has  to  be
returned by the shareholder to the company.  It does not  become  income  of
the shareholder.   Notwithstanding  the  same,  for  certain  purposes,  the
Legislature has deemed such a loan or payment  as  'dividend'  and  made  it
taxable at the hands of the said shareholder.   It  is,  therefore,  not  in
dispute that such a provision which is a deemed  provision  and  fictionally
creates certain kinds of receipts  as  dividends,  is  to  be  given  strict
interpretation.  It follows that unless all the conditions contained in  the
said provision are fulfilled, the receipt cannot  be  deemed  as  dividends.
Further, in case of doubt or where two views  are  possible,  benefit  shall
accrue in favour of the assessee.

A reading of clause (e) of Section 2(22) of the  Act  makes  it  clear  that
three types of payments can be brought to tax as dividends in the  hands  of
the share holders. These are as follows:
(a)   any payment of any sum (whether as representing a part of  the  assets
of the company or otherwise) by way of advance or loan to a shareholder.

(b)   any payment on behalf of a shareholder, and

(c)   any payment for the individual benefit of a shareholder.

[See: Alagusundaran Vs. CIT; 252 ITR 893 (SC)]

Certain conditions need to be fulfilled in order to attract tax  under  this
clause. It  is  not  necessary  to  stipulate  other  conditions.   For  our
purposes, following conditions need to be fulfilled:
      (a)  Payment is to be made by way of advance or loan  to  any  concern
in which such shareholder is a member or a partner.
       (b)   In  the  said  concern,  such  shareholder  has  a  substantial
      (c)  Such advance or loan should have been made after the 31st day  of
May, 1987.

Explanation 3(a) defines “concern” to mean HUF or a firm or  an  association
of persons or a body of individuals or a company.  As per Explanation  3(b),
a person shall be deemed to have a substantial interest in a HUF if  he  is,
at any time during the previous year,  beneficially  entitled  to  not  less
than 20% of the income of such HUF.

In the instant case, the payment in question is made to the  assessee  which
is a HUF.  Shares are held by Shri. Gopal Kumar Sanei, who is Karta of  this
HUF.  The said Karta is, undoubtedly,  the  member  of  HUF.   He  also  has
substantial interest in the assessee/HUF,  being  its  Karta.   It  was  not
disputed that he was entitled to not less than 20% of  the  income  of  HUF.
In view of the aforesaid position, provisions of  Section  2(22)(e)  of  the
Act get attracted and it is not even necessary to determine  as  to  whether
HUF can, in law, be beneficial shareholder or registered  shareholder  in  a

It is also found as a fact, from the audited annual return  of  the  Company
filed with ROC that the money towards  share  holding  in  the  Company  was
given by the assessee/HUF.  Though, the share certificates  were  issued  in
the name of the Karta, Shri Gopal Kumar Sanei, but in  the  annual  returns,
it is the HUF which was shown as registered and beneficial shareholder.   In
any case, it cannot be doubted that it is the beneficial shareholder.   Even
if we  presume  that  it  is  not  a  registered  shareholder,  as  per  the
provisions of Section 2(22)(e) of the Act, once the payment is  received  by
the HUF and shareholder (Mr. Sanei, karta, in this case) is a member of  the
said HUF and he has substantial interest in the HUF,  the  payment  made  to
the HUF shall constitute deemed dividend within the meaning  of  clause  (e)
of Section 2(22) of the Act.  This is the effect of  Explanation  3  to  the
said Section, as noticed above.  Therefore, it is no gainsaying  that  since
HUF itself is not the  registered  shareholder,  the  provisions  of  deemed
dividend are not attracted.  For  this  reason,  judgment  in  C.P.  Sarathy
Mudaliar, relied upon by the learned counsel for the  appellant,  will  have
no application.  That was a judgment rendered in the context of Section 2(6-
A)(e) of the Income Tax Act,  1922  wherein  there  was  no  provision  like
Explanation 3.

We, thus, do not find  any  merit  in  this  appeal,  which  is  accordingly
                                                            (A.K. SIKRI)

                                                   (ABHAY MANOHAR SAPRE)
JANUARY 04, 2017.

      ITA No. 2900/Mum/2011, AY 2007-08 dated 10.10.2012
[2]   1972 SCR 1076