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REPORTABLE

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) VERSUS

CIT KOLKATA-XI .....RESPONDENT(S)

J U D G M E N T A.K. SIKRI, J.

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?”

2) The aforesaid question has arisen, which pertains to Assessment

Year 2006-07, under the following circumstances:

3) The assessee herein had filed the return in respect of the said

Assessment  Year  declaring  his  total  income at  Rs.  1,62,745/-.

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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.  

4) 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

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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.   

5) 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,

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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.  

6) 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

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year, beneficially  entitled  to  not  less  than twenty per cent of the income of such concern.”

7) 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.

8) Undeterred, the assessee approached the next higher forum, i.e.,

ITAT in the form of appeal under Section 253 of the Act.  In this

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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 Tax1.  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.

9) 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 1

ITA No. 2900/Mum/2011, AY 2007-08 dated 10.10.2012

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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'.  

10) 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 Mudaliar2:

“....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.”

11) Learned  Additional  Solicitor  General,  on  the  other  hand,  after

reading  the  relevant  portions  of  the  orders  of  AO and CIT(A),

2 1972 SCR 1076

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submitted that on the facts of this case, the Revenue was justified

in making the addition.

12) 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.

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13) 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)]

14) 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

interest.

(c)  Such advance or loan should have been made after the 31st

day of May, 1987.

15) 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

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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.

16) 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 Company.   

17) 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

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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.

18) We, thus, do not find any merit in this appeal, which is accordingly

dismissed.

.............................................J. (A.K. SIKRI)

.............................................J. (ABHAY MANOHAR SAPRE)

NEW DELHI; JANUARY 04, 2017.

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