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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 2068-2071 OF 2012

NATIONAL TRAVEL SERVICES                  …APPELLANT (S)

VERSUS

       COMMISSIONER OF INCOME TAX,          DELHI, VIII …RESPONDENT (S)

WITH

C.A. NO. 837 of 2018 @ S.L.P. (C) NO. 27245 OF 2017

J U D G M E N T

R.F. Nariman, J.    

1) Leave granted.

2) The present appeals raise an interesting question as to the

correct interpretation of Section 2(22)(e) of the Income Tax Act,

1961, as amended in 1988.  

3) The brief facts in order to decide the present controversy

are as follows:

The Assessee is a partnership firm consisting of three partners,

namely,  Mr.  Naresh  Goyal,  Mr.  Surinder  Goyal  and  M/s  Jet

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Enterprises Private Limited having a profit sharing ratio of 35%,

15% and 50% respectively.  The Assessee firm had taken a

loan of Rs. 28,52,41,516/- from M/s Jetair Private Limited, New

Delhi.  In this Company, the Assessee subscribed to the equity

capital  of  the  aforesaid  Company in  the  name of  two  of  its

partners,  namely,  Mr.  Naresh  Goyal  and  Mr.  Surinder  Goyal

totaling  48.19  per  cent  of  the  total  shareholding.   Thus  Mr.

Naresh Goyal and Mr. Surinder Goyal are shareholders on the

Company's register as members of the Company.  They hold

the  aforesaid  shares  for  and  on  behalf  of  the  firm,  which

happens to be the beneficial shareholder.   

4) The question that arises in these appeals is as to whether

Section 2(22)(e) of the Act gets attracted inasmuch as a loan

has been made to a shareholder, who after the amendment, is

a person who is the beneficial owner of shares holding not less

than 10% of the voting power in the Company, and whether the

loan is made to any concern in which  such shareholder is a

partner  and  in  which  he  has  a  substantial  interest,  which  is

defined as being an interest of 20% or more of the share of the

profits of the firm.

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5) The Income Tax Act, 1922 contained the definition of

“dividend” which reads as follows:-

“2. (6A) `dividend' includes- …

(e)  any  payment  by  a  company,  not  being  a

company,  in  which  the  public  are  substantially

interested within the meaning of Section 23A, 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 or any payment by any such

company on behalf or for the individual benefit of a

shareholder, to the extent to which the company in

either case possesses accumulated profits;”

6) This provision came up for consideration before a Bench of

this Court in C.I.T., Andhra Pradesh vs.  C.P. Sarathy Mudaliar,

(1972)  4 SCC 531.   In  the context  of  the Assessee being a

Hindu  Undivided  Family,  the  question  of  law  set  out  in  the

aforesaid judgment is as follows:-

“Whether, on the facts and in the circumstances of

the case, the amounts of Rs.5,790 and Rs.39,085

could be deemed to be the dividend income of the

Hindu undivided family in the respective assessment

years?”

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After setting out the aforesaid section, this Court held:

“6. Before a payment can be considered as dividend

under Section 2 (6A)(e), the following conditions will

have to be satisfied:

1. It must be a payment by a company not being a

company  in  which  the  public  are  substantially

interested within the meaning of  Section 23A, any

sum whether as representing a part of the assets of

the  company or  otherwise  by  way  of  advance  or

loan.

2 (a) It must be an advance or loan to a shareholder,

or

(b) a payment by the company on behalf or for the

individual benefit of the shareholder, and

3. To the  extent  to  which  the  company  in  either

case possesses accumulated profits.”

After  stating  that  there  is  no  dispute  that  the  first  and  last

conditions are satisfied,  in  the said case,  the Court  went  into

condition 2(a).  This was answered by the Court as follows:

“8. The only surviving  question  is  whether  a  loan

advanced by a company to a H.U.F.,  which is the

real owner of  the shares, can be considered as a

loan advanced to  its  shareholder. It  is  well-settled

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that  an  H.U.F.  cannot  be  a  shareholder  of  a

company.  The  shareholder  of  a  company  is  the

individual who is registered as a shareholder in the

books of the company. The H.U.F., 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  H.U.F.  was  not  the  shareholder  of  the

company. Mr. Sen did not contend otherwise.

9.  Section 2 (6A)(e) gives an artificial definition of

“dividend”.  It  does  not  take  in  dividend  actually

declared or received. The dividend taken note of by

that provision is a deemed dividend and not a real

dividend. The loan granted to a shareholder has to

be returned to the company. It does not become the

income of the shareholder. For certain purposes, the

Legislature has deemed such a loan as “dividend”.

Hence, Section 2 (6A) (e) must necessarily receive a

strict construction. When Section 2(6A)(e) speaks of

“shareholder”, it refers to the registered shareholder

and not the beneficial owner. The H.U.F. cannot be

considered as a shareholder either under Section 2

(6A)(e) or under Section 23A or under Section 16(2)

read with  Section 18(5)  of  the Act.  Hence,  a loan

given to an H.U.F. cannot be considered as a loan

advanced to a “shareholder” of a company.”

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7) This judgment was followed by another judgment of  this

Court in  M/s    Rameshwari Lal Sanwarmal vs.  Commissioner of

Income Tax, Assam (1980) 2 SCC 371 which again arose in the

context  of  a Hindu Undivided Family.  Sarathy Mudaliar’s case

was followed in this judgment, and it was expressly stated that

there  was  no  conflict  between  this  judgment  and  another

judgment, namely, C.I.T. vs. Rameshwari Lal Sanwarmal, (1972)

4 SCC 342, and that the Revenue’s contention to refer Sarathy

Mudaliar’s case to a larger Bench was turned down.   

8) The effect  of these two judgments is clearly to hold that

before Section 2(6A) (e) of the 1922 Act can be attracted, the

“shareholder”  referred  to  in  the  said  provision  must  be  a

shareholder whose name is on the register of members of the

Company.  When the Income Tax Act, 1961 came into force and

repealed the 1922 Act, the definition of “dividend” contained in

Section 2(22)(e) was as follows:-

“Section 2. Definition – In this Act, unless the context

otherwise requires,-

(22) “dividend” includes-

(e)  any  payment  by  a  company,  not  being  a

company  in  which  the  public  are  substantially

interested, of any sum (whether as representing a

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part of the assets of the company or otherwise) by

way of  advance or loan to a shareholder, being a

person  who  has  a  substantial  interest  in  the

company or any payment by any such company on

behalf  or  for  the  individual  benefits,  of  any  such

shareholder, to the extent to which the company in

either case possesses accumulated profits;”

9) A cursory look at the aforesaid definition would go to show

that the shareholder referred to in the aforesaid provision would

continue to be a shareholder who is on the register of members

of the Company with one additional feature, namely, that such

shareholder should be a person who has a substantial interest in

the Company.  Admittedly, the aforesaid additional feature would

make  no  difference  to  the  position  of  law  laid  down  in  the

aforesaid two decisions.

10) In 1988, however, this definition was amended to read as

follows:-

“Section  2.  Definition  –  In  this  Act,  unless  the

context otherwise requires,-

(22) “dividend” includes-

(e)  any  payment  by  a  company,  not  being  a

company  in  which  the  public  are  substantially

interested, of any sum (whether as representing a

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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  percent  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'”

Explanation  2.  -  the  expression  “accumulated

profits”,  in  sub-clauses  (a),  (b),  (d)  and  (e),  shall

include all profits of the company up to the date of

distribution  or  payment  referred  to  in  those

sub-clauses, and in sub-clause (c) shall include all

profits of the company up to the date of liquidation,

{but shall not, where the liquidation is consequent

on the compulsory acquisition of its undertaking by

the  Government  or  a  corporation  owned  or

controlled by the Government under any law for the

time  being  in  force,  include  any  profits  of  the

company prior to three successive previous years

immediately preceding the previous year  in  which

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such acquisition took place;

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;”

11) The  Explanatory  memorandum  to  the  amendment  thus

made reads as follows:-

“With the deletion of Section 104 to 109 there was a

likelihood of closely held companies not distributing

their profits to shareholders by way of dividends but

by way of loans or advances so that these are not

taxed in the hands of the shareholders. To forestall

this  manipulation,  sub-clause (e)  of  clause (22)  of

Section  2  has  been suitably  amended.  Under  the

existing  provisions,  payments  by  way  of  loans  or

advance to shareholders having substantial interest

in a company to the extent to which the company

possesses  accumulated  profits  is  treated  as

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dividend.  The  shareholders  having  substantial

interest are those who have a shareholding carrying

not less than 20 per cent voting power as per the

provisions  of  clause  (32)  of  Section  2.  The

amendment of the definition extends its application

to payments made (i) to a shareholder holding not

less than 10 per cent of the voting power, or (ii) to a

concern  in  which  the  shareholder  has  substantial

interest.  “Concern”  as  per  the  newly  inserted

Explanation 3 (a) to Section 2 (22) means a HUF or

a  firm or  an  association  of  persons  or  a  body of

individuals  or  a  company. A shareholder  having  a

substantial  interest in a concern as per part (b) of

Explanation  3  is  deemed  to  be  one  who  is

beneficially entitled to not less than 20 per cent of

the income of such concern.

10.3  The  new  provisions  would,  therefore,  be

applicable in a case where a shareholder has 10 per

cent or more of the equity capital. Further, deemed

dividend would be taxed in the hands of a concern

where all the following conditions are satisfied:-

(i)  where the company makes the payment by way

of loans or advances to a concern.;

(ii) where  a  member  or  a  partner  of  the  concern

holds  10  per  cent  of  the  voting  power  in  the

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company; and

(iii) where the member or partner of the concern is also

beneficially entitled to 20 per cent of the income of such

concern.

With  a  view  to  avoid  the  hardship  in  cases  where

advances  or  loans  have  already been given,  the  new

provisions  have  been  made  applicable  only  in  cases

where loans or advances are given after 31st May, 1987.”

These  amendments  will  apply  in  relation  to

assessment year 1988-89 and subsequent years.”

12) A reading of  the amended definition would indicate that,

after 31.05.1987, a “shareholder” is now a person who is the

beneficial  owner  of  shares holding not  less than 10% of  the

voting power of the Company.  Also, a new category has been

added to the definition by introducing concerns in which such

shareholder  is  a  member  or  partner  and in  which  he  has  a

substantial interest.  Explanation (3) of the amended provision

states  that  “concern”  means  Hindu  Undivided  Family,  firm,

association of persons, body of individuals, or a Company and

further goes on to state that a person shall be deemed to have

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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 20% of the income of such concern.

13) Shri Ujjwal A. Rana, learned advocate, appearing on behalf

of  the appellants,  has argued before us that  a judgment had

been delivered by the very Division Bench in another case C.I.T.

vs. Ankitech Private Limited reported in [2012] 340 ITR 14 (Del).

The same Division Bench had arrived at a conclusion, following

other  judgments  of  other  Courts  and  Tribunals,  that  the

expression “shareholder” would continue to mean a registered

shareholder even after the amendment, and that, this being the

case, it is clear that the impugned judgment has taken an about

turn and has sought to distinguish the earlier judgment when it

was squarely applicable. He has also placed before us an order

dated  05.10.2017  passed  in  Civil  Appeal  No.  3961  of  2013

[C.I.T., Delhi-II vs. Madhur Housing and Development Company]

in which this Court has expressly affirmed the reasoning of the

aforesaid earlier judgment.  In his view, therefore, this judgment

ought to have been followed, and if it had been followed, it is

clear that the firm, not being a registered shareholder, could not

possibly be a person to whom Section 2(22)(e) would apply.

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14) As  opposed  to  this,  Shri  Guru  Krishnakumar,  learned

senior  advocate,  appearing  on  behalf  of  the  Revenue,  has

sought to support the impugned judgment by pointing out that

the impugned judgment itself has made a distinction between

the facts in Ankitech (supra) and in the present case.  According

to  him,  the  impugned  judgment  has  reference  only  to  the

second  limb  of  the  amended  definition,  namely,  to  the  limb

which deals with any concern in which such shareholder is a

member and not to the first limb, which deals with a shareholder

being  a  person  who  is  the  beneficial  owner  of  shares.

According  to  him,  therefore,  the  Division  Bench  rightly

sidestepped  the  decision  in  Ankitech  (supra)  and  correctly

arrived at the conclusions to the two questions raised.

15) This then brings us to the Division Bench judgment in the

present case.  In para 17, after referring to various judgments

referred to by us hereinabove, the Division Bench posed two

questions to be answered by it as follows:-

“(1) To attract the first limb of Section 2 (22) (e) of

the  Act,  is  it  necessary  that  the  person  who  has

received the advance or loan is a shareholder and

also beneficial  owner. To put  it  otherwise,  whether

both the conditions are required to be satisfied will

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depend upon the interpretation to  be given to  the

words “being a person who is a beneficial owner of

shares.....” which was inserted by amendment in the

aforesaid provision carried out by the Finance Act,

1987 w.e.f. 1st April, 1988.

(2) Whether the assessee who is a partnership firm

can  be  treated  as  `shareholder'  because  of  the

reason that it has purchased the shares in the name

of the two partners.”

16) It answered the first question by stating that the expression

“being a person who is a beneficial owner of shares” would be in

addition to the shareholder first being a registered shareholder

of the Company.  The Division Bench then states that, therefore,

in order to attract Section 2(22)(e) both conditions have to be

satisfied.   So  far  as  the  second  question  is  concerned,  the

Division Bench went on to state that a partnership firm can be

treated as a shareholder but that it is not necessary that it has to

be a registered shareholder.

17) We are of  the view that  it  is  very difficult  to  accept  the

reasoning of the Division Bench.  It  is not enough to say that

Ankitech’s  case  refers  to  the  second  limb  of  the  amended

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definition, whereas the present case refers to the first limb, for

the  simple  reason  that  the  word  “shareholder”  in  both  limbs

would mean exactly the same thing.  This is for the reason that

the  expression  “such  shareholder”  in  the  second  limb  would

show that it refers to a person who is a “shareholder” in the first

limb.   

18) This  being the case,  we are of  the view that  the whole

object of the amended provision would be stultified if the Division

Bench judgment were to be followed.  Ankitech’s case, in stating

that  no change was made by introducing the deeming fiction

insofar  as  the  expression  “shareholder”  is  concerned  is,

according  to  us,  wrongly  decided.   The  whole  object  of  the

provision is  clear from the Explanatory memorandum and the

literal language of the newly inserted definition clause which is to

get over the two judgments of this Court referred to hereinabove.

This is why “shareholder” now, post amendment, has only to be

a person who is the beneficial owner of shares.  One cannot be

a  registered  owner  and  beneficial  owner  in  the  sense  of  a

beneficiary of a trust or otherwise at the same time.  It is clear

therefore that the moment there is a shareholder, who need not

necessarily be a member of the Company on its register, who is

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the beneficial owner of shares, the Section gets attracted without

more.   To  state,  therefore,  that  two  conditions  have  to  be

satisfied, namely, that the shareholder must first be a registered

shareholder and thereafter, also be a beneficial owner is not only

mutually  contradictory  but  is  plainly  incorrect.   Also,  what  is

important  is  the  addition,  by  way  of  amendment,  of  such

beneficial owner holding not less than 10% of voting power.  This

is  another  indicator  that  the  amendment  speaks  only  of  a

beneficial shareholder who can compel the registered owner to

vote  in  a  particular  way,  as  has  been  held  in  a  catena  of

decisions starting from  Mathalone vs.  Bombay Life Assurance

Co. Ltd., [1954] SCR 117.

19) This being the case, we are prima facie of the view that the

Ankitech  judgment  (supra)  itself  requires  to  be  reconsidered,

and this being so, without going into other questions that may

arise, including whether the facts of the present case would fit

the  second  limb  of  the  amended  definition  clause,  we  place

these appeals before the Hon’ble Chief Justice of India in order

to constitute an appropriate Bench of three learned Judges in

order to have a relook at the entire question.

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20) Ordered accordingly.

                                                 .…………………………J.     (R.F. Nariman)

           ………………………..…..J.

            (Navin Sinha) New Delhi; January 18, 2018