REPORTABLE IN 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) JUDGMENT A.K. SIKRI, J. appellant/assessee, in instant appeal, has raised following question of law for determination: Whether in view of settled principle that HUF cannot be registered shareholder in company and hence could not have been both registered and beneficial shareholder, loan/advances received by HUF could be deemed as dividend within meaning of Section 2(22)(e) of Income Tax Act, 1961 especially in view of term concern as defined in Section itself? 2) aforesaid question has arisen, which pertains to Assessment Year 2006-07, under following circumstances: Signature Not Verified Digitally signed by assessee herein had filed return in respect of said NIDHI AHUJA Date: 2017.01.04 17:13:07 IST Reason: 3) Assessment Year declaring his total income at Rs. 1,62,745/-. Civil Appeal No. 12274 of 2016 Page 1 of 12 Assessing Officer (for short, 'AO') carried out assessment resulting into passing of assessment orders dated 31 st December, 2008 whereby net income of assessee was calculated at Rs. 1,30,31,280/-. Obviously, number of additions were made which contributed to enhancement of income to aforesaid figure, in contrast with paltry income declared by assessee. Here, we are concerned only with one addition which was made on account of deemed dividend within meaning of Section 2(22)(e) of Income Tax Act, 1961 (hereinafter referred to as 'Act'). Suffice it to state that other additions were deleted by Income Tax Appellate Tribunal (ITAT) and position affirmed by High Court, but Revenue has not challenged those deletions. 4) Insofar as addition under Section 2(22)(e) of Act is concerned, sum of Rs. 1,20,10,988/- was added on this account. assessee is Hindu Undivided Family (HUF). During previous year to Assessment Year, assessee had received certain advances from one M/s. G.S. Fertilizers (P) Ltd. (hereinafter referred to as 'Company'). Company is manufacturer and distributor of various grades of NPK Fertilizers and other agricultural inputs. In audit report and annual return Civil Appeal No. 12274 of 2016 Page 2 of 12 for relevant period, which was filed by it before Registrar of Companies (ROC), it was found that subscribed share capital of 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 assessee which represented 37.12% of total shareholding of Company. From this fact, AO concluded that assessee was both registered shareholder of Company and also beneficial owner of shares, as it was holding more than 10% of voting power. On this basis, after noticing that audited accounts of Company was showing balance of Rs. 1,20,10,988/- as Reserve & Surplus as on 31st March, 2006, this amount was included in income of assessee as deemed dividend. 5) In appeal filed by assessee, aforesaid addition was affirmed by Commissioner of Income Tax (Appeals) (for short 'CIT(A)'). Though, this addition was questioned by assessee on various grounds, we would take note of submission which is advanced before us as challenge is confined only on basis of said submission. assessee had argued that being HUF, it was neither beneficial shareholder nor registered shareholder. It was further argued that Company had issued shares in name of Shri Gopal Kumar Sanei, Karta of HUF, Civil Appeal No. 12274 of 2016 Page 3 of 12 and not in name of assessee/HUF as shares could not be directly allotted to HUF. On that basis, it was submitted that provisions of Section 2(22)(e) of Act cannot be attracted. 6) We would like to reproduce that portion of Section 2(22)(e) of Act at this stage, which is relevant for instant appeal: S.2(22) of Income Tax:- Dividend includes: xxx xxx xxx (e) any payment by company, not being company in which public are substantially interested, of any sum (whether as representing part of assets of company or otherwise) [made after 31st day of May, 1987, by way of advance or loan to shareholder, being person who is beneficial owner of shares (not being shares entitled to fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent of voting power, or to any concern in which such shareholder is member or partner and in which he has substantial interest (hereafter in this clause referred to as said concern)] or any payment by any such company on behalf, or for individual benefit, of any such shareholder, to extent to which company in either case possesses accumulated profits; but dividend does not include xxx xxx xxx Explanation 3. For purposes of this clause, (a) concern means Hindu undivided family, or firm or association of persons or body of individuals or company; (b) person shall be deemed to have substantial interest in concern, other than company, if he is, at any time during previous Civil Appeal No. 12274 of 2016 Page 4 of 12 year, beneficially entitled to not less than twenty per cent of income of such concern. 7) Taking note of aforesaid provision, CIT(A) rejected aforesaid contention of assessee. CIT(A) found that examination of annual returns of Company with Registrar of Company (ROC) for relevant year showed that even if shares were issued by Company in name of Shri. Gopal Kumar Sanei, Karta of HUF, but Company had recorded name of assessee/HUF as shareholders of Company. It was also recorded that assessee as shareholder was having 37.12% share holding. That was on basis of shareholder register maintained by Company. Taking aid of provisions of Companies Act, CIT(A) observed that shareholder is person whose name is recorded in register of shareholders maintained by Company and, therefore, it is assessee which was registered shareholder. CIT(A) also opined that only requirement to attract provisions of Section 2(22)(e) of Act is that shareholder should be beneficial shareholder. On this basis, addition made by AO was upheld. 8) Undeterred, assessee approached next higher forum, i.e., ITAT in form of appeal under Section 253 of Act. In this Civil Appeal No. 12274 of 2016 Page 5 of 12 endeavour, assessee succeeded as appeal of assessee was allowed holding that ingredients of Section 2(22)(e) of Act were not satisfied and, therefore, addition of aforesaid nature could not be made. For this purpose, ITAT referred to judgment rendered by its Mumbai Bench in case of Binal Sevantilal Koradia (HUF) Vs. Department of Income Tax1. In fact, only exercise done by ITAT in said order was to quote from aforesaid judgment with observations that issue is squarely covered by said decision. In Koradia (HUF), it was held by Tribunal that HUF cannot be said to be shareholder or beneficial shareholder. Since these are twin conditions to attract provisions of Section 2(22)(e) of Act, both have to be satisfied. As per ITAT, since HUF, in law, cannot be registered shareholder or beneficial shareholder, provisions of Section 2(22)(e) would not be attracted. 9) As noticed above, High Court, in impugned judgment rendered in appeal preferred by Revenue, has reversed judgment of ITAT, thereby restoring addition which was made by AO. order of High Court reveals that it has done nothing but to extract language of Section 2(22)(e) of 1 ITA No. 2900/Mum/2011, AY 2007-08 dated 10.10.2012 Civil Appeal No. 12274 of 2016 Page 6 of 12 Act and sustained addition made by AO with one line observation, viz., 'the assessee did not dispute that Karta is member of HUF which has taken loan from Company and, therefore, case is squarely within provisions of Section 2(22)(e) of Income Tax Act'. 10) arguments before us remain same. Mr. S.B. Upadhyay, learned senior counsel appearing for assessee, argued that ITAT had correctly explained legal position that HUF cannot be either beneficial owner or registered owner of shares and, therefore, no addition could be made under Section 2(22)(e) of Act. For buttressing this submission, learned counsel relied upon following observations in judgment of this Court in CIT, Andhra Pradesh Vs. C.P. Sarathy Mudaliar2: ....It is well settled that HUF cannot be shareholder of company. shareholder of company is individual who is registered as shareholder ion books of company. HUF, assessee in this case, was not registered as shareholder in books of company nor could it have been so registered. Hence there is no gain-saying fact that HUF was not shareholder of company. 11) Learned Additional Solicitor General, on other hand, after reading relevant portions of orders of AO and CIT(A), 2 1972 SCR 1076 Civil Appeal No. 12274 of 2016 Page 7 of 12 submitted that on facts of this case, Revenue was justified in making addition. 12) Section 2(22)(e) of Act creates fiction, thereby bringing any amount paid otherwise than as dividend into net of dividend under certain circumstances. It gives artificial definition of 'dividend'. It does not take into account that dividend which is actually declared or received. dividend taken note of by this provision is deemed dividend and not real dividend. Loan or payment made by company to its shareholder is actually not dividend. In fact, such loan to shareholder has to be returned by shareholder to company. It does not become income of shareholder. Notwithstanding same, for certain purposes, Legislature has deemed such loan or payment as 'dividend' and made it taxable at hands of said shareholder. It is, therefore, not in dispute that such provision which is deemed provision and fictionally creates certain kinds of receipts as dividends, is to be given strict interpretation. It follows that unless all conditions contained in said provision are fulfilled, receipt cannot be deemed as dividends. Further, in case of doubt or where two views are possible, benefit shall accrue in favour of assessee. Civil Appeal No. 12274 of 2016 Page 8 of 12 13) reading of clause (e) of Section 2(22) of Act makes it clear that three types of payments can be brought to tax as dividends in hands of share holders. These are as follows: (a) any payment of any sum (whether as representing part of assets of company or otherwise) by way of advance or loan to shareholder. (b) any payment on behalf of shareholder, and (c) any payment for individual benefit of 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 member or partner. (b) In said concern, such shareholder has substantial interest. (c) Such advance or loan should have been made after 31 st day of May, 1987. 15) Explanation 3(a) defines concern to mean HUF or firm or association of persons or body of individuals or company. As Civil Appeal No. 12274 of 2016 Page 9 of 12 per Explanation 3(b), person shall be deemed to have substantial interest in HUF if he is, at any time during previous year, beneficially entitled to not less than 20% of income of such HUF. 16) In instant case, payment in question is made to assessee which is HUF. Shares are held by Shri. Gopal Kumar Sanei, who is Karta of this HUF. said Karta is, undoubtedly, member of HUF. He also has substantial interest in assessee/HUF, being its Karta. It was not disputed that he was entitled to not less than 20% of income of HUF. In view of aforesaid position, provisions of Section 2(22)(e) of 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 Company. 17) It is also found as fact, from audited annual return of Company filed with ROC that money towards share holding in Company was given by assessee/HUF. Though, share certificates were issued in name of Karta, Shri Gopal Kumar Sanei, but in annual returns, it is HUF which was shown as registered and beneficial shareholder. In any case, it cannot be doubted that it is beneficial shareholder. Even if Civil Appeal No. 12274 of 2016 Page 10 of 12 we presume that it is not registered shareholder, as per provisions of Section 2(22)(e) of Act, once payment is received by HUF and shareholder (Mr. Sanei, karta, in this case) is member of said HUF and he has substantial interest in HUF, payment made to HUF shall constitute deemed dividend within meaning of clause (e) of Section 2(22) of Act. This is effect of Explanation 3 to said Section, as noticed above. Therefore, it is no gainsaying that since HUF itself is not registered shareholder, provisions of deemed dividend are not attracted. For this reason, judgment in C.P. Sarathy Mudaliar, relied upon by learned counsel for appellant, will have no application. That was judgment rendered in context of Section 2(6-A)(e) of 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. Civil Appeal No. 12274 of 2016 Page 11 of 12 ITEM NO.1B COURT NO.8 SECTION IIIA (For judgment) SUPREME COURT OF INDIA RECORD OF PROCEEDINGS 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) Date : 04/01/2017 This appeal was called on for pronouncement of judgment today. For Appellant(s) Mr. Santosh Mishra, Adv. For Respondent(s) Mrs. Anil Katiyar, Adv. Hon'ble Mr. Justice A. K. Sikri pronounced judgment of Bench comprising His Lordship and Hon'ble Mr. Justice Abhay Manohar Sapre. appeal is dismissed in terms of signed reportable judgment. (Nidhi Ahuja) (Mala Kumari Sharma) Court Master Court Master [Signed reportable judgment is placed on file.] Civil Appeal No. 12274 of 2016 Page 12 of 12 Gopal and Sons (HUF) v. CIT, Kolkata-XI