REPORTABLE IN 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 JUDGMENT R.F. Nariman, J. 1) Leave granted. 2) present appeals raise interesting question as to correct interpretation of Section 2(22)(e) of Income Tax Act, 1961, as amended in 1988. Signature Not Verified Digitally signed by VISHAL ANAND 3) brief facts in order to decide present controversy Date: 2018.01.24 17:10:30 IST Reason: are as follows: Assessee is partnership firm consisting of three partners, namely, Mr. Naresh Goyal, Mr. Surinder Goyal and M/s Jet 2 Enterprises Private Limited having profit sharing ratio of 35%, 15% and 50% respectively. Assessee firm had taken loan of Rs. 28,52,41,516/- from M/s Jetair Private Limited, New Delhi. In this Company, Assessee subscribed to equity capital of aforesaid Company in name of two of its partners, namely, Mr. Naresh Goyal and Mr. Surinder Goyal totaling 48.19 per cent of total shareholding. Thus Mr. Naresh Goyal and Mr. Surinder Goyal are shareholders on Company's register as members of Company. They hold aforesaid shares for and on behalf of firm, which happens to be beneficial shareholder. 4) question that arises in these appeals is as to whether Section 2(22)(e) of Act gets attracted inasmuch as loan has been made to shareholder, who after amendment, is person who is beneficial owner of shares holding not less than 10% of voting power in Company, and whether loan is made to any concern in which such shareholder is partner and in which he has substantial interest, which is defined as being interest of 20% or more of share of profits of firm. 3 5) Income Tax Act, 1922 contained definition of dividend which reads as follows:- 2. (6A) `dividend' includes- (e) any payment by company, not being company, in which public are substantially interested within meaning of Section 23A, of any sum (whether as representing part of assets of company or otherwise) by way of advance or loan to shareholder or any payment by any such company on behalf or for individual benefit of shareholder, to extent to which company in either case possesses accumulated profits; 6) This provision came up for consideration before Bench of this Court in C.I.T., Andhra Pradesh vs. C.P. Sarathy Mudaliar, (1972) 4 SCC 531. In context of Assessee being Hindu Undivided Family, question of law set out in aforesaid judgment is as follows:- Whether, on facts and in circumstances of case, amounts of Rs.5,790 and Rs.39,085 could be deemed to be dividend income of Hindu undivided family in respective assessment years? 4 After setting out aforesaid section, this Court held: 6. Before payment can be considered as dividend under Section 2 (6A)(e), following conditions will have to be satisfied: 1. It must be payment by company not being company in which public are substantially interested within meaning of Section 23A, any sum whether as representing part of assets of company or otherwise by way of advance or loan. 2 (a) It must be advance or loan to shareholder, or (b) payment by company on behalf or for individual benefit of shareholder, and 3. To extent to which company in either case possesses accumulated profits. After stating that there is no dispute that first and last conditions are satisfied, in said case, Court went into condition 2(a). This was answered by Court as follows: 8. only surviving question is whether loan advanced by company to H.U.F., which is real owner of shares, can be considered as loan advanced to its shareholder. It is well-settled 5 that H.U.F. cannot be shareholder of company. shareholder of company is individual who is registered as shareholder in books of company. H.U.F., 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 H.U.F. was not shareholder of company. Mr. Sen did not contend otherwise. 9. Section 2 (6A)(e) gives artificial definition of dividend . It does not take in dividend actually declared or received. dividend taken note of by that provision is deemed dividend and not real dividend. loan granted to shareholder has to be returned to company. It does not become income of shareholder. For certain purposes, Legislature has deemed such loan as dividend . Hence, Section 2 (6A) (e) must necessarily receive strict construction. When Section 2(6A)(e) speaks of shareholder , it refers to registered shareholder and not beneficial owner. H.U.F. cannot be considered as shareholder either under Section 2 (6A)(e) or under Section 23A or under Section 16(2) read with Section 18(5) of Act. Hence, loan given to H.U.F. cannot be considered as loan advanced to shareholder of company. 6 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 context of 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 Revenue s contention to refer Sarathy Mudaliar s case to larger Bench was turned down. 8) effect of these two judgments is clearly to hold that before Section 2(6A) (e) of 1922 Act can be attracted, shareholder referred to in said provision must be shareholder whose name is on register of members of Company. When Income Tax Act, 1961 came into force and repealed 1922 Act, definition of dividend contained in Section 2(22)(e) was as follows:- Section 2. Definition In this Act, unless context otherwise requires,- (22) dividend includes- (e) any payment by company, not being company in which public are substantially interested, of any sum (whether as representing 7 part of assets of company or otherwise) by way of advance or loan to shareholder, being person who has substantial interest in company or any payment by any such company on behalf or for individual benefits, of any such shareholder, to extent to which company in either case possesses accumulated profits; 9) cursory look at aforesaid definition would go to show that shareholder referred to in aforesaid provision would continue to be shareholder who is on register of members of Company with one additional feature, namely, that such shareholder should be person who has substantial interest in Company. Admittedly, aforesaid additional feature would make no difference to position of law laid down in aforesaid two decisions. 10) In 1988, however, this definition was amended to read as follows:- Section 2. Definition In this Act, unless context otherwise requires,- (22) dividend includes- (e) any payment by company, not being company in which public are substantially interested, of any sum (whether as representing 8 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 percent 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' Explanation 2. - expression accumulated profits , in sub-clauses (a), (b), (d) and (e), shall include all profits of company up to date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of company up to date of liquidation, {but shall not, where liquidation is consequent on compulsory acquisition of its undertaking by Government or corporation owned or controlled by Government under any law for time being in force, include any profits of company prior to three successive previous years immediately preceding previous year in which 9 such acquisition took place; 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 year, beneficially entitled to not less than twenty per cent of income of such concern; 11) Explanatory memorandum to amendment thus made reads as follows:- With deletion of Section 104 to 109 there was 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 hands of shareholders. To forestall this manipulation, sub-clause (e) of clause (22) of Section 2 has been suitably amended. Under existing provisions, payments by way of loans or advance to shareholders having substantial interest in company to extent to which company possesses accumulated profits is treated as 10 dividend. shareholders having substantial interest are those who have shareholding carrying not less than 20 per cent voting power as per provisions of clause (32) of Section 2. amendment of definition extends its application to payments made (i) to shareholder holding not less than 10 per cent of voting power, or (ii) to concern in which shareholder has substantial interest. Concern as per newly inserted Explanation 3 (a) to Section 2 (22) means HUF or firm or association of persons or body of individuals or company. shareholder having substantial interest in 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 income of such concern. 10.3 new provisions would, therefore, be applicable in case where shareholder has 10 per cent or more of equity capital. Further, deemed dividend would be taxed in hands of concern where all following conditions are satisfied:- (i) where company makes payment by way of loans or advances to concern.; (ii) where member or partner of concern holds 10 per cent of voting power in 11 company; and (iii) where member or partner of concern is also beneficially entitled to 20 per cent of income of such concern. With view to avoid hardship in cases where advances or loans have already been given, 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) reading of amended definition would indicate that, after 31.05.1987, shareholder is now person who is beneficial owner of shares holding not less than 10% of voting power of Company. Also, new category has been added to definition by introducing concerns in which such shareholder is member or partner and in which he has substantial interest. Explanation (3) of amended provision states that concern means Hindu Undivided Family, firm, association of persons, body of individuals, or Company and further goes on to state that person shall be deemed to have 12 substantial interest in concern other than Company if he is, at any time during previous year, beneficially entitled to not less than 20% of income of such concern. 13) Shri Ujjwal A. Rana, learned advocate, appearing on behalf of appellants, has argued before us that judgment had been delivered by very Division Bench in another case C.I.T. vs. Ankitech Private Limited reported in [2012] 340 ITR 14 (Del). same Division Bench had arrived at conclusion, following other judgments of other Courts and Tribunals, that expression shareholder would continue to mean registered shareholder even after amendment, and that, this being case, it is clear that impugned judgment has taken about turn and has sought to distinguish earlier judgment when it was squarely applicable. He has also placed before us 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 reasoning of aforesaid earlier judgment. In his view, therefore, this judgment ought to have been followed, and if it had been followed, it is clear that firm, not being registered shareholder, could not possibly be person to whom Section 2(22)(e) would apply. 13 14) As opposed to this, Shri Guru Krishnakumar, learned senior advocate, appearing on behalf of Revenue, has sought to support impugned judgment by pointing out that impugned judgment itself has made distinction between facts in Ankitech (supra) and in present case. According to him, impugned judgment has reference only to second limb of amended definition, namely, to limb which deals with any concern in which such shareholder is member and not to first limb, which deals with shareholder being person who is beneficial owner of shares. According to him, therefore, Division Bench rightly sidestepped decision in Ankitech (supra) and correctly arrived at conclusions to two questions raised. 15) This then brings us to Division Bench judgment in present case. In para 17, after referring to various judgments referred to by us hereinabove, Division Bench posed two questions to be answered by it as follows:- (1) To attract first limb of Section 2 (22) (e) of Act, is it necessary that person who has received advance or loan is shareholder and also beneficial owner. To put it otherwise, whether both conditions are required to be satisfied will 14 depend upon interpretation to be given to words being person who is beneficial owner of shares..... which was inserted by amendment in aforesaid provision carried out by Finance Act, 1987 w.e.f. 1st April, 1988. (2) Whether assessee who is partnership firm can be treated as `shareholder' because of reason that it has purchased shares in name of two partners. 16) It answered first question by stating that expression being person who is beneficial owner of shares would be in addition to shareholder first being registered shareholder of Company. Division Bench then states that, therefore, in order to attract Section 2(22)(e) both conditions have to be satisfied. So far as second question is concerned, Division Bench went on to state that partnership firm can be treated as shareholder but that it is not necessary that it has to be registered shareholder. 17) We are of view that it is very difficult to accept reasoning of Division Bench. It is not enough to say that Ankitech s case refers to second limb of amended 15 definition, whereas present case refers to first limb, for simple reason that word shareholder in both limbs would mean exactly same thing. This is for reason that expression such shareholder in second limb would show that it refers to person who is shareholder in first limb. 18) This being case, we are of view that whole object of amended provision would be stultified if Division Bench judgment were to be followed. Ankitech s case, in stating that no change was made by introducing deeming fiction insofar as expression shareholder is concerned is, according to us, wrongly decided. whole object of provision is clear from Explanatory memorandum and literal language of newly inserted definition clause which is to get over two judgments of this Court referred to hereinabove. This is why shareholder now, post amendment, has only to be person who is beneficial owner of shares. One cannot be registered owner and beneficial owner in sense of beneficiary of trust or otherwise at same time. It is clear therefore that moment there is shareholder, who need not necessarily be member of Company on its register, who is 16 beneficial owner of shares, Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that shareholder must first be registered shareholder and thereafter, also be beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that amendment speaks only of beneficial shareholder who can compel registered owner to vote in particular way, as has been held in catena of decisions starting from Mathalone vs. Bombay Life Assurance Co. Ltd., [1954] SCR 117. 19) This being case, we are prima facie of view that Ankitech judgment (supra) itself requires to be reconsidered, and this being so, without going into other questions that may arise, including whether facts of present case would fit second limb of amended definition clause, we place these appeals before Hon ble Chief Justice of India in order to constitute appropriate Bench of three learned Judges in order to have relook at entire question. 17 20) Ordered accordingly. . J. (R.F. Nariman) .. ..J. (Navin Sinha) New Delhi; January 18, 2018 National Travel Services v. Commissioner of Income-tax, Delhi-VIII