Whether a Hindu Undivided Family (HUF) can be considered a "beneficial owner" of shares registered in the name of its Karta, thereby attracting provisions of Section 2(22)(e) of the Income Tax Act, 1961, in case of loans or advances from a closely held company in which the HUF has substantial interest.
IN THE SUPREME COURT OF INDIA
GOPAL AND SONS (HUF) VERSUS CIT KOLKATA-XI
CIVIL APPEAL NO. 12274 OF 2016
(ARISING OUT OF SLP (C) NO. 22059 OF 2015
HELD THAT: If shares are registered in the name of KARTA of a HUF and HUF is shown as Registered and Beneficial Owner of shares in the Annual Accounts and Balance Sheet of the Company. Then HUF will be considered as beneficial owner of shares and provisions of Section 2(22)(e) will be applicable in case of any loan given to the HUF by a company in which HUF has substantial interest through its KARTA.
ISSUE RAISED BY APPELLANT
"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?"
APPLICABLE PROVISIONS
SECTION 2(22): Dividend includes:
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(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-
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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."
BRIEF FACTS
1. The assessee herein had filed the return in respect of the Assessment Year( 2006-07) declaring his total income at Rs. 1,62,745/-.
2. 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/-.
3. 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.
THE APEX COURT
4. 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.
5. 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').
6. 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.
7. 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.
8. In the appeal filed by the assessee, the aforesaid addition was affirmed by the Commissioner of Income Tax (Appeals) (for short 'CIT(A)').
9. 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.
ARGUMENT OF ASSESSEE
10. 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.
11. The arguments before APEX COURT remain the same. The 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.
12. 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[1972 SCR 1076] :
"....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 in 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."
APPEAL BEFORE CIT(A)
13. Taking note of the aforesaid provision, the CIT(A) rejected the aforesaid contention of the assessee.
APPEAL BEFORE ITAT
14. The ITAT reversed order of CIT(A)- 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[ITA No. 2900/Mum/2011, AY 2007-08 dated 10.10.2012 ]. 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.
APPEAL BEFORE HON'BLE HIGH COURT
15.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.
OBSERVATIONS & DECISION OF THE APEX COURT
16. 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 shareholders. 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.
[Alagusundaran Vs. CIT; 252 ITR 893 (SC)]
17. 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.
18. 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.
19. 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.
20. It is also found as a fact, from the audited annual return of the Company filed with ROC that the money towards shareholding 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.
21. 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.
22. We, thus, do not find any merit in this appeal, which is accordingly dismissed.
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