Court affirms shares held by guardian are beneficially owned, assessee lacks substantial interest.

The court upheld the Tribunal's decision that the shares held by Selva Saroja, including those held as a guardian, should be considered in determining voting power under the Income-tax Act. Consequently, the shares in her name were beneficially held by her, affirming that the assessee did not have a substantial interest in the company for the purposes of section 2(22)(e) of the Act. The court ruled against the Revenue, emphasizing that the shares should be included in assessing the application of the relevant provisions. No costs were awarded.

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Issues Involved:
1. Whether the shares in the name of Selva Saroja were beneficially held by her so as to attract the operation of section 2(22)(e) of the Income-tax Act, 1961.

Summary:

Issue 1: Beneficial Ownership of Shares u/s 2(22)(e) and 2(32) of the Income-tax Act, 1961:

The court examined whether the shares held by Selva Saroja, including those held as a guardian for her minor children, should be considered in determining if the assessee had substantial interest in the company, thereby attracting the provisions of section 2(22)(e) of the Income-tax Act, 1961. The Income-tax Officer initially treated the net drawings of Rs. 87,000 by the assessee as deemed dividends, asserting that the assessee was substantially interested in the company. The Appellate Assistant Commissioner and the Tribunal, however, found that the shares held by Selva Saroja, both in her name and as a guardian, should be included in the total shareholding.

The court upheld the Tribunal's finding that the shares held by Selva Saroja in her own name and on behalf of the minors should not be ignored. Section 153 of the Companies Act, 1956, was cited, which states that no notice of any trust shall be entered on the register of members, making the guardian the shareholder for all practical purposes. The court referenced various legal texts and precedents to support the view that the guardian, not the minors, is the shareholder with voting rights.

The court concluded that the shares held by Selva Saroja, including those held as a guardian, should be considered in determining the voting power u/s 2(32) of the Income-tax Act. Consequently, the shares in the name of Selva Saroja were beneficially held by her, and the Tribunal was correct in its decision. The question of law was answered against the Revenue, affirming that the shares should be taken into consideration for the application of section 2(22)(e) of the Act. There was no order as to costs.

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