2017 (1) TMI 331 - SC - Income Tax

HUF loans from companies constitute deemed dividend under Section 2(22)(e) despite share registration issues (22)(e)

Gopal and Sons (HUF) Versus CIT Kolkata-XI

The SC held that loans/advances received by a HUF constitute deemed dividend under Section 2(22)(e) of the Income Tax Act. Although share certificates ... Deemed dividend u/s 2(22)(e) - HUF - share certificates were issued in the name of the Karta - 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), especially in view of the term “concern” as defined in the Section itself ? Held that:- 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. It is also found as a fact, from the audited annual return of the Company filed with ROC that the money towards share holding 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. 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. For this reason, judgment in C.P. Sarathy Mudaliar [1971 (10) TMI 8 - SUPREME COURT] relied upon by the learned counsel for the appellant, will have no application. That was a judgment rendered in the context of Section 2(6-A)(e) of the Income Tax Act, 1922 wherein there was no provision like Explanation 3. Issues:1. Whether loan/advances received by a Hindu Undivided Family (HUF) could be deemed as dividend within the meaning of Section 2(22)(e) of the Income Tax Act, 1961Rs.2. Whether HUF can be a registered shareholder in a company and a beneficial shareholder simultaneouslyRs.Analysis:1. The appellant, a HUF, received advances from a company and the Assessing Officer (AO) added a sum as deemed dividend under Section 2(22)(e) of the Income Tax Act. The AO concluded that the appellant was both the registered and beneficial shareholder of the company. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the addition, stating that the shareholder should be a beneficial shareholder to attract Section 2(22)(e).2. The Income Tax Appellate Tribunal (ITAT) allowed the appeal, citing a precedent where HUF was held not to be a shareholder or a beneficial shareholder, thus not satisfying the conditions of Section 2(22)(e). However, the High Court reversed the ITAT's decision, emphasizing that the HUF was a member of the company and the case fell within the provisions of Section 2(22)(e).3. The Supreme Court analyzed Section 2(22)(e) and noted that it creates a fiction deeming certain payments as dividends under specific circumstances. The Court highlighted that the provision must be strictly interpreted and all conditions must be fulfilled for the receipt to be deemed as dividends. The Court outlined the types of payments that can be taxed as dividends under the provision.4. The Court emphasized that the payment made to the HUF in this case, with the Karta having substantial interest, falls within the ambit of Section 2(22)(e). Even if the HUF was not the registered shareholder, the payment to the HUF constituted deemed dividend as per Explanation 3 of the Section. The Court differentiated this case from precedents under the Income Tax Act, 1922, due to the presence of Explanation 3 in the current Act.5. Ultimately, the Court dismissed the appeal, stating that the provisions of deemed dividend were indeed attracted in this case, and the HUF's status as a registered shareholder was not necessary for the application of Section 2(22)(e).