TaxTMI 
TaxTMI 
2005 (7) TMI 91
X X X X Extracts X X X X
X X X X Extracts X X X X
....he facts and in the circumstances of the case, the Tribunal was, in law, justified in holding that the interest-free advances received by the assessee-firm from M/s. Jai Prakash Associates (P.) Ltd. could not be treated as deemed dividend within the meaning of section 2(22)(e) of the Income-tax Act, 1961? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was, in law, justified in holding that the assessee-firm was only a beneficial owner of the shares of M/s. Jai Prakash Associates (P.) Ltd., when the partners were holding these shares for and on behalf of the firm, acting in the course of business of the partnership, and, thus, the firm was not the beneficial owner but the legal owner of the shares in its own right? (iv) Whether, on the facts and in the circumstances of the case, the Tribunal was, in law, justified in holding that the interest paid to Smt. Rekha Dixit was disallowable under section 40(b) of the Income-tax Act, 1961, only to the extent to which it related to the period from November 1, 1985, to March 31, 1986, despite the fact that as per the terms of the partnership deed dated November 4, 1985, the said Rekha Dixit wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rson whose name and address are entered in the register of shareholders maintained by the company. The brief facts of the case were that a person who has purchased shares in a company under a blank transfer and in whose name the shares has not been registered in the books of the company, such purchaser who had paid the price of the shares wanted to have a set off of the tax deducted to source to the dividends by the company against his liability of income-tax towards the income of the said dividends, the said income was not allowed by the Department. Finally the hon'ble Supreme Court has held that notwithstanding the equitable right of the purchaser to the dividend on such shares, being not registered in the books of the company cannot be said to be shareholder and, this was not allowed to be set off of the tax deducted at source under section 18(5) of the Act. The Hon'ble Supreme Court in the case of CIT v. C.P. Sara thy Mudaliar [1972] 83 ITR 170 had held as under: 'Held, that only loans advanced to shareholders could be deemed to be dividends under section 2 (6A)(e). The Hindu undivided family could not be considered to be a "shareholder" u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e whose name is registered as the owner or the holder of the share in the register of shares of the company. The Companies Act 1956, by section 153 does not recognize any trust or beneficial interest of any person in any share. The brief facts of this case were that a public limited company gave loans to two of its shareholders, who were partners of a firm. The shares of the partners were shown as stock-in-trade of the firm and the amounts received were shown as deposits made by the company in the books of the firm. The question was as to whether the loans could be deemed to be extended in the hands of the firm under section 2(22)(e), it was held that the firm was not a registered shareholder of the company. Hence, the amounts advanced could not be deemed to be dividends in the hands of the firm within the meaning of section 2(22)(e). Admittedly, the provisions of section 2(6A)(e) of the Act of 1922 and of section 2(22)(e) of the Act, 1961 are similar. It appears that even the Legislature in its wisdom realised this lacuna in the eyes of law and amended the provisions of section 2(22)(e) with effect from April 1, 1988. As it is substantive law which gives rise to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from November 1, 1985, and this by no stretch of imagination or by any implication of law, she can be said to be a partner before November 1, 1985. Section 40(b) of the Income-tax Act is very clear on the point and it provides as under: '40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". (a)..... (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm....' The very section provides that it is only an interest to a partner which is inadmissible under section 40(b). Here in this case Smt. Rekha Dixit was not a partner up to November 1, 1985. The sharing of the profit was according to the partnership deed duly executed by the partners and agreed upon by them and, thus, that sharing of profit will not make Smt. Rekha Dixit a partner before November 1, 1985. This fact find support even from the assessment order made by the Assessing Officer disallowing the interest paid to these partners up to the period w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....... (d)... (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) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, 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." 10. The aforesaid clause (e) of the Act has been amended with effect from April 1, 1988, the amended clause (e) of the Act reads as follows: "(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 share 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 m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....39;shareholder' used in section 18(5) of the Act by these cases is correct. No valid reason exists why 'shareholder' as used in section 18(5) should mean a person other than the one denoted by the same expression in the Indian Companies Act, 1913. In Wala Wynaad Indian Gold Mining Co., In re [1882] 21 Ch. D. 849, 854 Chitty, J., observed: 'I use now myself the term which is common in the courts, "a shareholder", that means the holder of the shares. It is the common term used, and only means the person who holds the shares by having his name on the register.' Section 19A makes it clear, if any doubt existed, that by the term 'shareholder' is meant the person whose name and address are entered in the register of 'shareholders' maintained by the company. There is but one register maintained by the company. There is no separate 'register of shareholders' such as the assessee claims to be but only a 'register of members'. This takes us immediately to the register of members, and demonstrates that even for the purpose of the Indian Income-tax Act, the words 'member' and 'shareholder' can be read as syno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on before the Supreme Court was whether the loans advanced to the Hindu undivided family-beneficial owner of the shares-would be taxed as deemed dividend in the hands of the Hindu undivided family. The Supreme Court held that the Hindu undivided family being only the beneficial shareholder and not a registered shareholder would not fall within the purview of section 2(22)(e) of the Act. The apex court observed as follows: "What section 2 (6A)(e) is designed to strike at is advance or loan to a 'shareholder' and the word 'shareholder' can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a 'shareholder'. He may be beneficially entitled to the share but he is certainly not a 'shareholder'. It is only the person whose name is entered in the register of the shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company and not the person beneficially entitled to the shares. It is the former who is a 'shareholder' within the matrix and scheme of the company law a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e salary paid to a partner by a firm which grow and sells tea was exempt from tax under rule 24 of the Income-tax Rules, 1922, to the extent of 60 per cent. thereof representing agricultural income and the rest was liable to tax only to the extent of 40 per cent. The principle enunciated by the hon'ble Supreme Court was that the partners being employed by the firm in which he was a partner cannot be said to be different than the firm employing him. There was no question of any interpretation of the word "shareholder". The only point involved was the relationship of a partner shown as an employee of the firm vis-a-vis the said firm, hence this ruling has no application to the present case. 19. Likewise, the case of Malabar Fisheries Co. v. CIT reported in [1979] 120 ITR 49 (SC) too has no application to the present facts of the case, as in that case against the position of a partner vis-a-vis the firm was pro-pounded. The facts were that a firm constituting of four partners carried on six different businesses. During the accounting periods relevant to the assessment years 1960-61 to 1963-64 it installed various items of machinery in respect of which development rebate was all....