|CORAM:||A.K. Sikri J., Abhay Manohar Sapre J|
|CATCH WORDS:||beneficial owner of shares, deemed dividend|
|COUNSEL:||S. B. Upadhyay|
|DATE:||January 4, 2017 (Date of pronouncement)|
|DATE:||January 6, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 2(22)(2) Deemed Dividend: The argument that as the shares are issued in the name of the Karta, the HUF is not the “registered shareholder” and so s. 2(22)(e) will not apply to loans paid to the HUF is not correct because in the annual returns filed with the ROC, the HUF is shown as the registered and beneficial shareholder. In any case, the HUF is the beneficial shareholder. Even if it is assumed that the Karta is the registered shareholder and not the HUF, as per Explanation 3 to s. 2(22), any payment to a concern (i.e. the HUF) in which the shareholder (i.e. the Karta) has a substantial interest is also covered|
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’). 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. 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. In the appeal filed by the assessee, the aforesaid addition was affirmed by the CIT(A). The Tribunal reversed the CIT(A). The High Court reversed the Tribunal. Before the Supreme Court, the assessee 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. The Supreme Court had to consider the following question of law:
“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?”
HELD by the Supreme Court dismissing the appeal:
(i) Section 2(22)(e) of the Act creates a fiction, thereby bringing any amount paid otherwise than as a dividend into the net of dividend under certain circumstances. It gives an artificial definition of ‘dividend’. It does not take into account that dividend which is actually declared or received. The dividend taken note of by this provision is a deemed dividend and not a real dividend. Loan or payment made by the company to its shareholder is actually not a dividend. In fact, such a loan to a shareholder has to be returned by the shareholder to the company. It does not become income of the shareholder. Notwithstanding the same, for certain purposes, the Legislature has deemed such a loan or payment as ‘dividend’ and made it taxable at the hands of the said shareholder. It is, therefore, not in dispute that such a provision which is a deemed provision and fictionally creates certain kinds of receipts as dividends, is to be given strict interpretation. It follows that unless all the conditions contained in the said provision are fulfilled, the receipt cannot be deemed as dividends. Further, in case of doubt or where two views are possible, benefit shall accrue in favour of the assessee.
(ii) 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 share holders. 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. [See: Alagusundaran Vs. CIT; 252 ITR 893 (SC)]
(iii) 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.
(iv) 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.
(v) 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.
(vii) 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 1972 SCR 1076, 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.
This instantly provokes one who has personally been giving enough thoughts, to seriously upon the unintended, highly objectionable and absurd consequences that any such or similar ‘deeming’ provision , more often than not, leads to. More so,should the concept of ‘deeming’ be adopted,with no rhyme of reason, or rationale behind, as is being done by the government, simplistically for roping within the tax net any ‘transaction’; which is otherwise not permissible , hence might not be sustainable,by applying the common law principles of jurisprudence.
In one’s longstanding conviction, so also as being canvassed for,one such instance of a comparatively very recent origin, in which the foregoing line of reasoning might hold good and hence requires to be pressed for relates to the ongoing struggle against the propriety and constitutional validity of levy of any tax on ‘deemed works contract’.
Anyone,- regardless of whether or not he is a taxpayer impacted / likely to be impacted sometime, or an advising professional,- if so care and minded to,may go through the viewpoints shared,for the common good,and available in public domain on a diligent search.
KEY Note: The urging/utmost need for doing so, has yet again arisen in the context of the GST Code, pending enactment.For knowing and getting a grip of the enormity of the problems , galore, in store for the future,on a first hand basis, a close study of the contents of the lately released Revised Model GST Law (Nov 2016)*, by one and all truly concerned,is not but unavoidable and imperative.