Facts:

The assessee is the HUF of M/s Rameshwarlal Sanwarmal consisting of S. M. Saharia as manager and Karta and his wife and a minor son. During the relevant assessment year, the assessee was the beneficial owner of certain shares in a private limited company called Shyam Sundar Tea Co. (P.) Ltd. These shares, though beneficially owned by the assessee stood in the name of S. M. Saharia in the register of shareholders of the company. The assessee also owned business concerns, namely, Milmony Shop, Saharia & Co. and Saharia Industrial Corporation. The company advanced loans to these business concerns during the relevant assessment year and since it was a company in which the public were not substantially interested, a question arose in the assessment of the assessee to income-tax, whether the loans advanced to these business concerns could be regarded as “deemed dividend” of the assessee under S.. 2(6A)(e) of the Act ? The ITO took the view that the loans advanced to the business concerns were attributable to the accumulated profits of the company to the extent of Rs. 4,48,045 and since the assessee which owned the business concerns was the beneficial owner of the shares standing in the name of S. M. Saharia, the conditions of S. 2(6A)(e) were satisfied and the loans were liable to be regarded as “deemed dividend” taxable in the hands of the assessee under S.. 2(6A)(e). On appeal  the AAC agreed with the view taken by the ITO and held that since S. M. Saharia held shares in the company as representing the assessee and the loans were advanced to the three business concerns belonging to the assessee out of the accumulated profits of the company, the ITO was justified in treating the loans as “deemed dividend” under S. 2(6A)(e) and taxing them in the hands of the assessee. The matter was carried in further appeal to the Tribunal . The assessee contended  first, that since the assessee was not a registered holder of shares in the company, the loans advanced to the three business concerns of the assessee could not be regarded as loans advanced to a shareholder so as to attract the applicability of S.  2(6A)(e); and, secondly, even if the loans could be treated as deemed dividend under S. 2(6A)(e), they could be taxed only in the hands of S. M. Saharia, the registered shareholder, and not in the hands of the assessee. Both these arguments were negatived by the Tribunal and so also were the other subordinate arguments and the appeal was rejected and the assessment confirmed. This led to a reference by the assessee to the High Court. Inter alia amongst other questions raised the important questions related to the taxability of the loans advanced to the three business concerns of the assessee as deemed dividend under S. 2(6A)(e) and each of these questions brought in issue different aspects of taxability. The first of these questions which is material is reproduce as follows :

“Whether, on the facts and in the circumstances of the case, and on a true interpretation of the terms of s. 2(6A)(e) of the Indian IT Act, 1922, the Tribunal was right in holding that the amounts of Rs. 2,21,702 (gross) and Rs. 3,43,505 (net) were taxable as dividends in the hands of the applicant, HUF, for the asst. yrs. 1955-56 and 1956-57, respectively, when the shares were registered in the name of Sri S. M. Saharia, the Karta of the family ?”

The, two distinct aspects in this question were argued before the High Court. One was whether the loans advanced to the three business concerns of the assessee could be regarded as “deemed dividend” within the meaning of S.  2(6A)(e) and the other was whether these loans, even if regarded as “deemed dividend”, could be taxed in the hands of the assessee. The High Court decided both these aspects of the question in favour of the assessee and held that the word “shareholder” in S.  2(6A)(e) meant a registered shareholder or, in other words, a shareholder whose name is recorded in the register of the company as the holder of the shares and since the advance in the present case was made to the assessee which was not a registered shareholder, it could not be regarded as “deemed dividend” within the meaning of S.  2(6A)(e) and that even if it be assumed that the advance was liable to be regarded as “deemed divided” under S.  2(6A)(e), it could be taxed as dividend income only of the registered shareholder and not of the assessee. The result of this decision was that the assessment made by the Revenue authorities was set aside in so far as it included the loans advanced by the company to the three business concerns of the assessee as deemed dividend and taxed it in the hands of the assessee.

The Revenue preferred an appeal before Supreme Court. The Revenue attacked only that part of the order of the High Court which held that the “deemed dividend” could be assessed to tax only in the hands of S. M. Saharia, the registered shareholder, and not in the hands of the assessee which was merely the beneficial owner of the shares. The result was that the only question that came to be considered by SC was whether the “deemed dividend” under S.  2(6A)(e) could be taxed in the hands of the beneficial owner of the shares or it could be brought to tax only in the assessment of the registered shareholder and the view taken was that where the shares acquired with the funds of one person are held in the name of another, it is the former who is assessable to tax on the dividend on those shares and this principle would apply equally to the “deemed dividend” under S. 2(6A)(e). The Supreme Court did not consider whether the loans granted to the three business concerns of the assessee could at all be regarded as “deemed dividend” within the meaning of S. (6A)(e) when the assessee was not a registered shareholder and the decision of the High Court to the effect that assessee not being a registered shareholder, the loans advanced to it could not be regarded as “deemed dividend” under S.  2(6A)(e) remained undisturbed..

. Since the first question relating to the AY.1956-57 was answered by this Court in favour of the Revenue, the reference went back to the High Court for consideration of the remaining questions that had not been answered by the High Court . The  High Court answered two questions in favour of the Revenue and against the assessee. The assessee thereupon preferred the present appeal before Supreme  Court. There was only one contention advanced on behalf of the assessee in support of this appeal, namely, that the amounts of the loans advanced to the three business concerns of the assessee could not be regarded as “deemed dividend” within the meaning of S. 26A(e) since the assessee was not a registered shareholder of the company. This contention was sought to be supported by the decision of this Court in CIT v. C. P. Sarathy Mudaliar (1972) 83 ITR 170 (SC).

The Court observed that it did not decide the question whether a loan advanced to a beneficial owner of the shares can be regarded as “deemed dividend” within the meaning of S. 2(6A)(e) and the answer given by the Court in favour of the Revenue cannot be said to extend to this aspect of the question. Therefore, the Court held that the first question still remains to be answered so far as this aspect of the question is concerned and it is open to the assessee to contend that the amounts of loans advanced to the three business concerns of the assessee could not be regarded as “deemed dividend” under S. 2(6A)(e), since the assessee was not a registered shareholder.

The question whether, on a proper construction of S. 2(6A)(e), a loan advanced to a beneficial owner of the shares would be liable to be regarded as “deemed dividend” was not raised or argued before this Court in CIT v. Rameshwarlal Sanwarmal 1972 CTR (SC) 300  and this Court was not called upon to decide it and hence there is no discussion about it in the judgment of this Court nor is there any decision on it. It is only in the subsequent decision on CIT v. C. P. Sarathy Mudaliar (supra) that this question came up for the first time before this Court for consideration and this Court held that when S.  2(6A)(e) speaks of a “shareholder” it refers to the registered shareholder and not to the beneficial owner and hence a loan granted to a beneficial owner of the shares who is not a registered shareholder cannot be regarded as a loan advanced to a “shareholder” of the company so as to be within the mischief of S. 2(6A)(e). There is thus no conflict at all between the decisions in CIT v. C. P. Sarathy Mudaliar (supra) and CIT v. Rameshwarlal Sanwarmal (supra)

Issue:

The  appeal by special leave raises a question of law relating to the interpretation of S. 2(6A)(e) of the Indian IT Act,   1922 .

View :

What S. 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 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 and not the latter. It is only where a loan is advanced by the company to a registered shareholder and the other conditions set out in S. 2(6A)(e) are satisfied that the amount of the loan would be liable to be regarded as “deemed dividend” within the meaning of S. 2(6A)(e). The amount of the loan would not fall within the mischief of this section if it is granted to a beneficial owner of the shares who is not the registered shareholder. Now, in the present case, it was common ground that the loans were advanced to the three business concerns of the assessee which was an HUF and this HUF was not the registered holder of any shares in the company but it was the beneficial owner of certain shares which stood in the name of the manager and Karta. The loans were thus advanced to the beneficial owner of the shares and not to the registered shareholder and hence they could not be regarded as loans advanced to a “shareholder” of the company within the meaning of S. 2(6A)(e) of the Act .

Held :

Section  2(6A)(e) was accordingly not attracted and the amounts of the loans could not be taxed as deemed dividends in the hands of the assessee The decision in CIT v. C.P. Sarathy Mudaliar (supra) does,  lay down the correct interpretation of S. 2(6A)(e) of the Act .

The amount of loan would not fall within the mischief of S.  2(6A)(e) if it is granted to a beneficial owner of shares who is not the registered shareholder. (AY. 1956-57)  ( CA No 133 of 1973 dt 5-12-1979 )

Editorial : Subsequent decisions on the issue may be referred CIT v. Madhur Housing and Development Co (2018) 401 ITR 152 (SC); National Travel Service  v. CIT (2018) 401 ITR 154/162 DTR 201/300 CTR 582/253 Taxman 243 (SC)

“Speak only if it improves upon the silence.”

– Mahatma Gandhi