(Continued from the
last issue)
2.5 As mentioned in para 2.4 read with para
2.1.2.1 of Part-I of this write-up, the
Tribunal had decided the issue in favour of assessee merely by following the
decision of the co-ordinate bench in the case of Binal Sevantilal Koradia (HUF)
[Koradia (HUF) ‘s case] which in turn had followed the decision of the Special
Bench of the Tribunal in Bhaumik Colour’s case [313 ITR 146(AT)]. As further
mentioned in para 2.4 read with para 2.3 of Part –I of this write-up, the High
Court had reversed the decision of the Tribunal merely by referring to the provisions
of section 2(22)(e) and stating that it is not disputed that the Karta is a
member of the HUF which has taken a loan from G. S. Fertilizers Pvt. Ltd.
(GSF). As stated in para 1.4 of Part – I of this write-up, under the New
Provisions, loan given to two categories of persons are covered Viz. i) certain
shareholder (first limb of the provisions) and ii) the ‘concern’ in which such
shareholder has substantial interest (second limb of the provisions).
Gopal and Sons HUF vs. CIT(A)- (2017) 145 DTR 289 (SC)
3.1 The
issue of taxability of the loan taken by the assessee HUF from GSF as deemed
dividend u/s 2(22)(e) in the hands of the assessee HUF for the Asst. Year.
2006-07 came-up for consideration before the Apex Court at the instance of
assessee HUF.The following question of law was raised before the Court:
“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?”
3.2 On behalf of the assessee HUF, it was
contended that the tribunal had correctly explained the legal position that HUF
cannot be either beneficial owner or registered owner of the shares and hence
the amount of such loan cannot be taxed as deemed dividend u/s 2(22)(e) in the
hands of the assessee HUF.
3.2.1 In support
of the above contention, raised on behalf of the assessee HUF, reliance was
placed on the observations of the Apex Court in the case of C.P. Sarathy
Mudaliar (83 ITR 170) referred to in para 1.3.1 of Part-I of this write-up in
which, in substance, it is stated that an HUF cannot be a shareholder of the
company and the shareholder of a company is the individual who is registered as
shareholder in the books of the company. In that case, as mentioned in para 1.3
of Part-I of this write-up, the Court took the view that a loan granted to a
beneficial owner of the shares who is not a registered shareholder can not be
regarded as loan advanced to a ‘shareholder’ of the company within the mischief
of section 6A(e) of the 1922 Act.
3.3 On
the other hand, the counsel appearing on behalf of the Revenue had relied on
the findings of the AO and CIT(A) and submitted that on the facts of this case,
the Revenue was justified in taxing the amount in question as deemed dividend
in the hands of the assessee HUF.
3.4 For
the purpose of deciding the issue, the Court noted the facts of the assessee
HUF referred to in para 2.1 of Part-I of this write-up. The Court also referred
to the relevant provisions of section 2(22)(e) including Explanation 3 which
defines the expression “concern” (which includes HUF) and the meaning of
substantial interest of a person in a ‘concern’, other than a company, which
effectively states that a person shall deemed to have substantial interest in a
concern (in this case HUF) if he is, at any time during the previous year,
beneficially entitled to not less than 20% of the income of such ‘concern’ (in
this case HUF).
3.4.1 The Court then also referred to the contention
of the assessee HUF before the CIT(A) that the assessee being HUF, it was not
the registered shareholder and that the GSF had issued shares in the name of
Shri Gopal Kumar Sanei, the Karta of the HUF, and not in the name of the
assessee HUF as shares could not be directly allotted to an HUF and hence, the
New Provisions of section 2(22)(e) cannot be attracted. In this context and in
the context of the provisions of section 2(22)(e), the Court then observed as
under :
“Taking note of the aforesaid
provision, the CIT(A) rejected the aforesaid contention of the assessee. The
CIT(A) found that examination of annual returns of the Company with Registrar
of Company (ROC) for the relevant year showed that even if shares were issued
by the Company in the name of Shri. Gopal Kumar Sanei, Karta of HUF, but the
Company had recorded the name of the assessee/HUF as shareholders of the
Company. It was also recorded that the assessee as shareholder was having
37.12% share holding. That was on the basis of shareholder register maintained
by the Company. Taking aid of the provisions of the Companies Act, the CIT(A)
observed that a shareholder is a person whose name is recorded in the register
of the shareholders maintained by the Company and, therefore, it is the
assessee which was registered shareholder. The CIT(A) also opined that the only
requirement to attract the provisions of section 2(22)(e) of the Act is that
the shareholder should be beneficial shareholder. On this basis, the addition
made by the AO was upheld.”
3.5 The Court then noted the view taken by
the Tribunal and its reliance on the decision of the co-ordinate bench in
Koradia HUF’s case (supra) referred to in para 2.1.2 of Part-I of this
write-up. The Court then stated that the High Court has reversed the decision
of the Tribunal with one line observation, viz., ‘the assessee did not dispute
that the Karta is a member of HUF which has taken the loan from the Company
and, therefore, the case is squarely within the provisions of section 2(22)(e)
of the Income-tax Act’.
3.6 The Court then stated that Sec. 2(22)(e)
creates a fiction, thereby bringing any amount otherwise than as dividend in to
the net of dividend under certain circumstances. It gives artificial definition
of dividend. It treats the amount as deemed dividend which is not a real
dividend. As such, the Court reiterated the settled position that a provision
which is a deemed provision and fictionally creates certain kinds of receipts
as dividend is to be given strict interpretation. Therefore, unless all the
conditions contained in the provision are fulfilled, the receipt cannot be
deemed as divided. Further, the Court reiterated another settled principle,
viz., in case of a doubt or where two views are possible, benefit shall accrue
in favour of the assessee.
3.7 After referring to the legal position with
regard to deeming fiction, the Court, in the context of the section 2(22)(e),
stated that certain conditions need to be fulfilled in order to attract these
provisions The Court then pointed out that for the purpose of this case,
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.”
3.8 After referring to the provisions contained
in Explanation 3 [referred to in para 3.4 above], the Court observed as under :
“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.”
3.9 Finally, the Court decided the issue in
favour of Revenue and concluded as under :
“ 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.”
3.9.1 With the above conclusion, the Court stated
that the judgment of the Apex Court in the case C.P. Sarathy Mudaliar (supra)
will have no application. That was a judgment rendered in the context of
section 2(6A)(e) of the 1922 Act wherein there was no provision like
Explanation 3.
Conclusion
4.1 With the above judgment of the Apex Court,
it is now settled that in case of a loan given by a closely held company to an HUF (post May
‘87), and if other conditions of the second limb of the New Provisions of
section 2(22)(e) are satisfied, the deemed dividend becomes taxable in the
hands of the HUF. The contention that HUF as such is not a registered
shareholder and therefore, the New
Provisions of section 2(22)(e) are not attracted even if it is the beneficial
owner of the shares is not likely to support the case of the assessee to avoid
taxation of deemed dividend under the New Provisions in the hands of the HUF.
4.1.1 From the above judgment of the Apex Court, it
would appear that once a loan is given to an HUF by a closely held company and
the registered shareholder of such company with requisite shareholding is a
member of the HUF having substantial interest (i.e. beneficially entitled to
not less than 20% of the income of the HUF), the second limb of the New
Provisions of section 2(22)(e) will be
attracted. In such a case, as observed by the Court (refer para 3.8 above), it
would not be necessary to determine as to whether HUF can, in law, be
beneficial shareholder or registered shareholder in a company.
4.1.2 Based
on the judicial decisions referred to in part I of this write-up, the view
which prevailed that for the purpose of invoking second limb of the New
Provisions of section 2(22)(e) (dealing with loan given to a ‘concern’),only
such shareholder (with requisite shareholding) who is registered as well as
beneficial owner of the shares should be member or partner in a ‘concern’
should not hold good in view of the observations of the Apex Court (refer paras
3.8 and 3.9 above). However, the requirement that he should be beneficially
entitled to not less than 20% of the income of such ‘concern’ at any time
during the previous year (substantial interest in a ‘concern’) continues.
4.1.3 The above judgment is also relevant for the
purpose of deciding the taxable person under the second limb of the New
Provisions to section 2(22)(e) in cases
where a loan is given to any ‘concern’ referred to in Explanation 3(a) to
section 2(22)(e). It seems that, the issue referred to in para 1.4.2.1 of part
I of this write-up should now impliedly get settled to the effect that in such
cases, the deemed dividend is taxable in the hands of the ‘concern’ to whom the
loan is given by the company. This gives support to the view expressed in CBDT
Circular No. 495 dtd. 22/9/1987 wherein it has been opined that the deemed
dividend, in such case, would be taxed in the hands of a ‘concern’ (i.e.
non-shareholder). As such, in this context, the judicial precedents referred to
in that para will not be useful.
4.2 In the above case, the share certificates
were issued by the company in the name of the Karta but in the annual returns
of the company filed with the ROC, the HUF was shown as registered and
beneficial shareholder. This was the undisputed findings of the lower
authorities and on that basis, the Court, it seems, was inclined to treat the
HUF as registered shareholder also.
However, on these facts, the Court
concluded that it cannot be doubted that it is the beneficial owner and even if
it is not a registered shareholder, the payment received by the HUF wherein the
concerned shareholder is a member with substantial interest constitutes, in
view of the Explanation 3 to the section 2(22)(e), deemed dividend under the
second limb of the New Provisions of section 2(22)(e) in the hands of the HUF
(of course, to the extent provided in the section).
4.3 In
the above case, the Court also has clearly stated that for the purpose of this
case, to attract the second limb of the New Provisions of section 2(22)(e),
three conditions are required to be fulfilled (mentioned in para 3.7 above).
One such condition requires that in the ‘concern’ to whom the loan is given (in
which the specified shareholder is a member or a partner), such shareholder
should have a substantial interest (i.e. in this case, he should be
beneficially entitled to not less than 20% of the income of the HUF).
4.3.1 It is interesting to note that in the above
case, the Court has proceeded on the basis that it was not disputed that the
Karta (who was claimed to be the registered shareholder) is beneficially
entitled to not less than 20% of the income of the HUF. Therefore, the Court
has not gone into the correctness of the satisfaction of this condition and in
law, there could be debate on satisfaction of this condition.
4.3.2 From the facts of the above case and context
in which the question raised before the Apex Court is ultimately decided, it
would appear that in this case, the Court was not concerned with the issue of
applicability of the second limb of the New Provisions of section 2(22)(e) to
cases where only the beneficial owner of share in a closely held company (with
requisite percentage) is a member of a ‘concern’ with substantial interest and
such company has given a loan to such ‘concern’.
4.4 In the above case, the Apex Court has
reiterated the settled position that section 2(22)(e) is a deeming fiction and
therefore, it has to be strictly construed. The Court has also reiterated other
settled principle that in case of doubt or where two views are possible in
construing a provision under the Act, the view favourable to the assessee
should be taken.
4.5 In
the above case, the Court was concerned with the effect of the second limb of
the New Provisions of section 2(22)(e) read with Explanations 3 and therefore,
effect of the judgment should be confined only to that part of the provisions.
4.6
In view of the above judgment of the Apex Court, in the context of the
issues under the consideration, many decisions of the courts/Tribunal (referred
to in part I of this write-up) including the decision of the Special Bench in
Bhaumik Colour’s case (supra) will be affected and will have to be read
and applied accordingly.
