Payments to HUF held deemed dividend u/s 2(22)(e) because the prescribed conditions were fulfilled notwithstanding the fact that the HUF itself was not the registered shareholder of the company-Supreme Court
ABCAUS Case Law Citation:
ABCAUS 1095 (2017) (01) SC
Assessment Year : 2006-07
Important Case Laws Cited:
Binal Sevantilal Koradia (HUF) Vs. Department of Income Tax
CIT Vs. C.P. Sarathy Mudaliar
Alagusundaran Vs. CIT
Substantial Question for determination:
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?
Brief Facts of the Case:
The appellant assessee (HUF) had filed the return of income declaring his total income at Rs. 1,62,745/-. The Assessing Officer (‘AO’) passed the assessment order determining the income at Rs. Rs. 1,30,31,280/- by making number of additions which among other things included addition made on account of deemed dividend within the meaning of Section 2(22)(e) of the Income Tax Act, 1961 (‘Act’).
The AO had noticed that during the relevant previous year, the assessee had received certain advances from a private limited company (‘Company’). In the audit report and annual return of the company for the relevant period, which was filed before the Registrar of Companies (ROC), it was found that out of the subscribed share capital of the said Company, the number of shares subscribed and held by the HUF 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 at the end of the relevant previous year, this amount was added in the income of the assessee as deemed dividend.
The Commissioner of Income Tax (Appeals) (CIT-(A)) found that the annual returns of the Company filed with ROC showed that even if shares were issued by the Company in the name of Karta of HUF, but the Company had recorded the name of the assessee/HUF as shareholders of the Company. From the shareholder register maintained by the Company, it was also found that the assessee HUF as shareholder was having 37.12% share holding. 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 HUF which was registered shareholder. Thus the CIT(A) also opined that the only requirement to attract the provisions of Section 2(22)(e) of the Act was that the shareholder should be beneficial shareholder. On this basis, the addition made by the AO was upheld by him.
However, the Income Tax Appellate Tribunal (ITAT) placing reliance on the judgment of Mumbai ITAT allowed the appeal of the assessee holding that since HUF, in law, could not be a registered shareholder or a beneficial shareholder, provisions of Section 2(22)(e) would not be attracted.
However, the High Court, reversed the judgment of the ITAT, thereby restoring the addition which was made by the AO.
Contentions of the Appellant HUF:
It was contended that the ITAT had correctly explained the legal position that HUF could not be either beneficial owner or registered owner of the shares and, therefore, no addition could be made under Section 2(22)(e) of the Act. Reliance was place on a judgment of Hon’ble Supreme Court holding that HUF cannot be a shareholder of a company.
Observations made by the Supreme Court:
Deemed dividend which is a Legal Fiction is to be given strict interpretation
The Hon’ble Supreme Court observed that Section 2(22)(e) 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.
Three essential conditions
The Hon’ble Apex Court noted that clause (e) of Section 2(22) prescribes three types of payments that 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
The Hon’ble Court, for the purposes of the instant case listed the following conditions that needed to be fulfilled for attracting the deeming fiction as above:
(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.
It was observed that the 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
The Hon’ble Apex Court noted that In the instant case,
(i) the payment in question was made to the assessee which was a HUF.
(ii) Shares were held by the Karta of the HUF.
(iii) The said Karta was 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, The Hon’ble Court opined that the provisions of Section 2(22)(e) of the Act got attracted and it was not even necessary to determine as to whether HUF can, in law, be beneficial shareholder or registered shareholder in a Company.
It was also observed by the Hon’ble Supreme Court that as per the audited annual return of the Company filed with ROC 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, but in the annual returns, it was the HUF which was shown as registered and beneficial shareholder. In any case, it could not be doubted that it was the beneficial shareholder.
The Hon’ble Court clarified that even if it is presumed that HUF was 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 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 so because of the Explanation 3 to the said Section. Therefore, it was no gain saying that since HUF itself was not the registered shareholder, the provisions of deemed dividend were not attracted.
Appeal of the appellant HUF against the order of High Court dismissed.