The two judge bench of Supreme Court of India yesterday held that, payments received by Hindu Undivided Family (HUF) is considered as deemed 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. The two-judge bench of the Apex Court had categorically held that provisions of deemed dividend are attracted if HUF gets payment and shareholder is a shareholder in a company with substantial interest.
In this case, the AO found that the assessee, an HUF, 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.Based on this finding, the AO included Rs. 1,20,10,988/- to the taxable income of the assessee under the head ‘deemed dividend.’
The assessee impugned the above assessment and maintained that being a HUF, it was neither the beneficial shareholder nor the registered shareholder. Further, 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 and therefore, s. 2(22)(e) cannot be attracted.
Though the appeal filed by the assessee was rejected by the CIT(A), the ITAT allowed the same and observed that the provisions of s. 2(22) is not attracted. However, the High Court reversed the order of ITAT and restored the original assessment order.
Section 2(22)(e) of the Income Tax 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.”
The two judge bench comprising of Justice A.K Sikri and Justice A.M Sapre observed that, under Section 2(22)(e) of the Income Tax Act,three types of payments can be brought to tax as dividends in the hands of the share holders,they are,any payment of any sum by way of advance or loan to a shareholder,any payment on behalf of a shareholder, and any payment for the individual benefit of a shareholder.
“Three conditions are essential to attract section 2(22)(e) of the Income Tax Act,they are,
(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 31stday of May, 1987.
Explanation 3(a) defines “concern” to mean HUF or a firm or an association of persons or a body of individuals or a company. Asper 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 Court also observed that, “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.”
“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, ShriGopal 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 ifwe presume that it is not a registered shareholder, as per the provisions of Section 2(22)(e) of the Income Tax Act, once the payment is received by the HUF and shareholder”.
While dismissing the appeal, the court also added that, 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, 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.”
Read the full text of the Judgment below.
