Supreme Court refers Ankitech Ruling on ‘Deemed Dividend’ to Larger bench [Read Judgment]

The Supreme Court of India has referred C.I.T. vs. Ankitech Private Limited case to larger bench for reconsideration.

The Apex Court was considering the question whether Section 2(22)(e) of the Act gets attracted inasmuch as a loan has been made to a shareholder, who after the amendment, is a person who is the beneficial owner of shares holding not less than 10% of the voting power in the Company, and whether the loan is made to any concern in which such shareholder is a partner and in which he has a substantial interest, which is defined as being an interest of 20% or more of the share of the profits of the firm.

While referring the case to larger bench, the two judge bench of Supreme Court observed that, “it is very difficult to accept the reasoning of the Division Bench. It is not enough to say that Ankitech’s case refers to the second limb of the amended definition, whereas the present case refers to the first limb, for the simple reason that the word “shareholder” in both limbs would mean exactly the same thing. This is for the reason that the expression “such shareholder” in the second limb would show that it refers to a person who is a “shareholder” in the first limb”.

The two judge bench comprising of Justice R.F Nariman and Justice Navin Sinha also said that, “we are of the view that the whole object of the amended provision would be stultified if the Division Bench judgment were to be followed. Ankitech’s case, in stating that no change was made by introducing the deeming fiction insofar as the expression “shareholder” is concerned is, according to us, wrongly decided. The whole object of the provision is clear from the Explanatory memorandum and the literal language of the newly inserted definition clause which is to get over the two judgments of this Court referred”.

“This is why “shareholder” now, post amendment, has only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is he beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way, as has been held in a catena of decisions starting from Mathalone vs. Bombay Life Assurance Co. Ltd., [1954] SCR 117”, the bench said.

“We are prima facie of the view that the Ankitech judgment (supra) itself requires to be reconsidered, and this being so, without going into other questions that may arise, including whether the facts of the present case would fit the second limb of the amended definition clause, we place these appeals before the Hon’ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question”, the bench also added.