Full Judgment Text
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PETITIONER:
C.I.T. ANDHRA PRADESH
Vs.
RESPONDENT:
C. P. SARATHY MUDALIAR
DATE OF JUDGMENT12/10/1971
BENCH:
ACT:
Income-tax Act, 1922, s. 2(6A)(e)-Dividend-H.U.F. holding
shares in names of its members-HUF not registered as
shareholder--Loans to HUF by company not dividend within
meaning of s. 2 (6A) (e).
HEADNOTE:
The assessee was a Hindu undivided family. Three members of
he family namely, S and his two sons were shareholders in a
private limited company which was not a company in which the
public were substantially interested within the meaning of
s. 23A of the Income-tax Act, 1922. the account years
’relevant to the assessment years 1955-56, and 1956-57 the
company advanced certain loans to the aforesaid Hindu
undivided family The question arose whether these loans
could be considered as ’dividend’ within the meaning of that
expression in s. 2(6A)(e) of the Act. The Income-tax
Appellate Tribunal found as a fact that the loans in
question had been granted to the H.U.F. It further held that
the loans advanced to the H.U.F. could not be considered as
loans advanced to the ’shareholders’ within the meaning of
s. 2(6A) (e). The High Court in reference upheld the view
taken by the Tribunal. In appeal to this Court by the
Revenue,
HELD : It is well settled that an HUF cannot be a
shareholder of a company, The shareholder of a company is
the individual who is registered as the shareholder in the
books of the company. The H.U.F., the assessee in the
present case, was not registered as a shareholder in bocks
of the company nor could it have been so registered. Hence,
there was no gainsaying the fact that the H.U.F. was not the
shareholder of the company. [1081 B-C]
Section 2(6A) (e) gives an artificial definition of
’dividend’. It does not take in dividend actually declared
or received. The dividend taken note of by that provision
is a ’deemed dividend and not a real dividend. The loan
granted to a shareholder has to be returned to the company.
It does not become the income of the shareholder. For
certain purposes the legislature has deemed, such a loan as
’dividend’. Hence s. 2(6A)(e) must necessarily receive a
strict construction. When s. 2(6A)(e) speaks of
’shareholders’ it refers to the registered shareholder and
not to the beneficial owner. The HUF cannot be considered
as a shareholder either under s. 2(6A)(e) or under s. 23A or
s. 16(2) read with s. 18(5) of the Act. Hence a loan given
to an HUF cannot be considered as a loan advanced to a
’shareholder’ of a company [1081 D-E]
In the present case since no loans were advanced to the
shareholder., .s. 2(6A)(e) was inapplicable. The appeal is
dismissed. [1083 B]
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Howrah Trading Co. Ltd. v. C.I.T., Central Calcutta, 36
I.T.R. 215 and C.I.T., Bombay City II v. Shakuntala & Ors.,
43 I.T.R. 352, relied on.
Kishanchand Lunidasing Bajaj v. C.I.T., Bangalore, 60
I.T.R. .,distinguished.
1077
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2242 and
2243 of 1968.
Appeals by special leave from the judgment and order dated
March 28, 1967 of the Andhra Pradesh High Court in Case
Reference No. 2 of 1961.
B. Sen, R. N. Sachthey and B. D. Sharma, for the appellant
(in both the appeals).
K. Jayaram, for the respondent (in both the appeals).
The Income Tax Appellate Tribunal stated the case as fol-
lows:
Statement of Case
"The assessee is a Hindu undivided family of which the karta
is Sarathy and there are two adult members, Doraiswamy and
Singaram. Sarathy holds 2,797 shares, Doraiswamy 100 shares
and Singaram 100 shares of a limited company by name ’The
Chittoor Motor Transport Company (Private) Ltd.,’ in which,
the public are not ’substantially interested within the
meaning of section 23A. The Shares were acquired with the
funds of the Hindu undivided family and, therefore, the
shares were the property of the Hindu undivided family.
There, is no dispute about that. The dividend earned on
these shares was thus also the income of the Hindu undivided
family and was being assessed accordingly. There was no
dispute about that either. Sarathy was also the Managing
Director of the aforesaid company and the Managing
Director’s remuneration too was treated and assessed as the
income of the Hindu undivided family. There was no dispute
about that also.
In the two assessments made on the Hindu undivided family
for the assessment years 1955-56 and 1956-57, for which the
relevant ’previous vear-s’ are the years ended 31-3-1955 and
31-3-1956, respectively, two sums of Rs. 5,790/- and Rs.
39,085/- were treated as its dividend income falling within
section 2 (6A ) (e) of the Act in the respective years, The
assessee disputed the inclusion on several grounds.
Ultimately, the matter came up on appeal before the
Tribunal. The three contentions, before the Tribunal were :
(i) The provisions of Section 2(6A) (e) of
the Act are ultra vires the Constitution.
(ii) The re, in fact, was no Payment by the
aforesaid company by way of advance or loan to
the Hindu undivided family and
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(iii) The deemed dividend could not be
assessed (is the income of the Hindu undivided
family, the Hindu undivided family not being
the shareholder to whom the payment of the
advance or loan was made.
The first two of these contentions were rejected by the
Tribunal. .The first contention, in fact, was expressly
given up at the time of. the hearing of the appeals. As
regards the second, the Tribunal ’found as a fact that the
payment of the advance or loan was to the Hindu undivided
family and there was no basis for the claim that the advance
or loan was really to another person viz. THE VEGETOLS,
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Ltd., a limited company to whom the amount was ultimately
said to have been lent by the Hindu undivided family. As
,regards the third contention, relying on the interpretation
given to the expression ’shareholder’ by the Bombay High
Court in the case of S. C. Cambatta, (1946) 14 I.T.R. 748,
the Tribunal held that since the Hindu undivided family was
not itself and also could not be the registered shareholder
of the company, but it was the individual members who as
such were the registered shareholders, the ’advance or loan
to the Hindu undivided family, which was not a registered
shareholder, could not be treated as the dividend income of
the Hindu undivided family. Although in the Bombay case the
provisions of Section 23A, wherein also :there is a
provision for treating the deemed dividend as the income of
the shareholder, were being considered and in the instant
case the provisions of section 2(6A) (e) were to be
considered, the Tribunal held that. the ratio of the Bombay
case ’equally applied, as in both the sections, it was the
artificial income that was sought to be taxed and the
provisions of the law had, therefore, to be strictly
construed. The reasoning of the Tribunal will be found in
paragraph 3 of its common order dated 18-1-1960. A copy on
the Tribunal’s order is Annexure ’A’ hereto and forms ,,Part
of the case.
5. The question of law that, in our
opinion, arises is
"Whether, on the facts and in the
circumstances of the case, the amounts of Rs.
5,790/- and Rs. 39,085/could be deemed to, be
the dividend income of the Hindu undivided
family In the respective assessment years?"
The Judgment of the Court-was delivered by
Hegde, J. This is an appeal by special leave from a decision
of the Andhra Pradesh High Court. The, question of law
referred to the High Court under section 66(1) of the Indian
Incometax Act, 1922, (to be hereinafter referred to as "the
Act") is CC whether on the facts and in the circumstances
of the case, the
10 79
amounts of Rs. 5,790/- and Rs. 39,085/- could be deemed to
be the dividend income of the Hindu undivided family in the
respective assessment years?"
The assessee in this case is a Hindu undivided family. From
the case stated it is not possible to state definitely as to
how many coparceners were there in that family. But we
gather from the case stated that the three of the members of
that family, viz. Doraiswamy, Singaram and Sarathy were
shareholders in a private limited company by name "The
Chittoor Motor Transport Co. (Private) Ltd." Doraiswamy and
Singaram held 100 shares each in that company; Sarathy held
2,797 shares. The Tribunal found that these shares were
acquired from out of the family funds. It appears that in
the account years relevant to the assessment years 1955-56
and 1956-57 the Chittor Motor Transport Co. (Private) Ltd.
advanced certain loans to the Hindu undivided family of
which Doraiswamy, Singaram and Sarathy wer coparceners The
question arose whether those loans can be considered as
"dividend" within the meaning of that expression in section
2(6A) (e) of the Act. The Tribunal found as a fact that the
loan in question had been granted to the H.U.F. The assessee
contended that the same was taken for making an advance to
the Vegetols Ltd. The Tribunal did not examine the
correctness of that contention. It was contended on behalf
of the Revenue before the Tribunal that,the loan in question
was advanced to the shareholders of the company. The
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Tribunal repelled that contention. It came to the
conclusion that though the shares were acquired from out of
the family funds in law the shareholders were Doraiswamy,
Sinuaram,and Sarathy and not their H.U.F. Hence, the loan
advanced to the H.U.F. cannot be considered as loans
advanced to the "shareholders" within the meaning of section
2 (6A) (e).
Before the High Court the counsel for the Revenue gave up
the contention that the loans in question were advanced to
the "shareholders" of the company. On the other hand, he
contended that those loans had been advanced-on behalf of or
for the individual benefit of the shareholders. The High
Court did not accept that contention. It held that as no
such case had been taken up before the Tribunal it was not
possible to go into that contention. The facts found by the
Tribunal did not afford any basis for that contention. In
the result, the High Court answered the question referred to
it in favour of the assessee.
Before us Mr. B. Sen, the learned, counsel for the Revenue,
took up two contentions. His first contention was that the
loans advanced were those, advanced to the shareholders of
the company. Secondly, he contended that, at any rate, it
must be held
1080
that those loans were advanced on, behalf of or for the
individual benefit of the shareholders. He submitted that
the counsel for the Revenue gave up the first contention
before the High Court because of certain decisions of this
Court and, according to him, those cases cannot be held to
have been correctly decided in view of a later decision of
this Court.
We shall,now proceed to examine the two contentions advanced
by Mr. Sen. For doing so, we have to read section 2(6A).
That section says :
"2. (6A) ’dividend’ includes-
(e) any payment by a company, not being a
company in which the public are substantially
interested within the meaning of sect
ion 23A,
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 or any
payment by any such company on behalf or for
the individual benefit of a shareholder, to
the extent to which the company in either case
possesses accumulated profit
Before a payment can be considered as dividend under section
2(6A) (e) the following conditions will have to be satisfied
:-
1. It must be a payment by a company not being: a company
in which the public are substantially interested within the
meaning of section 23A of any sum whether as representing a
part of the assets of the company or otherwise by way of
advance or loan.
2. (a) It must be an advance or loan to a shareholder, or
2. (b) a payment by the company on behalf or for the
individual benefit of the, shareholder, and
3. to the extent to which the company in either case
possesses accumulated profits.
There is no dispute that first and the last conditions are
satisfied in the present case. The question is whether
conditions Nos. 2 and 3 are satisfied. We shall first take
up condition No. 2(b) No contention appears to have been
taken before the Tribunal that the loans in question were
given by the company on behalf of the shareholders or for
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their individual benefit. That being so, the Tribunal did
not go into that question. In fact, as can be gathered from
the case stated, the contention of the assessee before the
Tribunal was that the loan in question was borrowed for the
benefit of another company. But the Tribunal did not go
into that question. Under these circumstances, the High
1081
Court in our opinion, was right in not going into that
question because on the facts found by the Tribunal it was
not possible to decide that contention.
The only surviving question is whether a loan advanced by a,
company to a H.U.F., which is the real owner of the shares,
can be considered as a loan advanced to its shareholder. It
is well settled that an H.U.F. cannot be a shareholder of a
company. The shareholder of a company is the individual who
is registered as the shareholder in the books of the
company. The H.U.F., the assessee in this case, was not
registered as a shareholder in books of the company nor
could it have been so registered. Hence there is no gain-
saying the fact that the H.U.F. was not the shareholder of
the company. Mr. Sen did not contend otherwise.
Section 2(6A)(e) gives an artificial definition of
"dividend". It does not take in dividend actually declared
or received. The dividend taken note of by that provision
is a deemed dividend and not a real dividend. The loan
granted to a shareholder has to be returned to the company.
It does not become the income of the shareholder. For
certain purposes, the legislature has deemed such a loan as
"dividend". Hence, section 2(6A) (e) must necessarily
receive a strict construction. When section 2(6A) (e)
speaks of "shareholder", it refers to the registered
shareholder and not the beneficial owner. The H.U.F. cannot
be considered as a shareholder either under section 2(6A)
(e) or under section 23A or under section 16(2) read with
section 18(5) of the Act. Hence a loan given to an H.U.F.
cannot be considered as a loan advanced to a "shareholder"
of a company.
Our conclusion in this regard receives support from the de-
cisions of this Court. In Howrah Trading Co. Ltd. v. Com-
missioner of Income-tax, Central, Calcutta, (36 I.T.R. 215)
this Court had to examine the case of a person who had
purchased shares of a company under a blank transfer but in
whose name the shares had not been registered in the books
of the company. The question was whether he could be
considered as a "shareholder" in respect of such shares for
the purpose of section 18 (5 ) of the Act, because of his
equitable right to the dividend on such shares and therefore
entitled to have that dividend grossed up under section
16(2) by addition of income tax paid by the company in
respect of those shares and claim credit for the tax de-
ducted at the source. This Court held that he cannot be
considered as a "shareholder", the reason being that he had
not been registered as a shareholder.
119SupCI/72
1082
In Commissioner of Income tax, Bombay City II, v. Shakuntala
& ors. (43 I.T.R. p. 352) a Hindu undivided family which was
the beneficiary of certain shares in a company in which the
public were not substantially interested held those shares
in the names of different members of the family. The Income
Tax Officer applied the provisions of section 23A of the Act
(before its amendment in 1955) and passed an order that
undistributed portion of the distributable income of the
company shall be deemed to be distributed, and the amount
appropriate to the shares of the family were sought to be
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concluded in the income of the ,family. In that case again
this Court ruled that the word "shareholder" in section 23A
meant the shareholder registered in books of the company and
the amount appropriate to the shares had to be included in
the incomes of the members of the family, in whose names the
shares stood in the register of the company; and as the
Hindu undivided family was not a registered shareholder of
the company, that amount could not be considered as the
income of the family under section 23A.
From the above decisions it is clear that when the Act
speaks of the "shareholder" it refers to the registered
shareholder.
Mr. Sen contended that the above two decisions cannot be
considered to have laid down the law correctly in view of
the decision of this Court in Kishanchand Lunidasing Bajaj
v. Commissioner of Income tax Bangalore, (60 I.T.R. p. 500).
Therein the question was whether a H.U.F. could be charged
to tax in respect of dividends received by some of the
coparceners of that family in respect of shares held by
them, those shares having been purchased from out of the
family funds. This court ruled that the dividends paid to
the shareholder was the income of the family and that being
so, the same was assessable in the hands of the Hindu
undivided family. We see no conflict between this decision
and the decisions earlier referred to. In the Case of
actual receipt of dividends there is a receipt of income.
That income is received on behalf of the family. Hence, the
same was assessable in the hands of the family. In the case
of deemed dividends under section 2(6A)(e) the family does
not get any income at all. The dividend referred to by that
provision is only a deemed dividend and not a real dividend.
Hence, no
1083
income, is either received by the family or accrued to it.
Therefore, the only person who is deemed to have received
that income can be assessed in respect of that income.
Coming to. the facts of the present case the loans advanced
to shareholders alone can be deemed as dividends. No loans
had been advanced to shareholders as seen earlier. Hence,
the shareholders did not get any income. Hence section
2(6A) (e) became inapplicable.
For the reasons mentioned above these appeals fail and the
same are dismissed with costs.
G.C. Appeals dismissed..
1084