Holding

The provisions of Section 2(22)(e) are attracted; the advance to the HUF is a deemed dividend and the addition stands.

Summary

The appellant, Gopal and Sons (a Hindu Undivided Family), had subscribed to shares of a fertilizer company, with the share certificates issued in the name of its Karta but the HUF shown as the beneficial and registered shareholder in the company's annual returns. The Assessing Officer added Rs. 1,20,10,988 as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, treating the advance received by the HUF as a dividend. The appellant contended that an HUF cannot be a registered or beneficial shareholder and thus the provision should not apply. The Supreme Court held that Explanation 3 of Section 2(22) defines a "concern" to include an HUF and that a person having at least 20% of the HUF’s income has a substantial interest; the Karta satisfied both conditions, so the advance is deemed dividend. Consequently, the addition was upheld and the appeal dismissed.

Issues considered

Whether a Hindu Undivided Family can be a registered or beneficial shareholder for the purpose of Section 2(22)(e) of the Income Tax Act, 1961.
Whether an advance or loan received by an HUF from a company qualifies as a deemed dividend under Section 2(22)(e).
The proper interpretation of the terms "concern" and "substantial interest" in Explanation 3 to Section 2(22).

Legislation cited

Income Tax Act, 1961s. 2(22)(e)

Subjects

Deemed dividendHindu Undivided FamilySection 2(22)(e)Concern definitionSubstantial interestShareholderIncome Tax

Judgment

11 (2017] 1 S.C.R. 86

i
i
A GOPAL AND SONS (HUF)
V.

CIT KOLKA1A-XI
(Civil Appeal No. 12274 of2016)
B JANUARY 04, 2017
[A. K. SIKRI AND ADHAY MANOHAR SAPRE, JJ.)
Income Tax Act, 1961 - s.2(22)(e), Explanation 3 - Deemed
dividend - Appellant-assessee, an HUF subscribed to the shares of
c aofcompan~ Assessing Officer made certain addition to the income
assessee-HUF on account of deemed dividend - Assessee-llUF
co/1/ended that it was neither the beneficial shareholder nor
registered shareholder and as the shares of rhe company were .in
rhe name of the Karta ofHUF and not in name of the HUF. s.2(22)(e)
was not attracted - Held: Ar per Explanation J(a) "concern", inter
D . alia, means HUF - As per, Explanation 3(b) a person is dee111ed lo
have a substantial imerest in a HUF if he is beneficially entitled to ·
nor less than :20% of rhe income of such Hl./F - In rhe insranl case,
shares are held by Karra who is u11doubtedly rhe 111e111ber of assessee-
HUF - He also has substanlial interesr in HUF and is entirled to not
less rhan 20% of the income of HUF - Therefore, provisions of
E
s.2(22)(e} are attracted.
Income Tax Act, 1961 -.s.2(22}(e) - Deeming provision - Held:
The Section creares a ficrion bringing any amount paid otherwise
. than as a dividend illlo the net of dividend under certain
F circumstances - Such a deemed provision which fictionally creates
certain kinds of receipts as dividends, to be given strict interpretation ·-
- VnleJs all the conditions co/1/ained in rhe said 'provision are
fulfilled, the receipt cannot be deemed as dividends '-- In case of
doubt' where two i•iews are p=ible, benefit shall accrue in favour
- of the assessee. -- · -
G Words and phrases: Dividend - Meaning of. in the· context of
s.2(22)(e) of Income Tax Act, 1961.
Dismissing the -appeal, the Court

H
HELD: 1.1 The dividend taken note of in Section 2(22)(c)
is a deemed dividend and not a real dividend. Loan or payment
1
~ 86 .
I
GOPAL AND SONS (HUF) v. CIT KOLKATA-Xl 87

mad~ by the company to its shareholder is actnally not a dividend. A
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 'divide11d'
and made it taxable at the hands of the said shareholder.
B
Therefore, 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 Qf the assessee. c
[Para 12] [92-D-F]
1.2 In the instant case, the payment in question is made to
the :.ssessee which is a HUF. Shares are held by Karta of this
HUF. The said Karta is the member of HUF also having
substantial interest in the HUF, being its Karta. He was entitled D
to not less than 20% of the income of HUF. In view of the said
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. [Para 16] [93-D-F]
E
1.3 From the audited annual return of the Company filed
with ROC, it is found that the money towards shareholding 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 is the HUF which was shown as registered and beneficial
shareholder. It cannot be doubted that it ls the beneficial F
shareholder. Even presuming that it is not a registered
shareholder, as per tl)e provisions of Section 2(22)(e) of the Act,
once the payment is received by the HUF and the 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 G
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. [Para
17] [93-F-G]
CIT, Andhra Pradesh v. C.P Sarathy Mudaliar [1972]
SCR 1076 - held not applicable.
H
88 SUPREME COURT REPORTS [2017] 1 S.C.R.

A Bina! Sevanti/a/ Koradia (HUF) v. Department of
Income Tax ITA No. 2900/Mum/2011; Alagusz111dara11
v. CIT 252 ITR 893 (SC) - referred to.

Case Law Reference
ITA No. 2900/Mum/2011 referred to Para8
B
252 ITR 893 (SC) referred to Para 13
(1972] SCR 1076 held not applicable Para 17
C:VILAPPELLATE JURISDICTION: Civil Appeal No. I2274
of2016.
c From the Order dated 13.02.2015 by the High Court at Calcutta
in !TAT No. 73 of2014.
S. B. Upadhyay, Sr. Adv., Santosh Mishra, Param Mishra, Advs.
for the Appellant.
D Madhavi Diwan, Ms. Meenakshi Grover, Deepak Prakash, Ms.
Shruti Stivastava, Mrs. Anil Katiyar,Advs. forthe Respondent.
The Judgment of the Court was delivered by
A. K. SIKRI, J. 1. The appellant/assessee. in the instant appeal,
has raised following question oflaw for determination:
E
"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, Imm/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
F view of the term "concern" as defined in the Section itself?"
2. The aforesaid question has arisen, which pertains to Assessment
Year 2006-07, under the following circumstances:
3. The assessee herein had filed the return in respect of the said
Assessment Year declaring his total income at Rs.1,62, 745/-. The
G
Assessing Officer (for short,' AO') carried out the assessment resulting
into passing of assessment orders dated 3 I" December, 2008 whereby
the net income of the assessee was calculated at Rs. 1,30,31,280/-.
Obviously, number of additions were made which contributed to the
enhancement of income to the aforesai.d figure, in contrast with the paltry
H income declared by the assessee. Here, we are concerned only with
GOPAL AND SONS (HUF) v. CIT KOLKATA-XI 89
rA. K. SIKRI, J.l

one addition which was made on account of deemed dividend within the A
meaning of Section 2(22)( e) of the Income Tax Act, I 961 (hereinafter
referred to as the 'Act'). Suffice it to state that other additions were
deleted by the Income Tax Appellate Tribunal (!TAT) and the position
affirmed by the High Court, but the Revenue has not challenged those
deletions.
B
4. Insofar as addition under Section 2(22)(e) of the Act is
concerned, a sum of Rs. 1,20, I 0,988/- was added on this account. The ·
assessee is a Hindu Undivided Family (HUF). During the previous year
to the Assessment Year, the assessee had received certain advances
from one M/s. GS. Fertilizers (P) Ltd. (hereinafter referred to as the
'Company'). The. Company is the manufacturer and distributor of various
c
grades ofNPK Fertilizers and other agricultural inputs. In the audit report
and annual return for the relevant period, which was filed by it before
the Registrar of Companies (ROC), it was found that the subscribed
share capital of the said Company was Rs. 1,05, 75,000/- (i.e., 10,57,500
shares of Rs. I 0/- each). Out of this, 3,92,500 number of shares were D
subscribed by the assessee which represented 3 7 .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 I 0% of
voting power. On this basis, after noticing that the audited accounts of
the Company was showing a balance of Rs. 1,20, I 0,988/- as "Reserve E
& Surplus" as on 31" March, 2006, this amount was included in the
income of the assessee as deemed dividend.
5. In the appeal filed by the assessee, the aforesaid addition was ·
affirmed by the Commissioner of Income Tax (Appeals) (for short
'CIT(A)'). Though, this addition was questioned by the assessee on F
various grounds, we would take note of the submission which is advanced
before us as the challenge is confined only on the basis of said submission.
The assessee had argued that being a HUF, it was neitherthe beneficial
shareholder nor the registered shareholder. It was further argued that
the Company had issued shares in the name ofShri Gopal Kumar Sanei, G
Karta of the HUF, and not.in the name of the assessee/HUF as shares
could not be directly allotted to a HUF. On that basis, it was submitted
that provisions of Section 2(22)( e) of the Act cannot be attracted.
6. We would like to reproduce that portion of Section 2(22)(e) of
the Act at this stage, which is relevant for the instant appeal:
H
90 SUPREME COURT REPORTS [2017) 1 S.C.R.

A "S.2(22) of the lncon,ie Tax:- Dividend includes:
xxxxxx xxx
( e) any payment by a company, not being a company in which the
public are substantially interested, of any .sum (whether as
representing a part of the assets of the company or otherwise)
B [made after the 3 l" day of May, 1987, by way of advance or loan
to a shareholder, being a person who is the beneficial owner of
shares (not being shares entitled to a fixed rate of dividend whether
with or without a right to participate in profits) holding not less
than ten per cent of the voting power, or to any concern in which
. such shareholder is a member or a partner and in which he has a
C substantial interest (hereafter in this clause referred to as the said
concern)] or any payment by any such company on behalf, or for
the individual benefit, of any such shareholder, to the extent to
which the company in either case possesses accumulated profits;
but "dividend" does not include--
D xxxxxx xxx
Explanation 3.-For the purposes of this clause,
(a) "concern" means a Hindu undivided family, or a firm or an
association of persons or a body of individuals or a company;
(b) a person shall be deemed to have a substantial interest in a
E concern, other than a company, if he is, at any time during the
previous year, beneficially entitled to not less than twenty per cent
of the income of such concern."
7. Taking note of the aforesaid provision, the CIT(A) rejected the
aforesaid contention of the assessee. The CIT(A) found that examination
f 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 tlfe 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
G
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 ClT(A) also opined thatthe only requirement to attract
H the provisions of Section 2(22)(e) of the Act is that the shareholder
GOPAL AND SONS (HUF) v. CIT KOLKATA-XI 91
fA. K. SIKRI, J.l

should be.beneficial shareholder. On this basis, the addition made by the A
AO was·upheld.
8. Undeterred, the assessee approached the next higher forum,
i.e., !TAT in the form of appeal under Section 253 of the Act. In this
endeavour, the assessee succeeded as appeal of the assessee was allowed
holding that the ingredients of Section 2(22)(e) of the Act were not B
satisiied and,,therefore, addition of the aforesaid nature could not be
made.
For this purpose, the !TAT referred to the judgment rendered by
its Mumbai Bench in the case of lJin11/ Sev11nti/11/ Koradi11 (HUF) Vs.
Department of Income T11.x'. ln fact, the only exercise done by the c
ITA1 in the said order was to quote from the aforesaid judgment with
the observations that the issue is squarely covered by the said decision.
In Koradi11 (HUF), it was held by the Tribunal that HUF cannot be said
to be shareholder or a beneficial shareholder. Since these are the twin
conditions to attract the provisions of Section 2(22)( e) of the Act, both
have to be satisfied. As per the !TAT, since HUF, in. law, cannot be a D
registered shareholder or a beneficial shareholder, provisions of Section
2(22)(e) would not be attracted.
9. As noticed above, the High Court, in the iinpugned judgment
rendered in the appeal preferred by tht-: Revenue, has reversed the
judgment of the !TAT, thereby restoring the addition which was made by E
the AO. The orderofthe High Court reveals that it has done nothing but
to extract the language of Section 2(22)( e) of the Act and sustained the
addition made by AO 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 F
provisions of Section 2(22)(e) of the Income Tax Act'.
l 0. The arguments before us remain the same. Mr. S.B. Upadhyay,
learned senior counsel appearing for the asses see, argued that the ITAT
had correctly explained the legal position that HUF cannot be either ,.
beneficial owner or registered owner of the shares and, therefore, no G
addition c_ould be made under Section 2(22)( e) of the Act. For buttressing·
this submission, the learned counsel relied upon the following observations
in judgment of this Court in CIT, And/mi Pradesh Vs. C.P. Saratlty
Mudaliar 1 :
1 /TA No. 2900/Mum/201I,AY2007-08 dated 10.10.2012
2
1972 SCR 1076 H
92 SUPREME COURT REPORTS [2017] I S.C.R.

A " ... .It is well settled that an HUF cannot be a shareholder of a
cnmpany. The shareholder of a company is the individual who is
registered as the shareholder ion the books of the company. The.
HUF, 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 HUF was not the
B
shareholder of the company."
11. Learned Additional Solicitor General, on the other hand, after
reading die relevant portions of the orders of AO and CIT(A), submitted
that on the fact.s of this case, the Revenue was justified in making the
addition.
c
12. Section 2(22)( e) of the Act creates a fiction, thereby bringing
any amount paid otherwise than as a dividend into the net of dividend
under ce1tain circumstances. It gives an artificial definition of 'dividend'.
It does not take into account that dividend which is actually dee.Jared or
received. The dividend taken note of by this provision is a deemed
D 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
E 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 ce1tain kinds ofreceipts 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, .
F benefit shall accrue in favour of the. assessee.
lJ. A reading of clause (e) of Section 2(22) of the Act makes it
clear that three types of payments 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
G
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.
[See: Alagusumlara11 Vs. CIT; 252 /TR 893 (SC)/
H
GOPAL AND SONS (HUF) v. CIT KOLKATA-XI 93
[A. K. SIKRI, J.]

14. Certain conditions need to be fulfilled in order to attract tax A
under this clause. It is not necessary to stipulate other conditions. For
our purposes, fol lowing conditions need to be fulfil Jed:
(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. B

(c) Such advance or Joan should have been made after the 31"
day of May, 1987.
15. 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 c
Explanation 3(b ), a person shall be deemed to 11ave a..substantial interest
in a HUF if he is, at any time during the previous year, beneficially
entitled to not Jess than 20% of the income of such HUF. •
16. 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,
D
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 Jess 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 E
registered shareholder in a Company.
· 17. 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 F
Sanei, but in the annual.returns, it is the HUF which was shown as
registered and beneficial shareholdef. 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) oftlie
Act, once the payment is received by the HUF and shareholder (Mr.
G
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 HLJF shall
constitute deemed dividend within the meaning ofclause ( 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
nott:1e registered shareholder, the provisions of deemed dividend are H
94 SUPREME COURT REPORTS [2017] I S.C.R.

A not attracted. For this reason, judgment in C.P. Sar,,tl1y Mudt1fit1r,
relied upon by the learned counsel for the appellant, will have no
application. That was a judgment rentjered in the context of Section
2(6-A)(e) of the Income Tax Act, 1922 wherein there was no provision
like Explanation 3.
B 18. We, thus, do not find any merit in this appeal, which is
accordi1igly dismissed.
Divya Pai1dey Appeal dismissed.