C.J.T. v. C. P. SARATHY MUDALIAR

1076 ###### • **CJ.T.** **ANDHRA** **PRADESH** _v._ **C. P.** **SARATHY MUDALIAR** _October_ 12, 1971 [K. S. HEGDE AND H. R. KHANNA, JJ.J _Income-tax Act,_ 1922, _s,_ 2(6A) _(e)-Dividend-H.U.F._ _holding_ _**.share&**_ _**in names**_ _**of**_ _**its**_ _**members-HUF**_ _**not**_ _**registered as**_ _**shareholder-**_ _Loans_ _to_ _HUF by company not dividend wilhin meaning of_ _s._ 2(6A) (e). **The assessee was a Hindu undivided** **farn:Iy.** **Three** **m1embers** **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 interesf"d within the meaning of s. 23A of the Income-tax Act, 1922. fo the account years 'relevant _to_ the assessment years 1955-56, and 1956·57 **the** **company advanced certain loans to the** **aforesaid Hindu undivided·** **farnil:Y:** **The question** **ai;:ose** **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 tbo H.U.F. It further held that tho **loans _advanced** **to** **the H.U.F. collld not be considered as** **Joans** **advan..:cd** to the' 'shareholders' within the ·meaning of s. 2(6A)(e). The Higa **Court** **in** fefen~nce **upheld the view taken** **by** **the Tribunal.** **In** **appeai- to** 1his Court by the Revenue, HELD : It is well settled that an HUF cannot be a shareholder of a **comp.any.** **The shareholder** **of** **a company** _**is**_ **the individual who** **is** **regis-** tered as tho shareholder in the books of the company. The H.U.F., the **assessee** **in** **the present case, was not registered** **as** **a shareholder in books** **of** **the cpmpany** **nOr** **could it have been so registf!red.** **Hence, there** **\\·as** no gain-saying the fact that the H.U.F. was not the shareholder of the -company. [1081 B-C] A **B** ###### c **D** SectiQn 2(6A) (e) gives an artificial definition of 'dividend'. It docs not take in dividend actually declared or received. The dividend taken note of bv that provision is a deemed dividend and not a. real dividend. F 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 - 1he legislature has deemed such a loan as 'dividend'. Hence s. 2(6A)(e) - **must necessarilv receive a strict construction.** **When s.** **2(6A) (e)** speak~ **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** **Joan** **G** advanced to a 'shareholder' of a company (1081 D-E] **Jn** **the present case** **sinc1:::** **no** **Joans** **were advanced to the shareholder.,** ii. 2(6A)(e) was inapplicable. The appeal is dismissed. (1083 B] _Howrah Trading Co. Ltd._ v. _C.1.T., Cen/Ml Calcutta,_ 36 I.T.R. 215 and _C.J.T., Bombay City_ _JI_ v. _Shakuntala_ & _Ors.,_ 43 l.T.R. 352, relied **·OD.** _Kishanchand Lunidasing Bajaj_ v. _C.J.T.,_ _Bangc./ore,_ 60 I.T.R. 5iJO, <ltstinguished. **H** A B ###### c .D ## • E F G H C.J.T. _v._ c. P. SARATHY _(Hegde,_ /.) 1077 C1v1L 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 appelllilnt (in both the appeals) . _K._ _/ayaram,_ for the respondent (in both the appeals). [The Income Tax Appellate Tribunal stated the case as follows: _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_ I 00 _shares_ _and Singaram_ 100 _shares_ _of a limited company by name 'The_ _Chittoor Motor Transport Company (Private)_ _Ltd.:_ _in_ _which_ _the public are_ _not._ _'substaQtially interested within the meaning_ _of section_ 23A. _The Shares were acquired with the funds_ _pf_ _the Hindu undivided family and, therefore, the shares were the_ _property of the Hindu undivided family._ _There_ _is_ _no_ _dispute_ _about that._ _Tl(e dividend earned on these shares was thus also_ _the income of the.Hindu undivided family and was_ _b<ing_ _assess-_ _ed_ _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_ _tha.t_ _also._ _In the two_ _assessm1mts .made on the Hindu· undivided family_ _for_ _the assessment years_ 1955-56 _and_ 1956-57, _for_ _which the_ _relevant 'previous_ _years'_ _are_ _the years ended_ 31-3-1955 _am!_ 31-3-1956, _respectively,_ _two sums_ _of_ _Rs._ 5,790/- _and_ _Rs._ 39,085/- _were treated_ _as_ _its dividend)ncome falling within_ _section_ 2(6A) _(e)_ _of the Act in_ _the respective years •. The assessee_ _dispuied the_ _inclusioll/_ _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) _There,_ _in_ _fact,_ _was_ _no payment_ _by_ _the afore-_ _said company by way_ _of advance or_ _loan_ _to the_ _Hindu undivided family and_ **A** **B** #### **_c_** **D** **E** **F** :1078 _(iii)_ SUPREME .COURT REPORTS [1972] l S.C.R. _The deemed dividend could not_ _be_ _assessed_ _as_ _the income_ _of_ _the Hindu undivided family, the_ _Hindu undivided family not being the share-_ _holder 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 VEGE-_ _TOLS, Ltd., a limited company to whom the amount_ _was_ _ulti-_ _mately said to have been .lent by the Hindu undivided family._ _As_ _regards the third contention, relying_ _on_ _the interpretation given_ _to the expression 'shareholder'_ _b.v_ _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 share-_ _holders, 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_ _Sectior._ - 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_ _secti'on_ 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_ fB-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_ **G** _un.divided family_ _in_ _the respective assessment years_ _?"_ The Judgment of the Courrwas 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( I) of the Indian Incometax Act, 1922, (to,be hereinafter referred to as "the Act") is "whether on the facts and in the circumstances of the case, the **H** A B #### c D ### t E F G H C.J.T. _v._ c. P. SARATHY _(Hegde,_ _!.)_ I 0 79 amounts of Rs. 5,790/- and Rs. 39,085/- could ~e deemed to be the dividend income of the Hindu undivided family in the rcspectlve 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._ Dorniswamy, Singaram and Sf!rathy were shareholders in a private Before the High Comt 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 behal.f of or for the individual benefit of the shareholders. The High Courf 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 shaleholders of the company. · Secondly, he contended that, at any rate, it. must be held Hmlt~<l company by name "The Chittoor Motor Transport, Co . . (Private) Ltd." Doraiswamy and Singaram held JOO 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 assess.ment years 1955-56 and 1956-57 the Chittor Motor Transport Co. (Private) Ltd. advanced certain Joans to the Hindu undivided family of which Doraiswamy, Singaram and Sarathy. wer coparceners The qliestion 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 Joan 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 con~ tention. 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 Tribunal repelled that contention. It came to the· conclusion that though the share' were acquired from out of the family funds in law the shareholders were Doraiswamy, Singaram and Sarathy and not their H.U.F. Hence. the loan. advanced to the H.U.F. cannot be considered as Joans advanced to the "shareholders" within the meaning of section 2(6A)(e). 1080 SUPREME COURT REPORTS [1972] l S.C.R. 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. bave 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 section 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 caSJe possesses accumulated profits; ####, . . . . Before a, payment can be considered as diviciend under section 2(6A) (e) the following conditions will have to be satisfied: B ##### c D 1. It must be a payment by a company not being,a company E in which the public are substantially interested within the m.eaning of section 23A of any sum whether as representing a part of the a.ssets of the company or otherwise by way of advance or loan. 2. (a) It must be an advance or Joan to a shareholder, or 2. ( b) a payment by the company on behalf or for the F individual )Jenefit 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 G 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 their individual benefit. That being so, the Tribunal did not go into that question. In fact, as can )Je gathered from the case stated, the contention of the assessee H before the Tribunal was that the loan in question was borrowed for the benefit of another company. But the Tribunal did not j!,O ..illt2.!~at questi,. Under these circumstances, the High G H A B #### c D E C.J.T. _v._ c. P, SARATHY _(Hegde,_ J.) 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 ques1ion 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 deemrd 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 ito the regist>ered 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. ###### l F Our conclusion in this regard receives support from the decisions 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 G the shares had not been registered in the books of the compallJ. The question was whether he could be considered as a "shareholder" in, respect of such shares f2r the purpose ofSection 18 (5) of the Act, because of his equitable right to the divi\lend on such shares and therefore entitled to have that divide-nil grossed up under section 16(2) by addition of income tax paid by the com ..1 H dpany in respect of those shares and claim credit for the tax de - ucted 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. t7-L119SupCl/72 1082 SUPREME COURT REPORTS [1972] l S.C.R. In _Commissioner of Income tax, Bombay City II,_ v. _Shakun-_ _ta/a_ & _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 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 blooks 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 oJ' 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. _Com-_ _missioner_ _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. ;rn the case of deemed dividends under section 2(6A) (e) the family does not get any )ncome at all. The dividend referred to by that provision is only a deemed dividend and not a real dividend. Hence, no A B ##### c D E F G H A B C.!.T. _v._ c. P. SARATHY _\Hegde,_ _J.)_ I 08 ~ 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_ -~.