· In the said appeal, the Apex Court was concerned only with one addition which was made on account of deemed dividend within the meaning of Section 2(22)(e) of the Income Tax Act, 1961.
· The assessee was a HUF. During the previous year to the A.Y. under consideration, assessee received certain advances from one company. From the perusal of the Annual Return filed by the said company before the ROC, it was found that 37.12% of the total shareholding was subscribed by the assessee.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 10% of voting power, and thus, made the addition u/s 2(22)(e) of the Act.
· The assessee argued that being a HUF, it was neither the beneficial shareholder nor the registered shareholder. It was further argued that 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. On that basis, it was submitted that the provisions of 2(22)(e) could not have been attracted.
· The Apex Court observed that certain conditions need to be fulfilled in order to attract the provisions of 2(22)(e), which are as under:
(i) Payment is to be made by way of advance or loan to any concern in which such shareholder is a member or a partner
(ii) In the said concern, such shareholder has a substantial interest
(iii) Such advance or loan should have been made after the 31st day of May, 1987
· The Apex Court further observed that Explanation 3(a) defines "concern" to mean HUF or a firm or an association of persons or a body of individuals or a company. Also, as per 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 Hon’ble Supreme Court held that 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 was further concluded that even if it is presumed that HUF is not a registered shareholder, as per the provisions of Section 2(22)(e) of the Act, once the payment is received by the HUF, and 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 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.
For further reading, refer the attachment.
Further Reading