RAMESHWAR LAL SANWARMAL v. COMMISSIONER OF INCOME-TAX, ASSAM (2)

Citation: [1980] 2 S.C.R. 369

Court: Supreme Court of India

Bench: P.N. BHAGWATI, R.S. PATHAK

Case summary

The result 'va<:> that the first part of the High Court's decision that loans advanced to the bu~iness concerns of a beneficial owner of shares could not be regarded as "deemed dividend" in his hands and that the loans in the present case did not fall 1vithin the meaning of...

Judgment text

RAMESHWAR LAL SANWARMAL v. COMMISSIONER OF INCOME-TAX, ASSAM December 5, 1979 [P. N. BHAGWATI AND R. S. PATHAK, JJ. ] 8 Jnd~an Income Tax Act 1922-Section 2(6A) (e)-Scope of-Shares in a company registered i'n the name of Karta of HUF-Company advanced loans to business co11ctrns of HUF-/oans--if "deemed dividend". The assessee, a liindu Undivided Family, owned certain Shares in a private limited company in which the public \Vere not substantially interested. Though the shares were beneficially owned by the Hindu Undivided Family, they stood registered in the name of its Karta. From out of its accumulated profits the company gave loans, in the assessment yea·r 1956-57, to three business concerns which \Vere owned by the assessee. Section 2(6A) (e) of the Indian Income Tax .

Act, 1922 provided that where a ]private company in which public were not substantially interested gave loans to its shareholders from out of its accumulated profits such loans would be treated as "deemed dividend" in the hands of the shareholders. The Income Tax Officer treated the loans as "deemed dividend" in the hands of the assessee on the grol,Jnd that though the shares stood in the name of the Karta, the assessee being the beneficial owner, the conditions of section 2(6A)- (e) were satisfied. Thil view of the Income Tax Officer was upheld by the Appellate Assistant Commissioner.

The Appellate Tribunal rejected the contentions of the assessee that the loans could not be taxe that the first part of the High Court's decision that loans advanced to the bu~iness concerns of a beneficial owner of shares could not be regarded as "deemed dividend" in his hands and that the loans in the present case did not fall 1vithin the meaning of section 2(6A)(e) ren1ained intact and unaffected by the decision· of this Court. This Court could not have answered the first question against the assessee \Vithout over-ruling the first part of the ' High Court's decision. However) through inadvertan. :e, this Court s~t aside the High Court's answer without considering whether thi~ part of the, decision was right or 1vrong.

When no contention was raised on behalf- of the Revt:nue that even if the assessee Was not a registered shareholder loans advanced to its busines tered share-holder and the decision of the High Court to the effect that the assessee not bei•~ a registered share-holder, the loan advanced to it could not be regarded as 'deemed dividend' under section 2(6A) (e) remained undistw·bed. Now obviously, so long as the decision of the High Court on this point was not over-ruled, the question whether the JG · amount of the loans was taxable as "deemed dividend" in the hands of the assessee could not be answered. in favour of the Revenue. But sometimes even Homer nods and through some unfortunate inadvertence for which the counsel appearing on behalf of the assessee in that case must accept full responsibility. this Court discharged the answer given by the High Court in favour of the assessee and in iis place substituted an answe,r in favour of the Revenue.

This decision of the Court is reported in Co111111issio11er of Income-tax v. Rameshwar Lal Sanwarmal (supra). R L. SM,\nl , Sj! ~ that }))ou1! 4, this contention was not raj~ed, not,. ar~p t 1'~ right to,h9ld th~t mer5ly beca'! s~ iljis, S ,%0! /~ly al! Swerep the . first, question, • a~amst the a~~. ~s~~. 1v\\??. uf, cRB~,1~~rHlll i~~efher, the \'iew ,taken: by . the Hr. gh C". •urt "'\:th~~ PD1! 1t. was, :mcor. re\;~· the assessee n:ust, be pre~h1ded 1 fron,:t raising )he conte?! J. 91. '". tlfat,,,the . ,a,s~es~ee not )i1e1ng ,a registereii share··hold~~~ ,tl,i,~ ~1. '~S1! 1'%9L\~~? ~ ~pyaqsl'f! }? $ei,th~ee b11~iness con- . HI c~~~s of,,. t? e ~~. ~sse~,, d. ~d, . 1J9!. r. ;», 'l'~t,ji\μ :tlW 4~~ajtiqn9,~, '. '. cjeeme far ru, this aspec• of lh,e:! il_\lystjon is concerned and it is. opeu t 0 the assessee· to contend that. QJr <1mounts of}OOJtS a\lvanced to the, three business concerns. of! the. ,q. ssei;see could..

l)ot be regarded a~ "deemed dividend" under seetionv Z<-04l~(e), ~ince the assessee was not a registered shareholder. . J E' tds ·also obvious from what ~·e have s~il above that i11~r~ is ~'a·: cooftitt ·betW6en the deeislons of this Court· in C. l. T. v. Rmnesw~rl~l· . _, - - ' ' < ' ' , ' '' ' ' • ,?. Sanwlirmal' and C. l. T. v. C. P. Sarathy Mudaliaf (supra). The question wheth~, 'Ott a proper conitruction of section 2(6A) (e), a loan advance f to a . beneficial ownet of the shares would be· liable to be regarded ~? "dee! Ited dividend" was not raised or argued Jieforethis Court in c. t:t. ;< v. Rameswarlal Sanwarmal and this Court was not called upon to decide it and hence there is no discussion abont it mthe judgment of this Court nor is there any decision on it. It is only in the subsequeri! decision. in C. l. T. v. C. P. Sarathy Mudaliar (supra) that this question came up fo. r the first time before this Court for consideration and this G" Court held that when sec.

2(6A) (e) speaks oil a "shareholder" it refers • to ih~ registered shareholder and not to the beneficial owner and hence I a Joan' granted tO a beneficial OWner Of the Shares WhO is not a fegiSfered shareholder cannot be regarded as a loan advanced to a "sha! eholder" 1 of ltte compan}'. so as to be within the mischief of section 2 (6A) (e) . There is thus no coμJlict at all between the decisions in C. l. T. v. c. p, R Sarathy, ,Mudaliar (supra) and C. I. T. v. Rameswarlal Sanwannal. In fa9t, Mr. Justice He~e was a. common Member of the Bench in both· 3-:ii 'sci,so ·· ·· · · the cases and the subsequent decision in C. l. T. v. C. P. Sarathy Muaaliar was given within Jess than a month after the decision in C. l. T. v. ·- ' Rameshwarlal Sanwarmal. It is impossible to believe that Mr. Justice Hegde was oblivious of the decision in C. l. T. v. Rameswarlal Sanwarmiil when he delivered the judgment in C. I. T. v. C. P. Sarathy Mudaliar. The Revenue lastly contended that the decision in C. l.

T. v. C. P. Sarathy Mudaliar is incorrect and we must refer the present case to a larger Bench. Now it is obvious that before wei can be persuaded to accede to this request, we must be satisfied that the decision in Commissioner of Income Tax v. C. P. Sarathy Mudaliar is wrong. But having given our most anxious consideration, we find onrselves llllllble to disa~ee with the view taken in that decision. What section 2(6A) (e) is designed to strike at is advance or Joan to a "shareholder" and the word "shareholder" can mean only aj registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not apPeiir in the register of shareholders of the company can be said to be a "shareholder". He may be beneficially entitled to the shares but; he is certainly not a "shareholder". It is only the person whose name i~ entered in the register of shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company.

and not the person beneficially entitled to the shares. It is the former who is a "shareholder" within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered shareholder and the other conditions set ont in section 2(6A) {e) are sati&fied that the amount of the loan would be liable to be regarded as 'd~emed dividend' within the meanjng of section 2 (6A) (e). The amount ol the loan would not fall within thei mischief of this section if it is gra. ated to a beneficial owner of the shares who is not the registered shareholder. The decision in C. l. T. v. C. P. Sarathy Mudaliar does, in our opinion, lay down the correct interpretation of section 2(6A)(e).

Now in the present case it was common ground that the loons were advanced to the three business concerns of the assessee which was a Hindu Undivided Family and this Hindu Undvided • Family was not the registered holder of any shares in the company but it was the beneficial owner of certain shares which stood in the name of the Manager and Karta, Shri) S. M. Saharya. The loans were thus advanced to thei beneficial ownet of the shares and not to the registered shareholder and hence they conld not be regarded as loans advanced to a "shareholder" of the company within the meaning of section 2 (6A) (e). Section 2 (6A) (e) was accordingly not attracted f • and the amounts of the loans could not be taxed as deemed dividends R. L. SANWARMAL V. C. I. T. , ASSAM (Bhagwati,- ]. ) 379 in the hands of the assessee. We accqrdingly answer the first question A _, \ in favour of the assessee so far as this aspect is concerned.

In view -0f this answer to the first question, it is not necessary to consider the -other two questions decided by the High Court on remand. The learned . counsel appearing on behalf of the assessee, in fact, did not press them. There will he 10 order as to costs of the appeal. B 1-. 3. R. • '