BHAWANISHANKAR GINNING FACTORY,DHULE vs. ACIT, CIRCLE-DHULE, DHULE

PER Dr. DIPAK P. RIPOTE, A.M : This is an appeal filed by the assessee against the order of the Ld. ADDL/JCIT(A)-2, Kolkata (herein after referred to as ‘Ld. First Appellate Authority’), passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2015-16 on 03-07-2025, emanating from the Assessment Order u/s 143(3) of the Act, dated 28-11-2017.

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AO has recorded a fact that reserve and surplus of Mahesh Ginning Pvt. Ltd., are Rs. 2,63,50,969/-. Therefore, the AO held that there were sufficient reserve and surplus funds. The AO also relied on Circular No. 495 of 1987 of CBDT. Accordingly, AO made addition u/s. 2(22)(e) of the Act of Rs. 43,06,237/-, after giving credit to the earlier year’s addition. Aggrieved by the addition, the assessee filed an appeal before the Ld. First Appellate Authority. Before the Ld. First Appellate Authority, the assessee relied on various case laws and pleaded that assessee is not a shareholder of Mahesh Ginning Pvt. Ltd., hence provision of section 2(22)(e) of the Act are not applicable. However, after considering the facts, the Ld. First Appellate Authority relying on the decision of the Hon’ble Supreme Court in the case of Gopal & Sons (HUF) vs. CIT [2017] 77 taxmann.com 71 (SC), upheld the addition. Aggrieved by the same, the assessee filed an appeal before the Tribunal.

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determine whether the entity which received loan was beneficial shareholder or not as long as it is covered under the definition of “concern” given in Explanation-3 to section 2(22)(e) of the Act. Therefore, Ld.DR submitted that addition may be confirmed. Ld.DR submitted that the case laws relied by the Ld.AR are distinguishable on facts. Ld.DR further submitted that in the case of the assessee for AY. 2013-14, ITAT has not considered the decision of the Hon’ble Supreme Court in the case of Gopal & Sons (HUF) vs. CIT (supra), therefore, ITAT has erred in deleting the addition for AY. 2013-14 and hence, it is perineurium.

5.1. Section 2(22)(e) of the Act is reproduced hereunder, which is applicable for AY. 2015-16: Section 2(22) "dividend" includes— (a) ….. (b) ….. (c) ….. (d) …… (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) made after the 31st 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

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which he has a 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; Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. 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 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 ; [Emphasis supplied]

5.2. Thus, as per section 2(22)(e) of the Act, any payment by way of advance or loan by a company to any concern in which shareholder is a Member or a Partner is deemed dividend.

5.3. In this case, admittedly, Mr. Goverdhandas H. Tayal and Shri Gopal Hazarimal Tayal held 18.19% shares each in Mahesh Ginning Pvt. Ltd.

5.4. It is also an admitted fact that Mr. Goverdhandas H. Tayal and Shri Gopal Hazarimal Tayal are two partners having 50% share each in the assessee’s firm. Therefore, for the purpose of section 2(22)(e) of the Act, the concern in which shareholder is a partner is fulfilled. Admittedly, Mahesh Ginning Pvt. Ltd., had given loan of Rs. 1.55 crores. There were

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reserve and surplus more than that amount. Therefore, all the ingredients of section 2(22)(e) of the Act are fulfilled.

6.1. The relevant paragraphs of the Hon’ble Supreme Court’s decision in the case of Gopal & Sons (HUF) vs. CIT (supra) are reproduced as under: Quote“10. The arguments before us remain the same. Mr. S.B. Upadhyay, learned senior counsel appearing for the assessee, 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 addition could 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, Andhra Pradesh Vs. C.P. Sarathy Mudaliar[2]: “....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 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 shareholder of the company.” 11. Learned Additional Solicitor General, on the other hand, after reading the relevant portions of the orders of AO and CIT(A), submitted that on the facts of this case, the Revenue was justified in making the addition. 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 certain circumstances. It gives an artificial definition of 'dividend'. It does not take into account that dividend which is actually declared or received. The dividend taken note of by this provision is a deemed 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 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 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 of the assessee. 13. 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:

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(a) any payment 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. (b) any payment on behalf of a shareholder, and (c) any payment for the individual benefit of a shareholder. [See: Alagusundaran Vs. CIT; 252 ITR 893 (SC)]. 14. Certain conditions need to be fulfilled in order to attract tax under this clause. It is not necessary to stipulate other conditions. For our purposes, following conditions need to be fulfilled: (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. (c) Such advance or loan should have been made after the 31st 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 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. 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, 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 less 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 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 Sanei, but in the annual returns, it is the HUF which was shown as registered and beneficial shareholder. 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) of the Act, once the payment is received by the HUF and shareholder (Mr. 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 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, as noticed above. Therefore, it is no gainsaying that since HUF itself is not the registered shareholder, the provisions of deemed dividend are not attracted. For this reason, judgment in C.P. Sarathy Mudaliar, relied upon by the learned counsel for the appellant, will have no application. That was a judgment rendered in the context of Section 2(6- A)(e) of the Income Tax Act, 1922 wherein there was no provision like Explanation 3. 18. We, thus, do not find any merit in this appeal, which is accordingly dismissed.”Unquote [Emphasis supplied]

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whose partners were substantial owners of shares in Mahesh Ginning Pvt. Ltd. Mahesh Ginning Pvt. Ltd., has provided loan to the assessee firm. Therefore, as laid down by the Hon’ble Supreme Court in the case of Gopal & Sons (HUF) vs. CIT (supra), whether the assessee firm is a shareholder or not does not make any difference for the applicability of section 2(22)(e) of the Act. As per Explanation-3 of section 2(22)(e) of the Act, loan provided to the firm in which partners are substantial shareholders in the company, which provided loan comes under the deeming proving of section 2(22)(e) of the Act.

7.1. Therefore, we do not find any infirmity in the order of the Ld. First Appellate Authority in confirming the addition made u/s. 2(22)(e) of the Act.

8.1. Ld.AR has relied on the decision of the Hon’ble Madras High Court in the case of CIT vs. T. Abdul Wahid & Co. [2020] 119 taxmann.com 497 (Madras). The said decision is distinguishable on facts as it has been observed that the transactions were not in the nature of loan or advances, but are deferred liability. Therefore, the said decision is distinguishable on facts.

8.2. Ld.AR also relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Skyline Great Hills, dt. 16-02-2016 [2016] 68 taxmann.com 188 (Bombay). It is observed that the Hon’ble Bombay High Court decision of the in the case of CIT vs. Skyline Great Hills (supra) is prior to the decision of the Hon’ble Supreme Court in the case of Gopal & Sons (HUF) vs. CIT (supra). The decision of the Hon’ble Supreme Court in the case of Gopal & Sons (HUF) vs. CIT (supra), was rendered on 04-01-

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2017, whereas the decision in the case of CIT vs. Skyline Great Hills, is dt. 16-02-2016. Therefore, the said decision in the case of CIT vs. Skyline Great Hills (supra) will not be applicable once law has been explained by the Hon’ble Supreme Court in the case of Gopal & Sons (HUF) vs. CIT (supra). Similarly, Ld.AR relied on the decision in the case of CIT vs. Universal Medicare (P.) Ltd., [2010] 190 Taxman 144 (Bombay). The said decision is prior to the decision of the Hon’ble Supreme Court in the case of Gopal & Sons (HUF) vs. CIT (supra). Hence, it is not appliable in the case of the assessee.

Order pronounced in the open Court on 21st May, 2026

Sd/- Sd/- (MS. ASTHA CHANDRA) (Dr. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे/Pune; दिन ांक/Dated : 21-05-2026 TNMM

आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: अपील र्थी / The Appellant 1. प्रत्यर्थी / The Respondent 2. 3. The concerned Pr.CIT, Pune 4. DR, ITAT, ‘A’ Bench, Pune 5. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Assistant Registrar आयकर अपीलीय अदिकरण ,पुणे / ITAT, Pune