GOPAL AND SONS (HUF) vs. CIT KOLKATA-XI

CIVIL APPEAL No. 12274/2016Supreme Court[2017] 1 S.C.R. 8604 January 2017Bench: 2 JudgesAuthor: A.K. SIKRI, ABHAY MANOHAR SAPRE9 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the provisions of Section 2(22)(e) of the Income Tax Act, 1961, were attracted. The Court reasoned that the payment was made to the HUF, and the Karta, Shri Gopal Kumar Sanei, who held shares in the company, was a member of the HUF and had a substantial interest in it, being entitled to not less than 20% of the HUF's income. This position, as per Explanation 3 to Section 2(22)(e), meant that the provisions were attracted, and it was unnecessary to determine whether the HUF could legally be a beneficial or registered shareholder. The Court noted that the annual returns filed with the ROC showed the HUF as the registered and beneficial shareholder, and even if it were not a registered shareholder, the conditions of Section 2(22)(e) were met because the payment was received by the HUF, and the shareholder (Karta) was a member of the HUF with a substantial interest. The judgment in C.P. Sarathy Mudaliar was held not applicable due to the absence of Explanation 3 in the earlier Act.

What were the facts?

The assessee, Gopal and Sons (HUF), filed its return for Assessment Year 2006-07. The Assessing Officer (AO) made additions, including Rs. 1,20,10,988 on account of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The HUF had received advances from M/s. GS. Fertilizers (P) Ltd. The HUF subscribed to 37.12% of the company's shares. Although share certificates were in the name of the Karta, Shri Gopal Kumar Sanei, the annual returns filed with the Registrar of Companies (ROC) showed the HUF as the registered and beneficial shareholder. The AO treated the 'Reserve & Surplus' balance as deemed dividend. The assessee contended that as a HUF, it could not be a registered or beneficial shareholder, and shares were in the Karta's name, thus Section 2(22)(e) was not attracted. The CIT(A) affirmed the addition.

What were the issues?

1. Whether advances received by the assessee, a Hindu Undivided Family (HUF), from a company in which its Karta holds shares, can be deemed as dividend under Section 2(22)(e) of the Income Tax Act, 1961, especially considering the definition of 'concern' and the fact that HUFs cannot be registered shareholders? Assessee's contention: The assessee argued that as a HUF, it was neither a beneficial nor a registered shareholder. The shares were issued in the name of the Karta, Shri Gopal Kumar Sanei, and not the HUF, as HUFs cannot be directly allotted shares. Therefore, Section 2(22)(e) was not applicable. The assessee relied on the principle that HUFs cannot be registered shareholders, citing observations from CIT, Andhra Pradesh v. C.P. Sarathy Mudaliar. Revenue's contention: The Revenue contended that based on the facts, the addition was justified. The judgment does not explicitly detail the Revenue's specific arguments beyond this general statement.

Which sections of the Income-tax Act were involved?

Section 2(22)(e)

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A B c (2017] 1 S.C.R. 86 GOPAL AND SONS (HUF) V. CIT KOLKA1A-XI (Civil Appeal No. 12274 of2016) 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 a compan~ Assessing Officer made certain addition to the income of 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 of HUF 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 E less rhan 20% of the income of HUF - Therefore, provisions of s.2(22)(e} are attracted.

Income Tax Act, 1961 -.s.2(22}(e) - Deeming provision - Held:

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