Relevant provisions, references and links:
Section 2(6-A)(e) of the Income Tax Act, 1922 – this was different in comparison to present provision.
Section 2(22)(e) of the Income-tax act, 1961.
Gopal and Sons (HUF) Versus CIT Kolkata-XI 2017 (1) TMI 331 - SUPREME COURT
L. Alagusundaram Chettiar Versus Commissioner Of Income Tax 1996 (10) TMI 73 - SUPREME Court
Commissioner Of Income-Tax, Madras I Versus L. Alagusundaram Chettiar 1976 (10) TMI 22 - MADRAS High Court
C.P. Sarathy Mudaliar,[1971 (10) TMI 8 - SUPREME Court – case relating to Section 2(6-A)(e) of the Income Tax Act, 1922 – this was different in comparison to present provision of S.2 (22) (e).
Share certificates were issued in name of Karta of HUF and not in name of HUF. Therefore, it was contended that assessee HUF is not a registered holder of shares therefore one of condition was not satisfied to invoke deeming provision.
In members Register and annual return HUF was shown as member and HUF was having substantial stake in company.
Funds for subscription for shares were provided by HUF that is to say investment was made by HUF and not by Karta, though share certificates were issued in name of Karta of HUF.
In view of these facts HUF was owner, beneficial holder and registered member (as per Register of members and annual return).
Registered share holder who is Karta of HUF, being Karta and also because it was not disputed that he was entitled to not less than 20% of the income of HUF, had substantial stake in HUF.
As per assessee also the Karta was registered shareholder and shares registered in his name made him substantially interested in company by counting of shares registered in his name. Therefore, HUF being a concern in which such registered shareholder (Karta) had substantial interest will be subject to application of S.2 (22) (e).
In view of these facts, the supreme Court confirmed invocation of S. 2 (22) (e) in respect of loans given by company to HUF.
What is not considered or reconsidered:- the issue whether a HUF can be registered as shareholder was not considered by the Supreme Court. Because it was not necessary for the reason that karta having substantial holding by way of shares registered in his name, and he being substantial stake holder, caused application of s. 2 (22) (e) in hands of HUF. Court held that in case of C.P. Sarathy Mudaliar, supra wherein Section 2(6-A)(e) of the Income Tax Act, 1922 was considered, there was no provision similar to Explanation found in present S. 2 (22) ( e).
It has been held that even if it is assumed that the Karta is the registered shareholder and not the HUF, as per Explanation 3 to s. 2(22), any payment to a concern (the HUF in this case) in which the shareholder (i.e. the Karta) has a substantial interest is also covered.
Other important aspects decided / reiterated are:
Fiction or deeming provision:
Section 2(22)(e) , by way of fiction bring any amount paid otherwise than as a dividend into the net of dividend under certain circumstances. It gives an artificial definition of ‘dividend’.
Though 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.
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.
Benefit of doubt:
In case of doubt or where two views are possible, benefit shall accrue in favour of the assessee
Present situation – same law prevails:
The Supreme Court considered matter for assessment year 2006-07. That is law as on 01.04.2006. There seems no change in law in this regard since then. Therefore the judgment has continuing applicability since then.
More care and caution was required by assessee:
The author feels that more care and caution was required by the assessee HUF and its members in this case and distribution of shares in hands of other members and HUF could have been better option. Likewise loans could be obtained by HUF and other members in a manner that fiction could not be invoked.
All aspects of factual situation and provisions should be considered. When a matter concerning transactions within group of related and associated people or concern are planned more care is required to look at transactions and their effect on related parties.
Is it high time to omit S. 2.22.e:
Whether deeming provision for deeming dividend should continue or should be dropped:
There are lot of changes in situation for example:
- companies prefer to declare dividend,
- difference between rate of tax on companies and shareholders have reduced, in fact in cases where provision like S.2.22.e are applicable generally rate of tax on company and its members who can be effected by deeming provision, is same because such people are also generally falling in higher tax brackets.
- tax on dividend distributed on normal dividend is payable by companies and consequently dividend received by shareholder is exempted.
- Most of assessments of shareholders (individual and others) and also companies are made as per return and without scrutiny. Therefore, it is difficult to examine aspect of deemed dividend by AO. Generally shareholder taking loan from company feel, assumeand have belief that deeming provision is not applicable therefore self- disclosure is rarely made.
- Applicability of otherwise of S. 2.22.e itself is very contentious and complicated issue.
- The provisions should be such that can be understood, applied and monitored easily.
- Provisions of deemed dividend are applicable in case of closely held companies only, and scope of taxation on such dividend is limited and is not a major revenue earner. It is more litigation involving issue.
- Policy of government is to make business easy.
Therefore, now it is high time that provisions of S. 2 (22) ( e ) should be omitted from the Act.
By: CA DEV KUMAR KOTHARI - January 11, 2017