1979 (12) TMI 1 - SC - Income Tax

Interpretation of s. 2(6A)(e) - assessee is the HUF - Loan advanced by company to HUF who is a beneficial shareholder - shares registered in name of the karta. Whether the loan could be treated as deemed dividend in the hands of the HUF -Held no

Issues Involved
1. Interpretation of section 2(6A)(e) of the Indian Income-tax Act, 1922.
2. Taxability of loans advanced to business concerns as "deemed dividend."
3. Whether "deemed dividend" can be taxed in the hands of the beneficial owner or only in the hands of the registered shareholder.
4. Conflict between the decisions in CIT v. C. P. Sarathy Mudaliar and CIT v. Rameshwarlal Sanwarmal.

Issue-wise Detailed Analysis

1. Interpretation of Section 2(6A)(e) of the Indian Income-tax Act, 1922
The primary issue in this appeal was the interpretation of section 2(6A)(e) of the Indian Income-tax Act, 1922. The court had to determine whether loans advanced to business concerns could be considered "deemed dividend" under this section. The court referred to the decision in CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170, which concluded that only loans to registered shareholders could be deemed dividends. The court found no conflict between this decision and the earlier decision in CIT v. Rameshwarlal Sanwarmal [1971] 82 ITR 628, as the latter did not address whether loans to beneficial owners could be deemed dividends.

2. Taxability of Loans Advanced to Business Concerns as "Deemed Dividend"
The assessee, an HUF, owned shares in a private limited company, Shyam Sundar Tea Co. (P.) Ltd., which stood in the name of its manager and karta, S. M. Saharia. The company advanced loans to three business concerns owned by the assessee. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) treated these loans as "deemed dividend" under section 2(6A)(e) and taxed them in the hands of the assessee. However, the High Court ruled that since the assessee was not a registered shareholder, the loans could not be deemed dividends. The Supreme Court upheld this view, stating that only loans to registered shareholders could be considered "deemed dividend."

3. Whether "Deemed Dividend" Can Be Taxed in the Hands of the Beneficial Owner or Only in the Hands of the Registered Shareholder
The court addressed whether "deemed dividend" could be taxed in the hands of the beneficial owner or only in the hands of the registered shareholder. The revenue argued that the deemed dividend should be taxed in the hands of the beneficial owner, citing the decision in CIT v. Rameshwarlal Sanwarmal. However, the court clarified that this decision did not address whether loans to beneficial owners could be deemed dividends. The court held that only loans to registered shareholders could be deemed dividends and taxed accordingly.

4. Conflict Between the Decisions in CIT v. C. P. Sarathy Mudaliar and CIT v. Rameshwarlal Sanwarmal
The revenue contended that there was a conflict between the decisions in CIT v. C. P. Sarathy Mudaliar and CIT v. Rameshwarlal Sanwarmal. However, the court found no such conflict. The decision in CIT v. Rameshwarlal Sanwarmal did not address whether loans to beneficial owners could be deemed dividends, while CIT v. C. P. Sarathy Mudaliar explicitly held that only loans to registered shareholders could be deemed dividends. The court reaffirmed the correctness of the decision in CIT v. C. P. Sarathy Mudaliar, stating that the term "shareholder" in section 2(6A)(e) referred only to registered shareholders and not beneficial owners.

Conclusion
The Supreme Court concluded that the loans advanced to the three business concerns of the assessee could not be regarded as "deemed dividend" under section 2(6A)(e) since the assessee was not a registered shareholder. The court upheld the decision of the High Court and answered the first question in favor of the assessee. Consequently, the other questions were deemed unnecessary to address, and the appeal was allowed with no order as to costs.

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