1971 (10) TMI 8 - SC - Income Tax

Deemed Dividend - HUF - held shares in the company acquired with funds of the family - loan to the family could not be treated as deemed dividends

Summary

Issues:
1. Whether the amounts could be deemed as the dividend income of the Hindu undivided family in the respective assessment years?

Analysis:
The case involved an appeal regarding the classification of certain amounts as dividend income of a Hindu undivided family. The family members were shareholders in a private limited company, and the company had advanced loans to the family. The key legal question was whether these loans could be considered as dividends under the Indian Income-tax Act. The Tribunal found that the loans were granted to the family, not the shareholders directly. The High Court ruled in favor of the assessee, stating that the loans were not advanced on behalf of the shareholders. The Supreme Court analyzed the provisions of section 2(6A) of the Act, which define dividends. The Court emphasized the need for strict construction of the term "shareholder" and concluded that loans given to a Hindu undivided family could not be considered as loans advanced to shareholders.

2. Whether loans advanced to a Hindu undivided family can be considered as loans advanced to its shareholder?

The Supreme Court examined the legal definition of "shareholder" in the context of loans advanced by a company to a Hindu undivided family. The Court clarified that a Hindu undivided family cannot be a shareholder of a company, as the shareholder is the individual registered as such. The Court emphasized that section 2(6A)(e) provides an artificial definition of dividend, which must be strictly construed. Referring to previous court decisions, the Court reiterated that the term "shareholder" refers to the registered shareholder, not the beneficial owner. Therefore, loans given to a Hindu undivided family could not be considered as loans advanced to shareholders, as per the provisions of the Act.

3. Whether the deemed dividends under section 2(6A)(e) apply to the loans advanced in this case?

The Supreme Court further discussed the concept of deemed dividends under section 2(6A)(e) of the Act. The Court highlighted that for a payment to be considered as a dividend, specific conditions must be met, including being a payment by a company to a shareholder. Since the loans in question were not directly advanced to the shareholders but to the family, the Court concluded that the deemed dividend provision did not apply in this case. As a result, the Court dismissed the appeals and upheld the decision in favor of the assessee, emphasizing the strict interpretation of the law regarding dividends and shareholders.