Provisions Of Deemed Dividend Are Attracted If HUF Gets Payment And Shareholder Is Its Member With Substantial Interest: SC [Read Judgment]

It is no gain saying that since HUF itself is not the registered shareholder, the provisions of deemed dividend are not attracted, the Bench said

The Supreme Court in Gopal and Sons(HUF) vs. CIT Kolkata-XI has held that even if a Hindu Undivided Family (HUF) itself is not a registered shareholder, the provisions of deemed dividend are attracted once the payment is received by the HUF, and shareholder is a member of the said HUF and has substantial interest in it.

‘Once the payment is received by the HUF and shareholder 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’, a bench comprising Justice AK Sikri and Justice AM Sapre observed while dismissing an appeal of an assessee.

The bench was answering the question whether in view of the settled principle that HUF cannot be a registered shareholder in a company and hence could not have been both registered and beneficial shareholder, loan/advances received by HUF could be deemed as dividend within the meaning of Section 2(22) (e) of the Income Tax Act, 1961 especially in view of the term “concern” as defined in the Section itself?

On the facts of the case, the court observed: “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.”

Dismissing the appeal, the court also observed that audited annual return of the company filed with ROC, though the share certificates were issued in the name of the Karta, but in the annual returns, it is the HUF which was shown as registered and beneficial shareholder.

Read the Judgment here.