Case: Commissioner of Income Tax, A.P Vs. C.P. Sarathy Mudaliar

The assessee in this case is a Hindu undivided family. From the case stated it is not possible to state definitely as to how many coparceners were there in that family. But, we gather from the case stated that the three of the members of that family, viz., Doraiswamy, Singaram and Sarathy, were shareholders in a private limited company by name " The Chittoor Motor Transport Co. (Private) Ltd." Doraiswamy and Singaram held 100 shares each in that company ; Sarathy held 2, 797 shares. The Tribunal found that these shares were acquired from out of the family funds. It appears that in the account years relevant to the assessment years 1955-56 and 1956-57 the Chittoor Motor Transport Co. (Private) Ltd. advanced certain loans to the Hindu undivided family of which Doraiswamy, Singaram and Sarathy were coparceners. The question arose wbether those loans can be considered as " dividends " within the meaning of that expression in section 2(6A)(e) of the Act. The Tribunal found as a fact that the loan in question had been granted to the Hindu undivided family. The assessee contended that the same was taken for making an advance to the Vegetols Ltd. The Tribunal did not examine the correctness of that contention. It was contended on behalf of the revenue before the Tribunal that the loan in question was advanced to the shareholders of the company. The Tribunal repelled that contention. It came to the conclusion that, though the shares were acquired from out of the family funds, in law, the shareholders were Doraiswamy, Singaram and Sarathy and not their Hindu undivided family. Hence, the loan advanced to the Hindu undivided family cannot be considered as loans advanced to the " shareholders " within the meaning of section 2(6A)(e)Before the High Court the counsel for the revenue gave up the contention that the loans in question were advanced to the " shareholders " of the company. On the other hand, he contended that those loans had been advanced on behalf of or for the individual benefit of the shareholders. The High Court did not accept that contention. It held that, as no such case had been taken up before the Tribunal, it was not possible to go into that contention. The facts found by the Tribunal did not afford any basis for that contention. In the result, the High Court answered the question referred to it in favour of the assessee

Reasoning: In fact, as can be gathered from the case stated, the contention of the assessee before the Tribunal was that the loan, in question was borrowed for the benefit of another company. But the Tribunal did not go into that question. Under these circumstances, the High Court, in our opinion, was right in not going into that question because on the facts found by the Tribunal it was not possible to decide that contentionIt is well-settled that a Hindu undivided family cannot be a shareholder of a company. The shareholder of a company is the individual who is registered as the shareholder in the books of the company. The Hindu undivided family, the assessee in this case, was not registered as a shareholder in the books of the company nor could it have been so registered. Hence, there is no gainsaying the fact that the Hindu undivided family was not the shareholder of the company. Mr. Sen did not contend otherwiseSection 2(6A)(e) gives an artificial definition of " dividend ". It does not take in dividend actually declared or received. The dividend taken note of by that provision is a deemed dividend and not a real dividend. The loan granted to a shareholder has to be returned to the company. It does not become the income of the shareholder. For certain purposes, the legislature has deemed such a loan as " dividend ". Hence, section 2(6A)(e) must necessarily receive a strict construction. When section 2(6A)(e) speaks of " shareholder ", it refers to the registered shareholder and not to the beneficial owner. The Hindu undivided family cannot be considered as a shareholder either under section 2(6A)(e) or under section 23A or under section 16(2) read with section 18(5) of the Act. Hence a loan given to a Hindu undivided family cannot be considered as a loan advanced to a " shareholder " of a companyOur conclusion in this regard receives support from the decisions of this court. In Howrah Trading Ltd. Co. v. Commissioner of Income-tax, this court had to examine the case of a person who had purchased shares of a company under a blank transfer. but in whose name the shares had not been registered in the books of the companyThis court ruled that the dividends paid to the shareholders was the income of the family and, that being so, the same was assessable in the hands of the Hindu undivided family. We see no conflict between this decision and the decisions earlier referred to. In the case of actual receipt of dividends there is a receipt of income. That income is received on behalf of the family. Hence, the same was assessable in the hands of the family. In the case of deemed dividends under section 2(6A)(e) the family does not get any income at all. The dividend referred to by that provision is only a deemed dividend and not a real dividend. Hence, no income is either received by the family or accrued to it. Therefore, only the person who is deemed to have received that income can be assessed in respect of that incomeComing to the facts of the present case, the loans advanced to shareholders alone can be deemed as dividends. No loans had been advanced to shareholders as seen earlier. Hence, the shareholders did not get any income. Hence, section 2(6A)(e) became inapplicable.