NATIONAL TRAVEL SERVICES versus COMMISSIONER OF INCOME TAX, DELHI, VIII on 18 January 2018

[2018] 1 S.C.R. 336

SUPREME COURT REPORTS

[2018] 1 S.C.R.

A

NATIONAL TRAVEL SERVICES

v.

COMMISSIONER OF INCOME TAX, DELHI, VIII

(Civil Appeal Nos. 2068-2071 of 2012)

BJANUARY 18, 2018

[R. F. NARIMAN AND NAVIN SINHA, JJ.]

Income Tax Act, 1961:

s.2(22)(e) (as amended in 1988) – Applicability of –CPartnership firm purchased shares in the name of two of its partners– Whether the firm or the partners are to be treated as shareholdersfor the purpose of s.2(22)(e) – Held: The word “shareholder”occurring in s.2(22)(e) post amendment, has only to be a personwho is the beneficial owner of shares – One cannot be a registeredowner and beneficial owner in the sense of a beneficiary of a trustDor otherwise at the same time – To state that two conditions have tobe satisfied namely that shareholder must be a registeredshareholder and also be a beneficial owner, is mutually contradictoryand also incorrect – #Ankitech’s case (holding that expression“shareholder” would continue to mean a registered shareholderEeven after the amendment) has wrongly been decided – ThereforeAnkitech’s case needs reconsideration – Matter referred to largerBench.

Placing the matter before Hon’ble The Chief Justice of Indiafor constituting a three-judge Bench, the CourtF

HELD: 1. The definition of “dividend” as provided u/s.2(22)(e) of Income Tax Act, 1961, would go to show that theshareholder referred to in the aforesaid provision would continueto be a shareholder who is on the register of members of theCompany with one additional feature, namely, that suchGshareholder should be a person who has a substantial interest inthe Company. Admittedly, the aforesaid additional feature wouldmake no difference to the position of law laid down viz. theshareholder of a company is the individual who is registered as ashareholder in the books of the company. [Para 9][341-H; 342-A]H

2. However, after amendment of the definition of“dividend”, after 31.05.1987, a “shareholder” is a person who isthe beneficial owner of shares holding not less than 10% of thevoting power of the Company. Also, a new category has beenadded to the definition by introducing concerns in which suchshareholder is a member or partner and in which he has asubstantial interest. Explanation (3) of the amended provisionstates that “concern” means Hindu Undivided Family, firm,association of persons, body of individuals, or a Company andfurther goes on to state that a person shall be deemed to have asubstantial interest in a concern other than a Company if he is, atany time during the previous year, beneficially entitled to notless than 20% of the income of such concern. [Para 12][344-C-D]

3. The word “shareholder” in both limbs of the definitionu/s. 2(22)(e) would mean exactly the same thing. This is for thereason that the expression “such shareholder” in the secondlimb would show that it refers to a person who is a “shareholder”in the first limb. The whole object of the provision is clear fromthe Explanatory memorandum and the literal language of the newlyinserted definition clause which is to get over the two judgmentsi.e. in *C.P. Sarathy Mudaliar case and in **M/s Rameshwari LalSanwarmal case. This is why “shareholder” post amendment,has only to be a person who is the beneficial owner of shares.One cannot be a registered owner and beneficial owner in thesense of a beneficiary of a trust or otherwise at the same time. Itis clear therefore that the moment there is a shareholder, whoneed not necessarily be a member of the Company on its register,who is the beneficial owner of shares, the Section gets attractedwithout more. To state, therefore, that two conditions have to besatisfied, namely, that the shareholder must first be a registeredshareholder and thereafter, also be a beneficial owner is not onlymutually contradictory but is plainly incorrect. Also, what isimportant is the addition, by way of amendment, of such beneficialowner holding not less than 10% of voting power. This is anotherindicator that the amendment speaks only of a beneficialshareholder who can compel the registered owner to vote in aparticular way. [Paras 17, 18][345-G-H; 346-D-E]

AB

C

DE

F

G

H

AMathalone v. Bombay Life Assurance Co. Ltd. [1954]SCR 117 – relied on.

4. #Ankitech’s case, in stating that no change was made byintroducing the deeming fiction insofar as the expression“shareholder” is concerned, is wrongly decided and therefore,Brequires to be reconsidered. [Paras 18, 19][346-B-G]

*C.I.T., Andhra Pradesh v. C.P. Sarathy Mudaliar(1972) 4 SCC 531; **M/s Rameshwari Lal Sanwarmalv. Commissioner of Income Tax, Assam (1980) 2 SCC371 : [1980] 2 SCR 369; C.I.T. v. Rameshwari LalSanwarmal (1972) 4 SCC 342; #C.I.T. v. AnkitechCPrivate Limited [2012] 340 ITR 14 (Del). – referredto.

D

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2068- E2071 of 2012.

From the Judgment and Order dated 11.07.2011 of the High Courtof Delhi at New Delhi in ITA Nos. 223, 219 and 1204 of 2010 & ITANo. 309 of 2011.

WITH

F

C. A. No. 837 of 2018.

Guru Krishna Kumar, Sr. Adv., U. A. Rana, Himanshu Mehta,Satendra Kr. Rai (For M/s. Gagrat and Co.), Mrs. Anil Katiyar, AmitaSahani, S. A. Hasseb, Advs. for the appearing parties.

The Judgment of the Court was delivered byG

R. F. NARIMAN, J. 1. Leave granted.

2. The present appeals raise an interesting question as to thecorrect interpretation of Section 2(22)(e) of the Income Tax Act, 1961,as amended in 1988.

H

3. The brief facts in order to decide the present controversy areas follows:

The Assessee is a partnership firm consisting of three partners,namely, Mr. Naresh Goyal, Mr. Surinder Goyal and M/s Jet EnterprisesPrivate Limited having a profit sharing ratio of 35%, 15% and 50%respectively. The Assessee firm had taken a loan of Rs. 28,52,41,516/-from M/s Jetair Private Limited, New Delhi. In this Company, theAssessee subscribed to the equity capital of the aforesaid Company inthe name of two of its partners, namely, Mr. Naresh Goyal and Mr.Surinder Goyal totaling 48.19 per cent of the total shareholding. ThusMr. Naresh Goyal and Mr. Surinder Goyal are shareholders on theCompany’s register as members of the Company. They hold the aforesaidshares for and on behalf of the firm, which happens to be the beneficialshareholder.

4. The question that arises in these appeals is as to whether Section2(22)(e) of the Act gets attracted inasmuch as a loan has been made toa shareholder, who after the amendment, is a person who is the beneficialowner of shares holding not less than 10% of the voting power in theCompany, and whether the loan is made to any concern in which suchshareholder is a partner and in which he has a substantial interest, whichis defined as being an interest of 20% or more of the share of the profitsof the firm.

5. The Income Tax Act, 1922 contained the definition of “dividend”which reads as follows:- “2. (6A) `dividend’ includes- …

(e) any payment by a company, not being a company, in which thepublic are substantially interested within the meaning of Section23A, of any sum (whether as representing a part of the assets ofthe company or otherwise) by way of advance or loan to ashareholder or any payment by any such company on behalf orfor the individual benefit of a shareholder, to the extent to whichthe company in either case possesses accumulated profits;”

6. This provision came up for consideration before a Bench ofthis Court inC.I.T., Andhra Pradeshvs.C.P. Sarathy Mudaliar, (1972)4 SCC 531. In the context of the Assessee being a Hindu UndividedFamily, the question of law set out in the aforesaid judgment is as follows:- A

B

C

D

E

F

G

H

[2018] 1 S.C.R.

A

“Whether, on the facts and in the circumstances of the case, theamounts of Rs.5,790 and Rs.39,085 could be deemed to be thedividend income of the Hindu undivided family in the respectiveassessment years?”

After setting out the aforesaid section, this Court held:B

“6. Before a payment can be considered as dividend under Section2 (6A)(e), the following conditions will have to be satisfied:

1. It must be a payment by a company not being a company inwhich the public are substantially interested within the meaningof Section 23A, any sum whether as representing a part of theCassets of the company or otherwise by way of advance or loan.

2 (a) It must be an advance or loan to a shareholder, or (b) a payment by the company on behalf or for the individualbenefit of the shareholder, and D

3. To the extent to which the company in either case possessesaccumulated profits.”

After stating that there is no dispute that the first and last conditionsare satisfied, in the said case, the Court went into condition 2(a). Thiswas answered by the Court as follows:

E

“8. The only surviving question is whether a loan advanced by acompany to a H.U.F., which is the real owner of the shares, canbe considered as a loan advanced to its shareholder. It is well-settled that an H.U.F. cannot be a shareholder of a company. Theshareholder of a company is the individual who is registered as ashareholder in the books of the company. The H.U.F., the assesseein this case, was not registered as a shareholder in books of thecompany nor could it have been so registered. Hence, there is nogain-saying the fact that the H.U.F. was not the shareholder ofthe company. Mr. Sen did not contend otherwise.

F

9. Section 2 (6A)(e) gives an artificial definition of “dividend”. Itdoes not take in dividend actually declared or received. The dividendtaken note of by that provision is a deemed dividend and not a realdividend. The loan granted to a shareholder has to be returned tothe company. It does not become the income of the shareholder.For certain purposes, the Legislature has deemed such a loan as G

H

“dividend”. Hence, Section 2 (6A) (e) must necessarily receive astrict construction. When Section 2(6A)(e) speaks of“shareholder”, it refers to the registered shareholder and not thebeneficial owner. The H.U.F. cannot be considered as ashareholder either under Section 2 (6A)(e) or under Section 23Aor under Section 16(2) read with Section 18(5) of the Act. Hence,a loan given to an H.U.F. cannot be considered as a loan advancedto a “shareholder” of a company.”

7. This judgment was followed by another judgment of this Courtin M/s Rameshwari Lal Sanwarmalvs. Commissioner of Income Tax,Assam(1980) 2 SCC 371 which again arose in the context of a HinduUndivided Family. Sarathy Mudaliar’s case was followed in thisjudgment, and it was expressly stated that there was no conflict betweenthis judgment and another judgment, namely,C.I.T.vs.Rameshwari LalSanwarmal, (1972) 4 SCC 342, and that the Revenue’s contention torefer Sarathy Mudaliar’s case to a larger Bench was turned down.

8. The effect of these two judgments is clearly to hold that beforeSection 2(6A) (e) of the 1922 Act can be attracted, the “shareholder”referred to in the said provision must be a shareholder whose name is onthe register of members of the Company. When the Income Tax Act,1961 came into force and repealed the 1922 Act, the definition of“dividend” contained in Section 2(22)(e) was as follows:- “Section 2. Definition – In this Act, unless the context otherwiserequires,-

(22) “dividend” includes-

(e) any payment by a company, not being a company in which thepublic are substantially interested, of any sum (whether asrepresenting a part of the assets of the company or otherwise) byway of advance or loan to a shareholder, being a person who hasa substantial interest in the company or any payment by any suchcompany on behalf or for the individual benefits, of any suchshareholder, to the extent to which the company in either casepossesses accumulated profits;”

9. A cursory look at the aforesaid definition would go to show thatthe shareholder referred to in the aforesaid provision would continue tobe a shareholder who is on the register of members of the Company A

B

C

D

E

F

G

H

Awith one additional feature, namely, that such shareholder should be aperson who has a substantial interest in the Company. Admittedly, theaforesaid additional feature would make no difference to the position oflaw laid down in the aforesaid two decisions.

10. In 1988, however, this definition was amended to read asBfollows:- “Section 2. Definition – In this Act, unless the context otherwiserequires,-

(22) “dividend” includes-

(e) any payment by a company, not being a company in which thepublic are substantially interested, of any sum (whether asrepresenting a part of the assets of the company or otherwise)made after the 31[st] day of May 1987, by way of advance or loanto a shareholder, being a person who is the beneficial owner ofshares (not being shares entitled to a fixed rate of dividend whetherwith or without a right to participate in profits) holding not lessthan ten percent of the voting power, or to any concern in whichsuch shareholder is a member or a partner and in which he has asubstantial interest (hereafter in this clause referred to as the saidconcern), or any payment by any such company on behalf or forthe individual benefit, of any such shareholder, to the extent towhich the company in either case possesses accumulated profits’”

C

D

E

C

D

E

Explanation 2. - the expression “accumulated profits”, in sub-clauses (a), (b), (d) and (e), shall include all profits of the companyup to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the companyup to the date of liquidation, {but shall not, where the liquidation isconsequent on the compulsory acquisition of its undertaking bythe Government or a corporation owned or controlled by theGovernment under any law for the time being in force, includeany profits of the company prior to three successive previousyears immediately preceding the previous year in which suchacquisition took place; F

G

Explanation 3. - For the purposes of this clause,- (a) “concern” means a Hindu undivided family, or a firm or anassociation of persons or a body of individuals or a company; H

(b) a person shall be deemed to have a substantial interest in aconcern, other than a company, if he is, at any time during theprevious year, beneficially entitled to not less than twenty per centof the income of such concern;”

11. The Explanatory memorandum to the amendment thus madereads as follows:- “With the deletion of Section 104 to 109 there was a likelihood ofclosely held companies not distributing their profits to shareholdersby way of dividends but by way of loans or advances so thatthese are not taxed in the hands of the shareholders. To forestallthis manipulation, sub-clause (e) of clause (22) of Section 2 hasbeen suitably amended. Under the existing provisions, paymentsby way of loans or advance to shareholders having substantialinterest in a company to the extent to which the company possessesaccumulated profits is treated as dividend. The shareholders havingsubstantial interest are those who have a shareholding carryingnot less than 20 per cent voting power as per the provisions ofclause (32) of Section 2. The amendment of the definition extendsits application to payments made (i) to a shareholder holding notless than 10 per cent of the voting power, or (ii) to a concern inwhich the shareholder has substantial interest. “Concern” as perthe newly inserted Explanation 3 (a) to Section 2 (22) means aHUF or a firm or an association of persons or a body of individualsor a company. A shareholder having a substantial interest in aconcern as per part (b) of Explanation 3 is deemed to be one whois beneficially entitled to not less than 20 per cent of the income ofsuch concern.

10.3 The new provisions would, therefore, be applicable in a casewhere a shareholder has 10 per cent or more of the equity capital.Further, deemed dividend would be taxed in the hands of a concernwhere all the following conditions are satisfied:-

(i) where the company makes the payment by way of loans oradvances to a concern.;

(ii) where a member or a partner of the concern holds 10 per centof the voting power in the company; and

(iii) where the member or partner of the concern is also beneficiallyentitled to 20 per cent of the income of such concern.

A

B

C

D

E

F

G

H

A

With a view to avoid the hardship in cases where advances orloans have already been given, the new provisions have been madeapplicable only in cases where loans or advances are given after31[st] May, 1987.”

These amendments will apply in relation to assessment year 1988-B89 and subsequent years.”

12. A reading of the amended definition would indicate that, after31.05.1987, a “shareholder” is now a person who is the beneficial ownerof shares holding not less than 10% of the voting power of the Company.Also, a new category has been added to the definition by introducingCconcerns in which such shareholder is a member or partner and in whichhe has a substantial interest. Explanation (3) of the amended provisionstates that “concern” means Hindu Undivided Family, firm, associationof persons, body of individuals, or a Company and further goes on tostate that a person shall be deemed to have a substantial interest in aconcern other than a Company if he is, at any time during the previousDyear, beneficially entitled to not less than 20% of the income of suchconcern.

13. Shri Ujjwal A. Rana, learned advocate, appearing on behalfof the appellants, has argued before us that a judgment had been deliveredby the very Division Bench in another case C.I.T.vs. Ankitech PrivateELimitedreported in [2012] 340 ITR 14 (Del). The same Division Benchhad arrived at a conclusion, following other judgments of other Courtsand Tribunals, that the expression “shareholder” would continue to meana registered shareholder even after the amendment, and that, this beingthe case, it is clear that the impugned judgment has taken an about turnFand has sought to distinguish the earlier judgment when it was squarelyapplicable. He has also placed before us an order dated 05.10.2017passed in Civil Appeal No. 3961 of 2013 [C.I.T., Delhi-II vs. MadhurHousing and Development Company] in which this Court has expresslyaffirmed the reasoning of the aforesaid earlier judgment. In his view,therefore, this judgment ought to have been followed, and if it had beenGfollowed, it is clear that the firm, not being a registered shareholder,could not possibly be a person to whom Section 2(22)(e) would apply.

14. As opposed to this, Shri Guru Krishnakumar, learned senioradvocate, appearing on behalf of the Revenue, has sought to support the H

impugned judgment by pointing out that the impugned judgment itselfhas made a distinction between the facts in Ankitech (supra) and in thepresent case. According to him, the impugned judgment has referenceonly to the second limb of the amended definition, namely, to the limbwhich deals with any concern in which such shareholder is a memberand not to the first limb, which deals with a shareholder being a personwho is the beneficial owner of shares. According to him, therefore, theDivision Bench rightly sidestepped the decision in Ankitech (supra) andcorrectly arrived at the conclusions to the two questions raised.

15. This then brings us to the Division Bench judgment in thepresent case. In para 17, after referring to various judgments referredto by us hereinabove, the Division Bench posed two questions to beanswered by it as follows:- “(1) To attract the first limb of Section 2 (22) (e) of the Act, is itnecessary that the person who has received the advance or loanis a shareholder and also beneficial owner. To put it otherwise,whether both the conditions are required to be satisfied will dependupon the interpretation to be given to the words “being a personwho is a beneficial owner of shares.....” which was inserted byamendment in the aforesaid provision carried out by the FinanceAct, 1987 w.e.f. 1[st] April, 1988.

(2) Whether the assessee who is a partnership firm can be treatedas ‘shareholder’ because of the reason that it has purchased theshares in the name of the two partners.”

16. It answered the first question by stating that the expression“being a person who is a beneficial owner of shares” would be in additionto the shareholder first being a registered shareholder of the Company.The Division Bench then states that, therefore, in order to attract Section2(22)(e) both conditions have to be satisfied. So far as the second questionis concerned, the Division Bench went on to state that a partnership firmcan be treated as a shareholder but that it is not necessary that it has tobe a registered shareholder.

17. We are of the view that it is very difficult to accept the reasoningof the Division Bench. It is not enough to say that Ankitech’s caserefers to the second limb of the amended definition, whereas the presentcase refers to the first limb, for the simple reason that the word“shareholder” in both limbs would mean exactly the same thing. This is A

B

C

D

E

F

G

H

Afor the reason that the expression “such shareholder” in the second limbwould show that it refers to a person who is a “shareholder” in the firstlimb.

18. This being the case, we are of the view that the whole objectof the amended provision would be stultified if the Division BenchBjudgment were to be followed. Ankitech’s case, in stating that no changewas made by introducing the deeming fiction insofar as the expression“shareholder” is concerned is, according to us, wrongly decided. Thewhole object of the provision is clear from the Explanatory memorandumand the literal language of the newly inserted definition clause which isto get over the two judgments of this Court referred to hereinabove.CThis is why “shareholder” now, post amendment, has only to be a personwho is the beneficial owner of shares. One cannot be a registeredowner and beneficial owner in the sense of a beneficiary of a trust orotherwise at the same time. It is clear therefore that the moment thereis a shareholder, who need not necessarily be a member of the CompanyDon its register, who is the beneficial owner of shares, the Section getsattracted without more. To state, therefore, that two conditions have tobe satisfied, namely, that the shareholder must first be a registeredshareholder and thereafter, also be a beneficial owner is not only mutuallycontradictory but is plainly incorrect. Also, what is important is theaddition, by way of amendment, of such beneficial owner holding notEless than 10% of voting power. This is another indicator that theamendment speaks only of a beneficial shareholder who can compel theregistered owner to vote in a particular way, as has been held in a catenaof decisions starting from Mathalonevs. Bombay Life Assurance Co.Ltd., [1954] SCR 117.F

19. This being the case, we are prima facie of the view that theAnkitech judgment (supra) itself requires to be reconsidered, and thisbeing so, without going into other questions that may arise, includingwhether the facts of the present case would fit the second limb of theamended definition clause, we place these appeals before the Hon’bleGChief Justice of India in order to constitute an appropriate Bench ofthree learned Judges in order to have a relook at the entire question.

20. Ordered accordingly.

Matter placed before Hon’ble CJI for constituting three-judge Bench.