CIT Vs. Gopal & Sons (HUF) 2017 (Supreme Court)

Issue:

If loan given by closely held company to HUF who is shareholder is chargeable to tax as deemed dividend under section 2(22)(e) of Income Tax Act 1961?

Provision:

Section 2(22)(e) of Income Tax Act 1961

Dividend includes any payment by a company, not being a company in which public are substantially interested of any sum by way of loan or advance

• to a shareholder, being a person who is the beneficial owner of the shares ,holding not less than 10% of the voting rights, or
• to any concern in which such shareholder is a member or a partner and in which he has a substantial interest, or
• on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.

Gopal & Sons (HUF) 2017 (Supreme Court)

 

In given case assessee is a HUF and  holds 37.12% shares in M/s. G.S. Fertilizers Private Ltd a closely held company. Assessee received loans and advances from the company during the relevant assessment year.

Assessing Officer during scrutiny of return treated the loans and advances as deemed dividend under section 2(22) (e) of Income Tax Act 1961. The share certificates were issued in the name of the HUF’s Karta, Shri Gopal Kumar Sanei but the advances were given to HUF.

When a loan is given by a closely held company, it is chargeable to tax as deemed dividend if the loan was given to a shareholder having more than 10% shares in the company or to a concern in which the shareholder has substantial interest.

Further, on the issue whether a HUF can be a shareholder or not, it was observed that on account of Explanation 3 to section 2(22)(e), a concern includes a HUF.

There was issue as to who was the shareholder the Karta or the HUF as share certificates were issued in the name of the Karta but the annual return mentioned the HUF. The Supreme Court observed that in both scenario, section 2(22) (e) of Income Tax Act 1961 would be attracted. If the HUF was the shareholder, as it held more than 10% shares, situation was covered. If the Karta was the shareholder, the HUF would be the concern in which the Karta has substantial interest.

Conclusion:

Thus as per the Supreme Court Judgment in Gopal & Sons (HUF), loan given by closely held company to HUF is chargeable to tax as deemed dividend under section 2(22)(e) of Income Tax Act 1961.