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Gopal and Sons (HUF) v. CIT Kolkata-XI

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 12274 of 2016)Decided 4 Jan 2017
Civil Appeal No. 12274 of 2016
Justice A.K. Sikri · Justice Abhay Manohar Sapre

Background

An HUF received advances worth over Rs. 1.2 crore from a company in which its Karta (head of the HUF) held more than 10% of the shareholding, though the shares were formally registered in the Karta's own name rather than the HUF's. The Income Tax Department treated this advance as "deemed dividend" taxable in the HUF's hands under Section 2(22)(e) of the Income Tax Act, 1961. The HUF argued that since an HUF cannot itself be a registered shareholder in a company, the deeming provision could not apply to it. Both the ITAT and the High Court had ruled against the HUF, leading to this appeal.

Decision Breakdown

The Supreme Court dismissed the appeal and upheld the tax addition. It held that under Explanation 3 to Section 2(22)(e), it is sufficient that the shareholder (here, the Karta) is a "member" of the HUF and has a substantial interest in it (i.e., entitled to at least 20% of its income): it is not necessary that the HUF itself be the registered or beneficial shareholder. Since the Karta was both a registered shareholder of the company and a member with substantial interest in the HUF, the advance received by the HUF squarely fell within the deeming fiction for dividend income. The Court distinguished an older precedent (C.P. Sarathy Mudaliar) as having been decided under the 1922 Act, which lacked an equivalent to Explanation 3.

Lesson Learnt

Tax authorities can look through the formal shareholding structure of a company to tax advances received by an HUF as deemed dividend, so long as the HUF's Karta (or another member) is a registered shareholder with a substantial interest, structuring a loan through a family member who is a shareholder does not avoid this tax liability.

Official source (sci.gov.in)View Judgment (PDF)

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