# CJ.T. ANDHRA PRADESH v. C. P. SARATHY MUDALIAR

- **Citation:** [1972] 1 S.C.R. 1076
- **Court:** Supreme Court of India
- **Decided:** 1971-10-12
- **Bench:** K. S. Hegde, H. R. Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/cj-t-andhra-pradesh-v-c-p-sarathy-mudaliar-5326
- **Pages:** 8

## Headnote

Income-tax Act,
1922,
s,
2(6A) (e)-Dividend-H.U.F. holding
.share& in names of its members-HUF not registered as shareholderLoans to HUF by company not dividend wilhin meaning of s. 2(6A) (e).
The assessee was a Hindu undivided farn:Iy.
Three m1embers of !he
family namely, S and his two sons were shareholders. in a private limited
company which was not a company in which the public were substantially
interesf"d within the meaning of s. 23A of the Income-tax Act, 1922. fo
the account years 'relevant to the assessment years 1955-56, and 1956·57
the company advanced certain loans to the
aforesaid Hindu undivided·
farnil:Y:
The question ai;:ose whether these loans could be considered as
'dividend' within the meaning of that expression in s. 2(6A) (e) of the
Act.
The Income-tax Appellate Tribunal found as a fact that the loans
in question· had been granted to tbo H.U.F.
It further held that tho
loans _advanced to the H.U.F. collld not be considered as Joans advan..:cd
to the' 'shareholders' within the ·meaning of s.
2(6A)(e).
The
Higa
Court in fefen~nce upheld the view taken by the Tribunal. In appeai- to
1his Court by the Revenue,
HELD : It is well settled that an HUF cannot be a shareholder of a
comp.any.
The shareholder of a company is the individual who is registered as tho shareholder in the books of the company.
The H.U.F., the
assessee in the present case, was not registered as a shareholder in books
of the cpmpany nOr could it have been so registf!red.
Hence, there \\·as
no gain-saying the fact that the H.U.F. was not the shareholder of the
-company. [1081 B-C]
SectiQn 2(6A) (e) gives an artificial definition of 'dividend'.
It docs
not take in dividend actually declared or received.
The dividend taken
A
B
c
D
note of bv that provision is a deemed dividend and not a. real dividend.
F
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
· 1he legislature has deemed such a loan as 'dividend'. Hence s. 2(6A)(e)
· must necessarilv receive a strict construction.
When s. 2(6A) (e) speak~
of 'shareholderS' it refers to the registered shareholder and not to the
beneficial owner.
The HUF cannot be considered as a shareholder either
under s. 2(6A)(e) or under s. 23A or s. 16(2) read with s. 18(5) of
the Act.
Hence a loan given to an HUF cannot be considered as a Joan
G
advanced to a 'shareholder' of a company (1081 D-E]
Jn the present case sinc1::: no Joans were advanced to the shareholder.,
ii. 2(6A)(e) was inapplicable. The appeal is dismissed. (1083 B]
Howrah Trading Co. Ltd. v. C.1.T., Cen/Ml Calcutta, 36 I.T.R. 215
and C.J.T., Bombay City JI v. Shakuntala & Ors., 43 l.T.R. 352, relied
·OD.
Kishanchand Lunidasing Bajaj v. C.J.T., Bangc./ore, 60 I.T.R. 5iJO,
<ltstinguished.
H
•
A
B
c
.D
•
E
F
G
H
C.J.T. v. c. P. SARATHY (Hegde, /.)
1077
C1v1L APPELLATE JURISDICTION: Civil Appeals Nos. 2242
and 2243 of 1968.
Appeals by special leave from the judgment and order dated
March 28, 1967 of the Andhra Pradesh High Court in Case
Reference No. 2 of 1961.
B. Sen, R. N. Sachthey and B. D. Sharma, for the appelllilnt
(in both the appeals) .
K. /ayaram, for the respondent (in both the appeals).
[The Income Tax Appellate Tribunal stated the case as follows:
Statement of Case
"The assessee is a Hindu undivided family of which the karta
is Sarathy and there are two adult members, Doraiswamy and
Singaram. Sarathy holds 2, 797 shares, Doraiswamy I 00 shares
and Singaram 100 shares of a limited company by name 'The
Chittoor Motor Transport Company (Private) Ltd.: in which
the public are not. 'substaQtially interested within the meaning
of section 23A.
The Shares were acquired with the funds pf
the Hindu undivided family and, therefore, the shares were the
property of the Hindu undivided family.
There is no
dispute
about that.
Tl(e dividend earned on these shares was thus also
the income of the.Hindu undivided family and was b<ing assessed accordingly. There was no

## Text

1076
CJ.T. ANDHRA PRADESH
v.
C. P. SARATHY MUDALIAR
October 12, 1971
[K. S. HEGDE AND H. R. KHANNA, JJ.J
Income-tax Act,
1922,
s,
2(6A) (e)-Dividend-H.U.F. holding
.share& in names of its members-HUF not registered as shareholderLoans to HUF by company not dividend wilhin meaning of s. 2(6A) (e).
The assessee was a Hindu undivided farn:Iy.
Three m1embers of !he
family namely, S and his two sons were shareholders. in a private limited
company which was not a company in which the public were substantially
interesf"d within the meaning of s. 23A of the Income-tax Act, 1922. fo
the account years 'relevant to the assessment years 1955-56, and 1956·57
the company advanced certain loans to the
aforesaid Hindu undivided·
farnil:Y:
The question ai;:ose whether these loans could be considered as
'dividend' within the meaning of that expression in s. 2(6A) (e) of the
Act.
The Income-tax Appellate Tribunal found as a fact that the loans
in question· had been granted to tbo H.U.F.
It further held that tho
loans _advanced to the H.U.F. collld not be considered as Joans advan..:cd
to the' 'shareholders' within the ·meaning of s.
2(6A)(e).
The
Higa
Court in fefen~nce upheld the view taken by the Tribunal. In appeai- to
1his Court by the Revenue,
HELD : It is well settled that an HUF cannot be a shareholder of a
comp.any.
The shareholder of a company is the individual who is registered as tho shareholder in the books of the company.
The H.U.F., the
assessee in the present case, was not registered as a shareholder in books
of the cpmpany nOr could it have been so registf!red.
Hence, there \\·as
no gain-saying the fact that the H.U.F. was not the shareholder of the
-company. [1081 B-C]
SectiQn 2(6A) (e) gives an artificial definition of 'dividend'.
It docs
not take in dividend actually declared or received.
The dividend taken
A
B
c
D
note of bv that provision is a deemed dividend and not a. real dividend.
F
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
· 1he legislature has deemed such a loan as 'dividend'. Hence s. 2(6A)(e)
· must necessarilv receive a strict construction.
When s. 2(6A) (e) speak~
of 'shareholderS' it refers to the registered shareholder and not to the
beneficial owner.
The HUF cannot be considered as a shareholder either
under s. 2(6A)(e) or under s. 23A or s. 16(2) read with s. 18(5) of
the Act.
Hence a loan given to an HUF cannot be considered as a Joan
G
advanced to a 'shareholder' of a company (1081 D-E]
Jn the present case sinc1::: no Joans were advanced to the shareholder.,
ii. 2(6A)(e) was inapplicable. The appeal is dismissed. (1083 B]
Howrah Trading Co. Ltd. v. C.1.T., Cen/Ml Calcutta, 36 I.T.R. 215
and C.J.T., Bombay City JI v. Shakuntala & Ors., 43 l.T.R. 352, relied
·OD.
Kishanchand Lunidasing Bajaj v. C.J.T., Bangc./ore, 60 I.T.R. 5iJO,
<ltstinguished.
H
•
A
B
c
.D
•
E
F
G
H
C.J.T. v. c. P. SARATHY (Hegde, /.)
1077
C1v1L APPELLATE JURISDICTION: Civil Appeals Nos. 2242
and 2243 of 1968.
Appeals by special leave from the judgment and order dated
March 28, 1967 of the Andhra Pradesh High Court in Case
Reference No. 2 of 1961.
B. Sen, R. N. Sachthey and B. D. Sharma, for the appelllilnt
(in both the appeals) .
K. /ayaram, for the respondent (in both the appeals).
[The Income Tax Appellate Tribunal stated the case as follows:
Statement of Case
"The assessee is a Hindu undivided family of which the karta
is Sarathy and there are two adult members, Doraiswamy and
Singaram. Sarathy holds 2, 797 shares, Doraiswamy I 00 shares
and Singaram 100 shares of a limited company by name 'The
Chittoor Motor Transport Company (Private) Ltd.: in which
the public are not. 'substaQtially interested within the meaning
of section 23A.
The Shares were acquired with the funds pf
the Hindu undivided family and, therefore, the shares were the
property of the Hindu undivided family.
There is no
dispute
about that.
Tl(e dividend earned on these shares was thus also
the income of the.Hindu undivided family and was b<ing assessed accordingly. There was no dispute.about that either. Sarathy
was also the Managing Director of the aforesaid company and
the Managing Director's remuneration too was treated · and
assessed as the income of the Hindu· undivided family.
There
was no dispute about tha.t also.
In the two assessm1mts .made on the Hindu· undivided family
for the assessment years 1955-56 and 1956-57, for which the
relevant 'previous years' are the years ended 31-3-1955
am!
31-3-1956,
respectively,
two sums of Rs.
5,790/-
and
Rs. 39,085/- were treated as its dividend)ncome falling within
section 2(6A) (e) of the Act in the respective years •. The assessee
dispuied the inclusioll/ on several grounds. Ultimately, the matter
came up on appeal before the Tribunal.
The three contentions
before the Tribunal were :
(i) The provisions of Section 2(6A)(e) of the Act
are ultra vires the Constitution.
(ii) There, in fact, was no payment by the aforesaid company by way of advance or loan to the
Hindu undivided family and
:1078
(iii)
SUPREME .COURT REPORTS
[1972] l S.C.R.
The deemed dividend could not be assessed as
the income of the Hindu undivided family, the
Hindu undivided family not being the shareholder to whom the payment of the advance or
loan was made.
The first two of these contentions were rejected by the Tribunal.
The first contention, in fact, was expressly given up at the time
of the hearing of the appeals. As regards the second, the Tribunal
found as a fact that the payment of the advance or loan was to the
Hindu undivided family and there was no basis for the claim that
the advance or loan was really to another person viz. THE VEGETOLS, Ltd., a limited company to whom the amount was ultimately said to have been .lent by the Hindu undivided family. As
regards the third contention, relying on the interpretation given
to the expression 'shareholder' b.v the Bombay High Court in the
case of S. C. Cambatta. (1946) 14 I.T.R. 748, the Tribunal held
that since the Hindu undivided family was not itself and also
could not be the registered shareholder of the company, but it
was the individual members who as such. were the registered shareholders, the advance or loan to the Hindu undivided family,
which was not a registered shareholder, could not be treated as
the dividend income of the Hindu undivided family.· Although
in the Bombay case the provisions of Sectior. · 23A, wherein also
there is a provision for treating the deemed dividend as the
income of the shareholder, were being considered and in
the
instant case the provisions of secti'on 2(6A )(e) were to
be
considered, the Tribunal held that the ratio of the Bombay case
equally applied. as in both the sections. it was the artificial income
that was sought to be taxed and the provisions of the law had,
therefore, to be strictly construed. The reasoning of the Tribunal
will be found in paragraph 3 of its common order.dated fB-1-1960.
A copy on the Tribunal's order is Annexure 'A' hereto and forms
part of the case.
5. The question of law that, in our opinion. arises is :
A
B
c
D
E
F
"Whether, on the facts and in the· circumstances of
the case, the amounts of Rs. 5,790/- and Rs. 39,085/·
could be deemed to. be the dividend income of the Hindu
G
un.divided family in the respective assessment years ?"
The Judgment of the Courrwas delivered by
Hegde, J.
This is an appeal by special leave from a decision
of the Andhra Pradesh High Court. The question of law referred
to the High Court under section 66( I) of the Indian Incometax Act, 1922, (to ,be hereinafter referred to as "the Act") is
"whether on the facts and in the circumstances of the case, the
H
•
A
B
c
D
t
E
F
G
H
C.J.T. v. c. P. SARATHY (Hegde, !.)
I 0 79
amounts of Rs. 5,790/- and Rs. 39,085/- could ~e deemed to
be the dividend income of the Hindu undivided family in the
rcspectlve assessment years?"
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.
Dorniswamy, Singaram and Sf!rathy were shareholders in a private
Hmlt~<l company by name "The Chittoor Motor Transport, Co .
. (Private) Ltd." Doraiswamy and Singaram held JOO 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 assess.ment years
1955-56 and 1956-57 the Chittor Motor Transport Co. (Private)
Ltd. advanced certain Joans to the Hindu undivided family
of
which Doraiswamy, Singaram and Sarathy. wer coparceners The
qliestion arose whether those loans can be considered as "dividend" within the meaning of .that ,expression in section 2(6A)
(e) of the Act.
The Tribunal found as a fact that the Joan in
question had been granted to the H.U.F. 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 con~
tention. 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 share' were acquired
from out of the family funds in law the shareholders were Doraiswamy, Singaram and Sarathy and not their H.U.F. Hence. the
loan. advanced to the H.U.F. cannot be
considered
as
Joans
advanced to the "shareholders" within the meaning of section
2(6A)(e).
Before the High Comt 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 behal.f of or for the
individual benefit of the shareholders.
The High Courf 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.
Before us Mr. B. Sen, the learned counsel for the Revenue,
took up two contentions. His first contention was that the _loans .
advanced were those : advanced to the shaleholders of the company. · Secondly, he contended that, at any rate, it. must be held
1080
SUPREME COURT REPORTS
[1972] l S.C.R.
that those loans were advanced on behalf of or for the individual
benefit of the shareholders. He submitted that the counsel for
the Revenue gave up . the first contention before the High Court
because of certain decisions of this Court and, according to him,
those .cases cannot be held to. bave been correctly decided in view
of a later decision of this Court.
We shall , now proceed to examine the two contentions advanced by Mr. Sen. For doing so, we have to read section 2(6A).
That section says :
"2. ( 6A) 'dividend' includes-
.
.
.
.
.
( e) any payment by a company, not being a company in which the public are substantially interested
within the meaning of section 23A, of any sum (whether as representing , a part of the assets of the company or otherwise) by way of advance or loan to a
shareholder or any payment by any . such company on
behalf or for the individual benefit of a shareholder, to
the extent to which the company in either caSJe possesses
accumulated profits;
,
.
.
.
.
Before a , payment can be considered as diviciend under section
2(6A) (e) the following conditions will have to be satisfied:-
B
c
D
1. It must be a payment by a company not being,a company
E
in which the public are substantially interested within the m.eaning of section 23A of any sum whether as representing a part of
the a.ssets of the company or otherwise by way of advance or
loan.
2. (a) It must be an advance or Joan to a shareholder, or
2. ( b) a payment by the company on behalf or for the
F
individual )Jenefit of the shareholder, and
3. to the extent to which the company in either case possesses
accumulated profits.
There is no dispute that first and the last conditions are satisfied
in the present case. The question is whether conditions Nos. 2
and 3 are satisfied.
We shall first take up condition No. 2(b).
No contention appears to have been taken before the Tribunal
that the loans in question were given by the company on behalf
of the shareholders or for their individual benefit.
That being
so, the Tribunal did not go into that question. In fact, as can
)Je 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
j!,O ..illt2.!~at questi,. Under these circumstances, the High
G
H
l
A
B
c
D
E
F
C.J.T. v. c. P, SARATHY (Hegde, J.)
1081
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 contention.
The only surviving ques1ion is whether a loan advanced by a
company to a H.U.F., which is the real owner of the shares, can
be considered as a loan advanced to its shareholder. It is well
settled that an H.U:F. 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 H.U.F., the
assessee in this case, was not registered as a shareholder in books
of the company nor could it have been so registered. Hence,
there is no gain-saying the fact that the H.U.F. was not the
shareholder of the company.
Mr. Sen did not contend otherwise.
Section 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 deemrd
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 ito the regist>ered shareholder
and not the beneficial owner.
The H. U .F. 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 an H.U.F. cannot be considered as
a loan advanced to a "shareholder" of a company.
Our conclusion in this regard receives support from the decisions of this Court.
In Howrah Trading Co. Ltd. v. Commissioner of Income-tax, Central, Calcutta, (36 I.T.R. 215) 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
G
the shares had not been registered in the books of the compallJ.
The question was whether he could be considered as a "shareholder" in, respect of such shares f2r the purpose ofSection 18 (5)
of the Act, because of his equitable right to the divi\lend on such
shares and therefore entitled to have that divide-nil grossed up
under section 16(2) by addition of income tax paid by the com-
..1
H
dpany in respect of those shares and claim credit for the tax de-
•
ucted at the source. This Court held that he cannot be considered as a "shareholder", the reason being that he had not been
registered as a shareholder.
t7-L119SupCl/72
1082
SUPREME COURT REPORTS
[1972] l S.C.R.
In Commissioner of Income tax, Bombay City II, v. Shakunta/a & ors. ( 43 I.T.R. p. 352) a Hindu undivided family which
was the beneficiary of certain shares in a company in which the
public were not substantially interested held those shares in the
names of different members of the family.
The Income Tax
Officer applied the provisions of section 23A of the Act (before
its amendment in 1955) and passed an order that undistributed
portion of the distributable income of the company shall be
deemed to be distributed, and the amount appropriate to the shares
of the family were sought to be concluded in the income of the
family. In that case again this Court ruled that the word "shareholder" in section 23A meant the shareholder registered in blooks
of the company and the amount appropriate to the shares had
to be included in the incomes of the members of the family, in
whose names the shares stood in the register of the company;
and as the Hindu undivided family was not a registered shareholder oJ' the company, that amount could not be considered as
the income of the family under section 23A.
From the above decisions it is clear that when the Act speaks
of the "shareholder" it refers to the registered shareholder.
Mr. Sen contended that the above two decisions cannot be
considered to have laid down the law correctly in view of the decision of this Court in Kishanchand Lunidasing Bajaj v.
Commissioner of Income tax, Bangalore, (60 I.T.R. p. 500). Therein
the question was whether a H.U:F. could be charged to tax in
respect of dividends received by some of the coparceners of that
family in respect of shares held by them, those shares having
been purchased from out of the family funds.
This court ruled
that the dividends paid to the shareholder 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. ;rn the case of deemed
dividends under section 2(6A) (e) the family does not get any
)ncome at all.
The dividend referred to by that provision is
only a deemed dividend and not a real dividend.
Hence, no
A
B
c
D
E
F
G
H
A
B
-~.
C.!.T. v. c. P. SARATHY \Hegde, J.)
I 08 ~
income is either received by the family or accrued to it. Therefore, the only person who is deemed to have received that income
can be assessed in respect of that income.
Coming 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.
For the reasons mentioned above these appeals fail and the
same are dismissed with costs.
G.C.
Appeals dismissed