Saturday, January 7, 2017

Loan to HUF is deemed dividend when shareholder-Karta has substantial interest in HUF: Apex Court

Facts:

a) The assessee-HUF received advances from G.S. Fertilizers (P) Ltd. ('Company'). The AO concluded that the HUF was both the registered shareholder of the Company and also the beneficial owner of shares, as it was holding more than 10% of voting power. On this basis, the amount of advance was included in the income of the HUF as deemed dividend.

b) The assessee argued that being a HUF, it was neither the beneficial shareholder nor the registered shareholder. It was further argued that the Company had issued shares in the name of Karta of the HUF, and not in the name of the HUF as shares could not be directly allotted to a HUF. Thus, the provisions of Section 2(22)(e) could not be attracted. 

The Supreme Court held as under:

1) In the instant case, the impugned advance was made to the assessee which was a HUF. However, the Karta of HUF held shares in the lending Company. The said Karta was, undoubtedly, the member of HUF.

2) It was not disputed that Karta was entitled to not less than 20% of the income of HUF. Thus, he had substantial interest in the HUF, being its Karta. Therefore, the provisions of Section 2(22)(e) would be attracted as advance was given to the concern in which shareholder had substantial interest. It was not even necessary to determine as to whether HUF could be beneficial shareholder or registered shareholder in lending company. [2017] 77 taxmann.com 71 (SC)
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