Income Tax Act, 1961:
s.2(22)(e) (as amended in 1988) – Applicability of – Partnership firm purchased shares in the name of two of its partners – Whether the firm or the partners are to be treated as shareholders for the purpose of s.2(22)(e) – Held: The word “shareholder” occurring in s.2(22)(e) 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 the sense of a beneficiary of a trust or otherwise at the same time – To state that two conditions have to be satisfied namely that shareholder must be a registered shareholder and also be a beneficial owner, is mutually contradictory and also incorrect – #Ankitech’s case (holding that expression “shareholder” would continue to mean a registered shareholder even after the amendment) has wrongly been decided – Therefore Ankitech’s case needs reconsideration – Matter referred to larger Bench.
Placing the matter before Hon’ble The Chief Justice of India for constituting a three-judge Bench, the Court
HELD: 1. The definition of “dividend” as provided u/s. 2(22)(e) of Income Tax Act, 1961, would go to show that the shareholder referred to in the aforesaid provision would continue to be a shareholder who is on the register of members of the Company with one additional feature, namely, that such shareholder should be a person who has a substantial interest in the Company. Admittedly, the aforesaid additional feature would make no difference to the position of law laid down viz. the shareholder of a company is the individual who is registered as a shareholder in the books of the company. [Para 9][341-H; 342A]
2. However, after amendment of the definition of “dividend”, after 31.05.1987, a “shareholder” is a person who is the beneficial owner of shares holding not less than 10% of the voting power of the Company. Also, a new category has been added to the definition by introducing concerns in which such shareholder is a member or partner and in which he has a substantial interest. Explanation (3) of the amended provision states that “concern” means Hindu Undivided Family, firm, association of persons, body of individuals, or a Company and further goes on to state that a person shall be deemed to have a substantial interest in a concern other than a Company if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such concern. [Para 12][344-CD]
3. The word “shareholder” in both limbs of the definition u/s. 2(22)(e) would mean exactly the same thing. This is for the reason that the expression “such shareholder” in the second limb would show that it refers to a person who is a “shareholder” in the first limb. The whole object of the provision is clear from the Explanatory memorandum and the literal language of the newly inserted definition clause which is to get over the two judgments i.e. in *C.P. Sarathy Mudaliar case and in **M/s Rameshwari Lal Sanwarmal 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 the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way. [Paras 17, 18][345-G-H; 346-D-E] Mathalone v. Bombay Life Assurance Co. Ltd. [1954] SCR 117 – relied on.
4. #Ankitech’s case, in stating that no change was made by introducing the deeming fiction insofar as the expression “shareholder” is concerned, is wrongly decided and therefore, requires 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 Sanwarmal v. Commissioner of Income Tax, Assam (1980) 2 SCC
371 : [1980] 2 SCR 369; C.I.T. v. Rameshwari Lal Sanwarmal (1972) 4 SCC 342; #C.I.T. v. Ankitech Private Limited [2012] 340 ITR 14 (Del). – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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