NATIONAL TRAVEL SERVICESversusCOMMISSIONER OF INCOME TAX, DELHI, VIII

336                      [2018]REPORTS
               SUPREME COURT    1 S.C.R. 336              [2018] 1 S.C.R.


A                       NATIONAL TRAVEL SERVICES
                                       v.
             COMMISSIONER OF INCOME TAX, DELHI, VIII
                     (Civil Appeal Nos. 2068-2071 of 2012)
B                             JANUARY 18, 2018
                [R. F. NARIMAN AND NAVIN SINHA, JJ.]
            Income Tax Act, 1961:
            s.2(22)(e) (as amended in 1988) – Applicability of –
C     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
D
      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
E     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
F           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
G     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; 342-
      A]
H
                                      336
    NATIONAL TRAVEL SERVICES v. COMMISSIONER OF                       337
               INCOME TAX, DELHI, VIII

       2. However, after amendment of the definition of               A
“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
                                                                      B
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       C
less than 20% of the income of such concern. [Para 12][344-C-
D]
       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           D
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,             E
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,      F
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    G
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]
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338            SUPREME COURT REPORTS                         [2018] 1 S.C.R.


A          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,
B     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
C
            Private Limited [2012] 340 ITR 14 (Del). – referred
            to.
                           Case Law Reference
            (1972) 4 SCC 531           referred to             Para 6
D           [1980] 2 SCR 369                   referred to     Para 7
            (1972) 4 SCC 342                   referred to     Para 7
            [2012] 340 ITR 14 (Del).           referred to     Para 13
            [1954] SCR 117                    relied on        Para 18
            CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2068-
E     2071 of 2012.
            From the Judgment and Order dated 11.07.2011 of the High Court
      of Delhi at New Delhi in ITA Nos. 223, 219 and 1204 of 2010 & ITA
      No. 309 of 2011.
                                    WITH
F
            C. A. No. 837 of 2018.
            Guru Krishna Kumar, Sr. Adv., U. A. Rana, Himanshu Mehta,
      Satendra Kr. Rai (For M/s. Gagrat and Co.), Mrs. Anil Katiyar, Amita
      Sahani, S. A. Hasseb, Advs. for the appearing parties.
            The Judgment of the Court was delivered by
G
            R. F. NARIMAN, J. 1. Leave granted.
            2. The present appeals raise an interesting question as to the
      correct interpretation of Section 2(22)(e) of the Income Tax Act, 1961,
      as amended in 1988.
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    NATIONAL TRAVEL SERVICES v. COMMISSIONER OF                                 339
       INCOME TAX, DELHI, VIII [R. F. NARIMAN, J.]

       3. The brief facts in order to decide the present controversy are        A
as follows:
      The Assessee is a partnership firm consisting of three partners,
namely, Mr. Naresh Goyal, Mr. Surinder Goyal and M/s Jet Enterprises
Private Limited having a profit sharing ratio of 35%, 15% and 50%
respectively. The Assessee firm had taken a loan of Rs. 28,52,41,516/-          B
from M/s Jetair Private Limited, New Delhi. In this Company, the
Assessee subscribed to the equity capital of the aforesaid Company in
the name of two of its partners, namely, Mr. Naresh Goyal and Mr.
Surinder Goyal totaling 48.19 per cent of the total shareholding. Thus
Mr. Naresh Goyal and Mr. Surinder Goyal are shareholders on the
Company’s register as members of the Company. They hold the aforesaid           C
shares for and on behalf of the firm, which happens to be the beneficial
shareholder.
       4. The question that arises in these appeals is as to whether Section
2(22)(e) of the Act gets attracted inasmuch as a loan has been made to
a shareholder, who after the amendment, is a person who is the beneficial       D
owner of shares holding not less than 10% of the voting power in the
Company, and whether the loan is made to any concern in which such
shareholder is a partner and in which he has a substantial interest, which
is defined as being an interest of 20% or more of the share of the profits
of the firm.                                                                    E
     5. The Income Tax Act, 1922 contained the definition of “dividend”
which reads as follows:-
      “2. (6A) `dividend’ includes- …
      (e) any payment by a company, not being a company, in which the           F
      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 case possesses accumulated profits;”                G
      6. This provision came up for consideration before a Bench of
this Court in C.I.T., Andhra Pradesh vs. C.P. Sarathy Mudaliar, (1972)
4 SCC 531. In the context of the Assessee being a Hindu Undivided
Family, the question of law set out in the aforesaid judgment is as follows:-
                                                                                H
340             SUPREME COURT REPORTS                              [2018] 1 S.C.R.


A            “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 undivided family in the respective
             assessment years?”
      After setting out the aforesaid section, this Court held:
B            “6. Before a payment can be considered as dividend under Section
             2 (6A)(e), the following conditions will have to be satisfied:
             1. It must be a payment by a company not being a company in
             which the public are substantially interested within the meaning
             of Section 23A, any sum whether as representing a part of the
C            assets of the company or otherwise by way of advance or loan.
             2 (a) It must be an advance or loan to a shareholder, or
             (b) a payment by the company on behalf or for the individual
             benefit of the shareholder, and
D            3. To the extent to which the company in either case possesses
             accumulated profits.”
             After stating that there is no dispute that the first and last conditions
      are satisfied, in the said case, the Court went into condition 2(a). This
      was answered by the Court as follows:
E
             “8. The only surviving question 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 a
F            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.
G            9. 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 deemed such a loan as
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    NATIONAL TRAVEL SERVICES v. COMMISSIONER OF                              341
       INCOME TAX, DELHI, VIII [R. F. NARIMAN, J.]

      “dividend”. Hence, Section 2 (6A) (e) must necessarily receive a       A
      strict construction. When Section 2(6A)(e) speaks of
      “shareholder”, it refers to the registered 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,
                                                                             B
      a loan given to an H.U.F. cannot be considered as a loan advanced
      to a “shareholder” of a company.”
       7. This judgment was followed by another judgment of this Court
in M/s Rameshwari Lal Sanwarmal vs. Commissioner of Income Tax,
Assam (1980) 2 SCC 371 which again arose in the context of a Hindu
Undivided Family. Sarathy Mudaliar’s case was followed in this               C
judgment, and it was expressly stated that there was no conflict between
this judgment and another judgment, namely, C.I.T. vs. Rameshwari Lal
Sanwarmal, (1972) 4 SCC 342, and that the Revenue’s contention to
refer Sarathy Mudaliar’s case to a larger Bench was turned down.
       8. The effect of these two judgments is clearly to hold that before   D
Section 2(6A) (e) of the 1922 Act can be attracted, the “shareholder”
referred to in the said provision must be a shareholder whose name is on
the register of members of the Company. When the Income Tax Act,
1961 came into force and repealed the 1922 Act, the definition of
“dividend” contained in Section 2(22)(e) was as follows:-                    E
      “Section 2. Definition – In this Act, unless the context otherwise
      requires,-
      (22) “dividend” includes-
      (e) any payment by a company, not being a company in which the         F
      public are substantially interested, 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, being a person who has
      a substantial interest in the company or any payment by any such
      company on behalf or for the individual benefits, of any such
      shareholder, to the extent to which the company in either case         G
      possesses accumulated profits;”
       9. A cursory look at the aforesaid definition 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
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342            SUPREME COURT REPORTS                            [2018] 1 S.C.R.


A     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 in the aforesaid two decisions.
            10. In 1988, however, this definition was amended to read as
B     follows:-
            “Section 2. Definition – In this Act, unless the context otherwise
            requires,-
            (22) “dividend” includes-

C           (e) any payment by a company, not being a company in which the
            public are substantially interested, of any sum (whether as
            representing a part of the assets of the company or otherwise)
            made after the 31st day of May 1987, by way of advance or loan
            to a shareholder, being a person who is the beneficial owner of
            shares (not being shares entitled to a fixed rate of dividend whether
D           with or without a right to participate in profits) holding not less
            than ten percent of the voting power, or to any concern in which
            such shareholder is a member or a partner and in which he has a
            substantial interest (hereafter in this clause referred to as the said
            concern), or any payment by any such company on behalf or for
E           the individual benefit, of any such shareholder, to the extent to
            which the company in either case possesses accumulated profits’”
            Explanation 2. - the expression “accumulated profits”, in sub-
            clauses (a), (b), (d) and (e), shall include all profits of the company
            up to the date of distribution or payment referred to in those sub-
F           clauses, and in sub-clause (c) shall include all profits of the company
            up to the date of liquidation, {but shall not, where the liquidation is
            consequent on the compulsory acquisition of its undertaking by
            the Government or a corporation owned or controlled by the
            Government under any law for the time being in force, include
            any profits of the company prior to three successive previous
G           years immediately preceding the previous year in which such
            acquisition took place;
            Explanation 3. - For the purposes of this clause,-
            (a) “concern” means a Hindu undivided family, or a firm or an
            association of persons or a body of individuals or a company;
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   NATIONAL TRAVEL SERVICES v. COMMISSIONER OF                                343
      INCOME TAX, DELHI, VIII [R. F. NARIMAN, J.]

     (b) a person shall be deemed to have a substantial interest in a         A
     concern, other than a company, if he is, at any time during the
     previous year, beneficially entitled to not less than twenty per cent
     of the income of such concern;”
      11. The Explanatory memorandum to the amendment thus made
reads as follows:-                                                            B
     “With the deletion of Section 104 to 109 there was a likelihood of
     closely held companies not distributing their profits to shareholders
     by way of dividends but by way of loans or advances so that
     these are not taxed in the hands of the shareholders. To forestall
     this manipulation, sub-clause (e) of clause (22) of Section 2 has        C
     been suitably amended. Under the existing provisions, payments
     by way of loans or advance to shareholders having substantial
     interest in a company to the extent to which the company possesses
     accumulated profits is treated as dividend. The shareholders having
     substantial interest are those who have a shareholding carrying
     not less than 20 per cent voting power as per the provisions of          D
     clause (32) of Section 2. The amendment of the definition extends
     its application to payments made (i) to a shareholder holding not
     less than 10 per cent of the voting power, or (ii) to a concern in
     which the shareholder has substantial interest. “Concern” as per
     the newly inserted Explanation 3 (a) to Section 2 (22) means a           E
     HUF or a firm or an association of persons or a body of individuals
     or a company. A shareholder having a substantial interest in a
     concern as per part (b) of Explanation 3 is deemed to be one who
     is beneficially entitled to not less than 20 per cent of the income of
     such concern.
                                                                              F
     10.3 The new provisions would, therefore, be applicable in a case
     where a shareholder has 10 per cent or more of the equity capital.
     Further, deemed dividend would be taxed in the hands of a concern
     where all the following conditions are satisfied:-
     (i) where the company makes the payment by way of loans or               G
     advances to a concern.;
     (ii) where a member or a partner of the concern holds 10 per cent
     of the voting power in the company; and
     (iii) where the member or partner of the concern is also beneficially
     entitled to 20 per cent of the income of such concern.                   H
344            SUPREME COURT REPORTS                          [2018] 1 S.C.R.


A           With a view to avoid the hardship in cases where advances or
            loans have already been given, the new provisions have been made
            applicable only in cases where loans or advances are given after
            31st May, 1987.”
            These amendments will apply in relation to assessment year 1988-
B           89 and subsequent years.”
             12. A reading of the amended definition would indicate that, after
      31.05.1987, a “shareholder” is now 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
C     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
D
      year, beneficially entitled to not less than 20% of the income of such
      concern.
             13. Shri Ujjwal A. Rana, learned advocate, appearing on behalf
      of the appellants, has argued before us that a judgment had been delivered
      by the very Division Bench in another case C.I.T. vs. Ankitech Private
E
      Limited reported in [2012] 340 ITR 14 (Del). The same Division Bench
      had arrived at a conclusion, following other judgments of other Courts
      and Tribunals, that the expression “shareholder” would continue to mean
      a registered shareholder even after the amendment, and that, this being
      the case, it is clear that the impugned judgment has taken an about turn
F     and has sought to distinguish the earlier judgment when it was squarely
      applicable. He has also placed before us an order dated 05.10.2017
      passed in Civil Appeal No. 3961 of 2013 [C.I.T., Delhi-II vs. Madhur
      Housing and Development Company] in which this Court has expressly
      affirmed the reasoning of the aforesaid earlier judgment. In his view,
      therefore, this judgment ought to have been followed, and if it had been
G
      followed, it is clear that the firm, not being a registered shareholder,
      could not possibly be a person to whom Section 2(22)(e) would apply.
           14. As opposed to this, Shri Guru Krishnakumar, learned senior
      advocate, appearing on behalf of the Revenue, has sought to support the
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    NATIONAL TRAVEL SERVICES v. COMMISSIONER OF                                   345
       INCOME TAX, DELHI, VIII [R. F. NARIMAN, J.]

impugned judgment by pointing out that the impugned judgment itself               A
has made a distinction between the facts in Ankitech (supra) and in the
present case. According to him, the impugned judgment has reference
only to the second limb of the amended definition, namely, to the limb
which deals with any concern in which such shareholder is a member
and not to the first limb, which deals with a shareholder being a person
                                                                                  B
who is the beneficial owner of shares. According to him, therefore, the
Division Bench rightly sidestepped the decision in Ankitech (supra) and
correctly arrived at the conclusions to the two questions raised.
      15. This then brings us to the Division Bench judgment in the
present case. In para 17, after referring to various judgments referred
                                                                                  C
to by us hereinabove, the Division Bench posed two questions to be
answered by it as follows:-
       “(1) To attract the first limb of Section 2 (22) (e) of the Act, is it
       necessary that the person who has received the advance or loan
       is a shareholder and also beneficial owner. To put it otherwise,
       whether both the conditions are required to be satisfied will depend       D
       upon the interpretation to be given to the words “being a person
       who is a beneficial owner of shares.....” which was inserted by
       amendment in the aforesaid provision carried out by the Finance
       Act, 1987 w.e.f. 1st April, 1988.
       (2) Whether the assessee who is a partnership firm can be treated          E
       as ‘shareholder’ because of the reason that it has purchased the
       shares in the name of the two partners.”
       16. It answered the first question by stating that the expression
“being a person who is a beneficial owner of shares” would be in addition
to the shareholder first being a registered shareholder of the Company.           F
The Division Bench then states that, therefore, in order to attract Section
2(22)(e) both conditions have to be satisfied. So far as the second question
is concerned, the Division Bench went on to state that a partnership firm
can be treated as a shareholder but that it is not necessary that it has to
be a registered shareholder.                                                      G
       17. We are of the view that it is very difficult to accept the reasoning
of the Division Bench. It is not enough to say that Ankitech’s case
refers to the second limb of the amended definition, whereas the present
case refers to the first limb, for the simple reason that the word
“shareholder” in both limbs would mean exactly the same thing. This is
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346             SUPREME COURT REPORTS                             [2018] 1 S.C.R.


A     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.
             18. This being the case, we are of the view that the whole object
      of the amended provision would be stultified if the Division Bench
B     judgment were to be followed. Ankitech’s case, in stating that no change
      was made by introducing the deeming fiction insofar as the expression
      “shareholder” is concerned is, according to us, wrongly decided. 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 of this Court referred to hereinabove.
C     This is why “shareholder” now, 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
D     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
E     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, as has been held in a catena
      of decisions starting from Mathalone vs. Bombay Life Assurance Co.
      Ltd., [1954] SCR 117.
F            19. This being the case, we are prima facie of the view that the
      Ankitech judgment (supra) itself requires to be reconsidered, and this
      being so, without going into other questions that may arise, including
      whether the facts of the present case would fit the second limb of the
      amended definition clause, we place these appeals before the Hon’ble
G     Chief Justice of India in order to constitute an appropriate Bench of
      three learned Judges in order to have a relook at the entire question.
             20. Ordered accordingly.

      Kalpana K. Tripathy                                 Matter placed before Hon’ble
H                                                CJI for constituting three-judge Bench.