A company lent money to our HUF. The shares are held in the members' names but bought with family funds. Is the loan a deemed dividend of the HUF?
No, on the law as it then stood. The Supreme Court held that a Hindu undivided family cannot be a shareholder of a company; the shareholder is the person registered as such in the company's books. Since the family was not and could not be registered, a loan to it was not a loan to a shareholder, and the deemed dividend provision did not apply. The provision creates an artificial dividend out of money that has to be repaid and never becomes the borrower's income, so it must be strictly construed and shareholder means the registered shareholder, not the beneficial owner.
Decided by the Supreme Court (Supreme Court of India; the source does not name the judges) on 1971-10-12, reported as (1972) 83 ITR 170; (1972) 1 SCR 1076; 1972 Tax LR 1006; (1972) 2 SCJ 587. It bears on section 2(22)(e) of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the decision that anchored the registered shareholder reading of deemed dividend, and its reasoning is still worth having even though the provision has moved on. Two strands. First, a deeming provision that turns a repayable loan into income is an artificial charge and gets a strict construction, so the words are not stretched to reach the person who really owns the shares. Second, the Court explained why the beneficial owner cases do not conflict: where a real dividend is actually received on family shares, income has come in and is assessable in the family's hands, as Kishanchand Lunidasing Bajaj held; where the dividend is only deemed, no income is received or accrues to the family at all, so only the person deemed to have received it can be assessed. That distinction between a real receipt and a deemed one is the part of the judgment that still travels.
Binding on every court and authority in India.
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The assessee was a Hindu undivided family whose karta, Sarathy, held 2,797 shares and whose two adult members held 100 shares each in The Chittoor Motor Transport Company (Private) Ltd, a company in which the public were not substantially interested. The shares had been bought with family funds and were the family's property, the dividends on them were assessed as the family's income, and the karta's managing director's remuneration was likewise assessed as the family's income; none of that was disputed. For assessment years 1955-56 and 1956-57 the company advanced Rs 5,790 and Rs 39,085 to the family, which the Income-tax Officer treated as deemed dividend under section 2(6A)(e) of the 1922 Act. Before the Tribunal the assessee argued that the provision was unconstitutional, which it gave up; that there had been no advance to the family, the money having really gone to another company; and that the family, not being the shareholder, could not be assessed on the deemed dividend. The Tribunal found as a fact that the advance was to the family, rejected the first two contentions, and accepted the third. The Andhra Pradesh High Court agreed on reference, and the Revenue appealed by special leave.
The appeals were dismissed with costs. A Hindu undivided family cannot be a shareholder of a company; the shareholder is the individual registered as such in the company's books. This family was not registered as a shareholder and could not have been, so it was not a shareholder. The provision gives an artificial definition of dividend and covers a deemed dividend rather than a real one: a loan to a shareholder has to be returned and does not become his income, so the provision must receive a strict construction, and when it speaks of shareholder it means the registered shareholder and not the beneficial owner. The family could not be treated as a shareholder under that provision, nor under section 23A, nor under section 16(2) read with section 18(5). Since no loan had been advanced to a shareholder, the provision did not apply.
The Court reasoned from the artificial character of the charge. Nothing has come in: the loan is repayable and never becomes the borrower's income, and it is only by legislative deeming that it is treated as a dividend for certain purposes. A provision of that kind is construed strictly, and the word shareholder is therefore given the meaning it bears in company law, the person on the register. That reading was supported by two earlier decisions of the Court. In Howrah Trading Co., a buyer of shares under a blank transfer whose name was not on the register was held not to be a shareholder for the purposes of grossing up and credit for tax deducted, precisely because he was not registered. In Shakuntala, a family beneficially entitled to shares held in the names of its members was held not to be a shareholder for section 23A, so the deemed distribution fell to be included in the incomes of the registered members. The Revenue's reliance on Kishanchand Lunidasing Bajaj, where dividends on shares bought with family funds were held assessable in the family's hands, was met by the distinction the Court drew: there income was actually received, and it was received on the family's behalf; here nothing is received or accrues to the family at all, so only the person who is deemed to have received the income can be assessed on it.
When section 2(6A)(e) speaks of "shareholder", it refers to the registered shareholder and not the beneficial owner.
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Handle my notice → Ask a CA on WhatsAppNo, on the law as it then stood. The Supreme Court held that a Hindu undivided family cannot be a shareholder of a company; the shareholder is the person registered as such in the company's books. Since the family was not and could not be registered, a loan to it was not a loan to a shareholder, and the deemed dividend provision did not apply. The provision creates an artificial dividend out of money that has to be repaid and never becomes the borrower's income, so it must be strictly construed and shareholder means the registered shareholder, not the beneficial owner. This was decided by the Supreme Court (Supreme Court of India; the source does not name the judges) and bears on section 2(22)(e) of the Income Tax Act 1961. It is reported as (1972) 83 ITR 170; (1972) 1 SCR 1076; 1972 Tax LR 1006; (1972) 2 SCJ 587. This is the decision that anchored the registered shareholder reading of deemed dividend, and its reasoning is still worth having even though the provision has moved on. Two strands. First, a deeming provision that turns a repayable loan into income is an artificial charge and gets a strict construction, so the words are not stretched to reach the person who really owns the shares. Second, the Court explained why the beneficial owner cases do not conflict: where a real dividend is actually received on family shares, income has come in and is assessable in the family's hands, as Kishanchand Lunidasing Bajaj held; where the dividend is only deemed, no income is received or accrues to the family at all, so only the person deemed to have received it can be assessed. That distinction between a real receipt and a deemed one is the part of the judgment that still travels. If it applies to you, the first step is this: Start with the register. Establish who is recorded as the shareholder in the company's books, and for what number of shares, before arguing about beneficial ownership either way.
The assessee was a Hindu undivided family whose karta, Sarathy, held 2,797 shares and whose two adult members held 100 shares each in The Chittoor Motor Transport Company (Private) Ltd, a company in which the public were not substantially interested. The shares had been bought with family funds and were the family's property, the dividends on them were assessed as the family's income, and the karta's managing director's remuneration was likewise assessed as the family's income; none of that was disputed. For assessment years 1955-56 and 1956-57 the company advanced Rs 5,790 and Rs 39,085 to the family, which the Income-tax Officer treated as deemed dividend under section 2(6A)(e) of the 1922 Act. Before the Tribunal the assessee argued that the provision was unconstitutional, which it gave up; that there had been no advance to the family, the money having really gone to another company; and that the family, not being the shareholder, could not be assessed on the deemed dividend. The Tribunal found as a fact that the advance was to the family, rejected the first two contentions, and accepted the third. The Andhra Pradesh High Court agreed on reference, and the Revenue appealed by special leave. The matter was decided on 1971-10-12 by the Supreme Court (Supreme Court of India; the source does not name the judges). On those facts the Supreme Court held as follows. The appeals were dismissed with costs. A Hindu undivided family cannot be a shareholder of a company; the shareholder is the individual registered as such in the company's books. This family was not registered as a shareholder and could not have been, so it was not a shareholder. The provision gives an artificial definition of dividend and covers a deemed dividend rather than a real one: a loan to a shareholder has to be returned and does not become his income, so the provision must receive a strict construction, and when it speaks of shareholder it means the registered shareholder and not the beneficial owner. The family could not be treated as a shareholder under that provision, nor under section 23A, nor under section 16(2) read with section 18(5). Since no loan had been advanced to a shareholder, the provision did not apply.
The Court reasoned from the artificial character of the charge. Nothing has come in: the loan is repayable and never becomes the borrower's income, and it is only by legislative deeming that it is treated as a dividend for certain purposes. A provision of that kind is construed strictly, and the word shareholder is therefore given the meaning it bears in company law, the person on the register. That reading was supported by two earlier decisions of the Court. In Howrah Trading Co., a buyer of shares under a blank transfer whose name was not on the register was held not to be a shareholder for the purposes of grossing up and credit for tax deducted, precisely because he was not registered. In Shakuntala, a family beneficially entitled to shares held in the names of its members was held not to be a shareholder for section 23A, so the deemed distribution fell to be included in the incomes of the registered members. The Revenue's reliance on Kishanchand Lunidasing Bajaj, where dividends on shares bought with family funds were held assessable in the family's hands, was met by the distinction the Court drew: there income was actually received, and it was received on the family's behalf; here nothing is received or accrues to the family at all, so only the person who is deemed to have received the income can be assessed on it. In the words reproduced by the source cited on this page: "When section 2(6A)(e) speaks of "shareholder", it refers to the registered shareholder and not the beneficial owner."
It was decided by the Supreme Court on 1971-10-12 and is reported as (1972) 83 ITR 170; (1972) 1 SCR 1076; 1972 Tax LR 1006; (1972) 2 SCJ 587. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(22)(e), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed with costs. A Hindu undivided family cannot be a shareholder of a company; the shareholder is the individual registered as such in the company's books. This family was not registered as a shareholder and could not have been, so it was not a shareholder. The provision gives an artificial definition of dividend and covers a deemed dividend rather than a real one: a loan to a shareholder has to be returned and does not become his income, so the provision must receive a strict construction, and when it speaks of shareholder it means the registered shareholder and not the beneficial owner. The family could not be treated as a shareholder under that provision, nor under section 23A, nor under section 16(2) read with section 18(5). Since no loan had been advanced to a shareholder, the provision did not apply. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 2(22)(e) of the Income Tax Act 1961, and was decided by Supreme Court of India; the source does not name the judges. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not carry this case straight across to a present-day assessment; the provision now speaks of the beneficial owner as well as the registered holder, and later authority has applied it to a family in that position. Keep real dividends and deemed dividends apart in your argument; the treatment of an actual receipt on family shares says nothing about a loan. Where the loan is said to have been routed onward to someone else, prove it; here the Tribunal found as a fact that the advance was to the family and that finding decided the shape of the case.
Superseded by amendment. The strict construction of a deeming provision and the distinction between real and deemed dividends stand. But the corresponding provision of the 1961 Act was amended to describe the recipient as a shareholder being a person who is the beneficial owner of the shares, and later Supreme Court authority has applied it to a Hindu undivided family which is the beneficial owner of shares registered in members' names. So the result no longer follows for years governed by the amended text. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment decides section 2(6A)(e) of the Income-tax Act, 1922; the sections field gives the corresponding provision of the 1961 Act, section 2(22)(e). The amendment and the later Supreme Court authority noted under validity were not verified against a source in this session; read the current text and the case law under it before applying this decision. The source does not name the judges who decided the case, so the bench could not be given. The harvested page carries a reporter's headnote above the judgment, which has been disregarded. The batch line gave the year as 1972, which is the year of the reports; the judgment is dated 12 October 1971 and that date is used. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with costs. A Hindu undivided family cannot be a shareholder of a company; the shareholder is the individual registered as such in the company's books. This family was not registered as a shareholder and could not have been, so it was not a shareholder. The provision gives an artificial definition of dividend and covers a deemed dividend rather than a real one: a loan to a shareholder has to be returned and does not become his income, so the provision must receive a strict construction, and when it speaks of shareholder it means the registered shareholder and not the beneficial owner. The family could not be treated as a shareholder under that provision, nor under section 23A, nor under section 16(2) read with section 18(5). Since no loan had been advanced to a shareholder, the provision did not apply.
TaxSphere, “CIT v C.P. Sarathy Mudaliar”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-c-p-sarathy-mudaliar-deemed-dividend-registered-shareholder/ (validity last checked 2026-08-29)
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My company reduced its share capital and paid me cash and property for the reduction. Is that dividend, capital gains, or both?
The company and I have a mutual, open and current account with money moving both ways. Is the deemed dividend the closing debit balance, the highest debit balance during the year, or something else? And can the Department tax money that reached me through a firm rather than directly?
The shares are in the Karta's name, not the HUF's. Does s.2(22)(e) still catch a loan to the HUF?
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