The shares are in the Karta's name, not the HUF's. Does s.2(22)(e) still catch a loan to the HUF?
Yes. On the record the HUF was shown in the company's filings as registered and beneficial shareholder. In any event s.2(22)(e) also reaches a payment to a concern in which a shareholder is a member with a substantial interest — beneficial entitlement to not less than 20 per cent of the concern's income — and the Karta was a member of the HUF.
Decided by the Supreme Court (Supreme Court of India — A.K. Sikri J and Abhay Manohar Sapre J) on 2017-01-04, reported as (2017) 391 ITR 1 (SC); [2017] 245 Taxman 48 (SC); [2017] 77 taxmann.com 71 (SC); (2017) 291 CTR 321 (SC); Civil Appeal No. 12274 of 2016; AY 2006-07. It bears on section 2(22)(e) of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This is a revenue decision and it removes the most common defence run in HUF deemed-dividend cases: that the twin requirement of registered and beneficial shareholding cannot be met because an HUF cannot in law be a registered shareholder. The Supreme Court did not need to decide that abstract question, because the third limb of s.2(22)(e) — payment for the individual benefit of a shareholder, extended through the definition of 'concern' — catches the payment either way. Expect it whenever a closely held company advances money to a family entity.
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For assessment year 2006-07 the assessee, a Hindu undivided family, returned income of Rs 1,62,745. By an assessment order of 31 December 2008 the total was raised to Rs 1,30,31,280 through several additions, only one of which reached the Supreme Court. During the year the HUF had received advances from G.S. Fertilizers (P.) Ltd., a closely held company. Of that company's subscribed capital of Rs 1,05,75,000, the assessee had subscribed 3,92,500 shares, 37.12 per cent of the shareholding. The company's audited accounts showed Rs 1,20,10,988 as reserves and surplus as on 31 March 2006, and it was that amount - the accumulated profits - that the Assessing Officer brought to tax as deemed dividend. The share certificates stood in the name of the Karta, Gopal Kumar Sanei, but the annual returns filed with the Registrar of Companies recorded the HUF as shareholder. The Commissioner (Appeals) upheld the addition; the Tribunal deleted it, following its Mumbai Bench decision in Binal Sevantilal Koradia (HUF) that an HUF can be neither a registered nor a beneficial shareholder; the Calcutta High Court reversed the Tribunal and restored the addition.
The appeal was dismissed. On the record the HUF was shown in the company's annual returns as registered and beneficial shareholder, and in any case it was the beneficial shareholder. But the Court decided the case without needing that: even presuming the HUF is not a registered shareholder, once the payment is received by the HUF, and the shareholder - here the Karta - is a member of that HUF and has a substantial interest in it, the payment to the HUF is deemed dividend under s.2(22)(e). That is the effect of Explanation 3, which defines 'concern' to include a Hindu undivided family and treats a person as having a substantial interest if beneficially entitled to not less than twenty per cent of its income. It was therefore unnecessary to decide whether an HUF can in law be a registered or beneficial shareholder.
Section 2(22)(e) creates a fiction: a loan is not really a dividend, since it has to be repaid and does not become the shareholder's income, and the Legislature has deemed it one. Being a deeming provision it must be construed strictly, so unless every condition is satisfied the receipt cannot be deemed a dividend, and where two views are possible the benefit goes to the assessee. Read that way, the clause reaches three kinds of payment - an advance or loan to a shareholder, a payment on behalf of a shareholder, and a payment for the individual benefit of a shareholder - and the first of these extends by its own words to an advance or loan to any concern in which such shareholder is a member or partner and has a substantial interest, provided the advance was made after 31 May 1987. Explanation 3 supplies the two definitions that decide the case: 'concern' includes a Hindu undivided family, and substantial interest means beneficial entitlement to not less than twenty per cent of the concern's income. The Karta was a member of the HUF and it was not disputed that he was entitled to at least that share, so the conditions were met whichever way the registered shareholding was characterised. C.P. Sarathy Mudaliar, on which the assessee relied for the proposition that an HUF cannot be a shareholder, was distinguished as a decision on s.2(6A)(e) of the 1922 Act, which contained no provision like Explanation 3.
provisions of Section 2(22)(e) of the Act get attracted and it is not even necessary to determine as to whether HUF can, in law, be beneficial shareholder or registered shareholder in a Company
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Handle my notice → Ask a CA on WhatsAppYes. On the record the HUF was shown in the company's filings as registered and beneficial shareholder. In any event s.2(22)(e) also reaches a payment to a concern in which a shareholder is a member with a substantial interest — beneficial entitlement to not less than 20 per cent of the concern's income — and the Karta was a member of the HUF. This was decided by the Supreme Court (Supreme Court of India — A.K. Sikri J and Abhay Manohar Sapre J) and bears on section 2(22)(e) of the Income Tax Act 1961. It is reported as (2017) 391 ITR 1 (SC); [2017] 245 Taxman 48 (SC); [2017] 77 taxmann.com 71 (SC); (2017) 291 CTR 321 (SC); Civil Appeal No. 12274 of 2016; AY 2006-07. This is a revenue decision and it removes the most common defence run in HUF deemed-dividend cases: that the twin requirement of registered and beneficial shareholding cannot be met because an HUF cannot in law be a registered shareholder. The Supreme Court did not need to decide that abstract question, because the third limb of s.2(22)(e) — payment for the individual benefit of a shareholder, extended through the definition of 'concern' — catches the payment either way. Expect it whenever a closely held company advances money to a family entity. If it applies to you, the first step is this: Fix the assessment year first, because it decides the consequence rather than the finding: up to AY 2020-21 a s.2(22)(e) finding produced a company-level dividend distribution tax outcome, while from AY 2021-22 the same finding puts the full amount on the recipient's own return as income from other sources with 10 per cent TDS under s.194.
For assessment year 2006-07 the assessee, a Hindu undivided family, returned income of Rs 1,62,745. By an assessment order of 31 December 2008 the total was raised to Rs 1,30,31,280 through several additions, only one of which reached the Supreme Court. During the year the HUF had received advances from G.S. Fertilizers (P.) Ltd., a closely held company. Of that company's subscribed capital of Rs 1,05,75,000, the assessee had subscribed 3,92,500 shares, 37.12 per cent of the shareholding. The company's audited accounts showed Rs 1,20,10,988 as reserves and surplus as on 31 March 2006, and it was that amount - the accumulated profits - that the Assessing Officer brought to tax as deemed dividend. The share certificates stood in the name of the Karta, Gopal Kumar Sanei, but the annual returns filed with the Registrar of Companies recorded the HUF as shareholder. The Commissioner (Appeals) upheld the addition; the Tribunal deleted it, following its Mumbai Bench decision in Binal Sevantilal Koradia (HUF) that an HUF can be neither a registered nor a beneficial shareholder; the Calcutta High Court reversed the Tribunal and restored the addition. The matter was decided on 2017-01-04 by the Supreme Court (Supreme Court of India — A.K. Sikri J and Abhay Manohar Sapre J). On those facts the Supreme Court held as follows. The appeal was dismissed. On the record the HUF was shown in the company's annual returns as registered and beneficial shareholder, and in any case it was the beneficial shareholder. But the Court decided the case without needing that: even presuming the HUF is not a registered shareholder, once the payment is received by the HUF, and the shareholder - here the Karta - is a member of that HUF and has a substantial interest in it, the payment to the HUF is deemed dividend under s.2(22)(e). That is the effect of Explanation 3, which defines 'concern' to include a Hindu undivided family and treats a person as having a substantial interest if beneficially entitled to not less than twenty per cent of its income. It was therefore unnecessary to decide whether an HUF can in law be a registered or beneficial shareholder.
Section 2(22)(e) creates a fiction: a loan is not really a dividend, since it has to be repaid and does not become the shareholder's income, and the Legislature has deemed it one. Being a deeming provision it must be construed strictly, so unless every condition is satisfied the receipt cannot be deemed a dividend, and where two views are possible the benefit goes to the assessee. Read that way, the clause reaches three kinds of payment - an advance or loan to a shareholder, a payment on behalf of a shareholder, and a payment for the individual benefit of a shareholder - and the first of these extends by its own words to an advance or loan to any concern in which such shareholder is a member or partner and has a substantial interest, provided the advance was made after 31 May 1987. Explanation 3 supplies the two definitions that decide the case: 'concern' includes a Hindu undivided family, and substantial interest means beneficial entitlement to not less than twenty per cent of the concern's income. The Karta was a member of the HUF and it was not disputed that he was entitled to at least that share, so the conditions were met whichever way the registered shareholding was characterised. C.P. Sarathy Mudaliar, on which the assessee relied for the proposition that an HUF cannot be a shareholder, was distinguished as a decision on s.2(6A)(e) of the 1922 Act, which contained no provision like Explanation 3. In the words reproduced by the source cited on this page: "provisions of Section 2(22)(e) of the Act get attracted and it is not even necessary to determine as to whether HUF can, in law, be beneficial shareholder or registered shareholder in a Company"
It was decided by the Supreme Court on 2017-01-04 and is reported as (2017) 391 ITR 1 (SC); [2017] 245 Taxman 48 (SC); [2017] 77 taxmann.com 71 (SC); (2017) 291 CTR 321 (SC); Civil Appeal No. 12274 of 2016; AY 2006-07. 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed. On the record the HUF was shown in the company's annual returns as registered and beneficial shareholder, and in any case it was the beneficial shareholder. But the Court decided the case without needing that: even presuming the HUF is not a registered shareholder, once the payment is received by the HUF, and the shareholder - here the Karta - is a member of that HUF and has a substantial interest in it, the payment to the HUF is deemed dividend under s.2(22)(e). That is the effect of Explanation 3, which defines 'concern' to include a Hindu undivided family and treats a person as having a substantial interest if beneficially entitled to not less than twenty per cent of its income. It was therefore unnecessary to decide whether an HUF can in law be a registered or beneficial shareholder. It arises in Assessment & Scrutiny matters, on section 2(22)(e) of the Income Tax Act 1961, and was decided by Supreme Court of India — A.K. Sikri J and Abhay Manohar Sapre J. 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. Pull the company's annual returns filed with the Registrar of Companies — this case turned on those filings showing the HUF itself as registered and beneficial shareholder, whatever the share certificates said. Test the concern limb on the facts: whether the shareholder is a member or partner of the recipient concern and whether the Explanation 3(b) threshold of 20 per cent beneficial entitlement to income is met. Check the two limits that remain available — the deeming operates only to the extent of accumulated profits, and only for advances made after 31 May 1987.
Still good law. A separate check on later treatment found no decision overruling or doubting Gopal and Sons; the substantive test in s.2(22)(e) is unchanged. What has changed is who pays: with the abolition of dividend distribution tax by the Finance Act 2020, from 1 April 2020 dividend including deemed dividend is taxable in the shareholder's hands as income from other sources at slab rates, with the company deducting tax at 10 per cent under s.194. That finding was checked against a published source, which is linked on this page, on 2026-08-25. 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 Court did not decide whether a Hindu undivided family can be a registered shareholder; it held that question unnecessary once the concern limb of s.2(22)(e) was satisfied, so this is not authority on the company-law point. The amount assessed, Rs 1,20,10,988, was the company's reserves and surplus as on 31 March 2006, the deeming being limited to accumulated profits. C.P. Sarathy Mudaliar remains distinguishable rather than overruled: it was decided under the 1922 Act, which had no Explanation 3. 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 appeal was dismissed. On the record the HUF was shown in the company's annual returns as registered and beneficial shareholder, and in any case it was the beneficial shareholder. But the Court decided the case without needing that: even presuming the HUF is not a registered shareholder, once the payment is received by the HUF, and the shareholder - here the Karta - is a member of that HUF and has a substantial interest in it, the payment to the HUF is deemed dividend under s.2(22)(e). That is the effect of Explanation 3, which defines 'concern' to include a Hindu undivided family and treats a person as having a substantial interest if beneficially entitled to not less than twenty per cent of its income. It was therefore unnecessary to decide whether an HUF can in law be a registered or beneficial shareholder.
TaxSphere, “Gopal and Sons (HUF) v CIT”, https://taxnotice.vittsphere.com/caselaw/case/gopal-and-sons-huf-v-cit-deemed-dividend/ (validity last checked 2026-08-25)
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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?
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?
I have a running account with my company. I overdrew during the year, but the account was squared up by a journal adjustment on the last day of the year against another shareholder's credit balance. Can the withdrawals still be deemed dividend?
