Supreme Court Rules – Deemed Dividend

This Tax Alert summarizes a recent ruling of Supreme Court of India (SC) in the case of Gopal and Sons (HUF) (Taxpayer) on the issue whether advance received by the Taxpayer from Indian Company wherein the Taxpayer’s Karta is a registered shareholder can be regarded as deemed dividend under the provisions of the Indian Tax Laws (ITL).
The ITL provides for deemed dividend taxation in respect of payment by a closely held company by way of advance or loan given to (a) a beneficial shareholder holding not less than 10% of the voting rights in such company; or (b) any concern in which such shareholder (viz. holding 10% or more voting power) is a member or a partner and such shareholder has a substantial interest (20% or more) in the said concern.
The Taxpayer contended that it was neither the beneficial shareholder nor the registered shareholder of ICo as the shares were issued in the name of Karta and, hence, the deemed dividend provisions of the ITL is not applicable.
SC, however, held, deemed dividend provision is attracted in present case as the Taxpayer is a concern in which shareholder (Karta) has a substantial interest. Thus, the payment received by the Taxpayer from an Indian company (ICo), is deemed dividend under the provisions of the ITL.
SC held that a loan given to a concern can also constitute dividend if a shareholder has substantial interest. SC noted that the Karta in whose name shares were registered has substantial interest in the income of the Hindu Undivided Family (HUF) and that this proposition was not in dispute. SC, therefore, concluded that the loan was given to a concern and, hence, the loan can be considered as deemed dividend.