IMPORTANT POINT
When decision of a co-ordinate bench is doubted, the matter must be referred to a larger bench.

JUDGMENT :

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.

3. The brief facts in order to decide the present controversy are 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/- 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 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 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.

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 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;”

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:-

“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:

“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 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

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:

“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 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