1. This appeal by the department relates to the assessment year 1967-68. The original assessment was completed on 23-3-1969. The assessment was reopened by the ITO under Section 147(a) of the Income-tax Act, 1961 ('the Act'), as, according to the ITO, there was reason to believe that income amounting to Rs. 1,88,242, being deemed dividend under Section 2(22)(e), read with Section 2(32), of the Act, escaped assessment. He brought the amount to tax in the reassessment.
In appeals, this was set aside by the Commissioner (Appeals). The department has, therefore, come up in appeal.
2. The only ground taken in the appeal is that the Commissioner (Appeals) erred in holding that the amount cannot be considered as deemed dividend.
3. The assessee is a shareholder in Zenith Tin Works (P.) Ltd. (hereinafter referred to as 'the company'). During the relevant accounting period, the assessee nad drawn substantial amounts from the company and the debit came to Rs. 1,88,242. This was the amount which was treated as deemed dividend by the ITO under Section 2(22)(e).
4. Almost all the shares of the company are held by the assessee, his two brothers and their families. There were some gifts of the shares.
The three brothers gifted shares to the children of other brothers. The final position at the relevant time as regards the assessee was that the assessee held 1,500 shares, his wife 500 shares, and his two minor sons 1,000 shares each. In the share register, the mother figured as the guardian of the minors. Under Mohamedan law, the father alone will be the guardian, and it was found by the ITO and the Commissioner (Appeals) that the father should be deemed to have the control over the voting rights with regard to these shares.
5. Section 2(22)(e) so far as it is relevant for the present purpose, provides that any payment by a company, in which the public are not substantially interested, by way of advance or loan to a shareholder, who has a substantial interest in the company, shall be deemed to be dividend. Under Section 2(32), so far as it is relevant for the present purpose, a person who is the beneficial owner of shares carrying not less than 20 per cent of the voting power will be a person who has a substantial interest in the company.
6. The 1,500 shares held by the assessee carries only 12.5 per cent of the voting power. The ITO held that the assessee should also be deemed to be the beneficial owner of the 2,000 shares held by his two minor sons. If these are also reckoned, the voting power of the assessee will be more than 20 per cent. The ITO, therefore, reopened the assessment under Section 147(o) and held that the amount of Rs. 1,88,242 covered by the debit to the assessee should be deemed to be dividend and brought the same to tax in the hands of the assessee.
7. Before the Commissioner (Appeals), the assessee questioned the validity of the reopening of the assessment and also questioned the correctness of the assessment on merits. The Commissioner (Appeals) did not adjudicate upon the validity of the reopening but on merits he held that" the amount cannot be brought to tax. He was of the view that the assessee cannot be held to be the beneficial owner of the shares standing in the name of the minor sons as the benefit of such ownership does not accrue to him, and that the assessee does not, therefore, control 20 per cent of the voting power. He, therefore, deleted the addition made by the ITO. The department has come up in appeal against this order.
8. Before us, it was contended by the learned departmental representative that the assessee is having voting control not only with regard to the shares owned by him but also with regard to the shares standing in the name of the minor sons, that he should, therefore, be deemed to be the beneficial owner of the shares and that he will, thus, have more than 20 per cent of the voting power. Tn this connection, the learned departmental representative also relied upon page 69 of Kanga and Palkhivala's Law and Practice of Income-tax, wherein it is stated thus: "Beneficial ownership and not legal ownership, of shares is the criterion. Thus, the registered holder of even the majority of equity shares would not fall within this definition if he has no beneficial interest in the shares; and conversely, a person who is beneficially entitled to 20 per cent or more of the equity capital would be covered by this definition even if he is not the registered holder of any shares". This passage, in our view, does not help the department, because it only points out that what is important is not the name in which the shares are registered, but the beneficial interest therein.
This proposition is not disputed by the assessee. The only point of controversy is whether the assessee can be said to be the beneficial owner of the shares standing in the name of his minor sons. As stated earlier, the shares had come to the minors by transfer. This does not seem to be material because the question mentioned above will still remain even if the shares were gifted by the assessee himself to his minor sons. A father as guardian may manage the affairs with regard to the shares standing in the name of bis minor sons, but this will not make him the beneficial owner of the shares. To make him a beneficial owner, the benefit or advantage arising out of the shares must accrue to him. In the present case, the shares belong to the minors and the benefit arising out of the same accrues only to the minors. By managing the shares as the guardian, it cannot be said that the father will become the beneficial owner of the shares. We are in full agreement with the yiew expressed by the Commissioner (Appeals) that the assessee cannot be said to be the beneficial owner of the shares. In this connection, the learned counsel for the assessee also drew our attention to Explanation 2 to Section 64 of the Act, which relates to the clubbing of the income of spouse, minor child, etc. Clause (ii) of Sub-section (1) of Section 64 also refers to an individual who has a substantial interest in a concern. In this context, Explanation 2, among other things, provides that a person shall be deemed to have a substantial interest in a company if its shares carrying not less than 20 per cent of the voting power, are at any time during the previous year owned beneficially by such person and partly by one or more of his relatives. This will indicate that owning beneficial interest is different from the ownership of shares by relatives and that where the Legislature intended that the shares held by relatives should also be recknoed for the purpose of determining whether a person has substantial interest in a company, it has been specifically provided for. We, therefore, hold that the assessee cannot be said to be the beneficial owner of the shares standing in the name of his minor sons and that the amount standing to the debit of the assessee in the accounts of the company cannot be deemed to be dividend under Section 2(22)(e). We may also state that in coming to this conclusion, we have accepted the contention of the department that the assessee should be deemed to be the guardian of his minor sons in spite of the fact that the mother has been entered as a guardian in the share register of the company.