Portuguese Law doesn’t Allow Wife to Hold 50% Voting Rights in Husband’s Shares; Deemed Dividend Applicable | HC

Case Details: Dattaprasad Kamat v. ACIT - [2023] 153 taxmann.com 702 (Bombay)

Judiciary and Counsel Details

• • Valmiki SA Menezes & M.S. Sonak, JJ.
  • Jitendra Jain, Jas Sanghavi, H.D. Naik & A.D. Naik, Advs. for the Appellant.
  • Ms Susan Linhares, Standing Counsel for the Respondent.

Facts of the Case

Assessee-individual held 33% shares in a private limited company. Assessee was married to his spouse as per the provisions of the Portuguese Civil Code, as applicable to the State of Goa.

As per section 5A of the Income-tax Act, if the Portuguese Civil Code governs the husband and wife, the income of the husband and wife under any head of the income, except income derived from “salaries”, shall be apportioned equally between them.

A search was conducted in the Company’s office and directors’ residences. After the search, Assessing Officer (AO) held that various payments made by the assessee through the Company were deemed dividends under section 2(22)(e).

Applying the Portuguese Civil Code, the assessee contended that his wife is the beneficial owner of half of the 33% shares (16.5% shares) in the said Company. Since the qualifying limit of 20% referred to in Section 2(22)(e) isn’t satisfied, the deemed dividend provisions aren’t applicable.

The matter reached before the Bombay High Court.

High Court Held

The High Court held that if the wife doesn’t make any statement under Section 187-C(2) of the Companies Act, 1956, asserting her ownership of a 50% beneficial interest in the shares held by her husband, then the husband would be considered sole owner of entire 33% share portion. This ownership would come with complete voting rights and authority linked to these shares.

A shareholder would be one whom the Company recognizes as the person to whom dividends declared are legally payable. The Memorandum of Articles essentially binds the shareholders of the Company to itself through the various covenants contained therein, which regulate and restrict the liabilities of the shareholders in relation to the Company, which is a separate juristic entity.

In the present case, the wife did not claim to have had a name entered into the Register or Members of the Company. She did not participate in passing resolutions or exercising any voting rights, as she did not hold any shares in the Company.

The provisions of the Civil Code could not create any right in a spouse who is not a registered shareholder of the Company. The Company Act provisions exclusively regulate the relationship between the Company and a shareholder. The wife would have no voting powers under the scheme of the Companies Act attached to any of the shares, which have been exclusively registered in the husband’s name.

Consequently, the submission that the wife of the assessee, married under the provisions of Portuguese Civil Code, would be entitled to the beneficial ownership of the husband’s shares was to be rejected. Thus, the provisions of 2(22)(e) would fully apply to the husband.