Deemed dividend under 2(22)(e): registered shareholder requirement upheld; payments to non-shareholders cannot be taxed as dividend.

Interpretation of the term shareholder under the deeming provision for deemed dividend: the legislative definition of dividend was broadened to include advances or loans made to a registered shareholder, and distributions on reduction of capital or liquidation. Payments made to an entity in which a person has beneficial interest do not convert that person into a registered shareholder; beneficial ownership alone does not suffice. Consequently, where the recipient company was not a shareholder on the register, amounts could not be treated as deemed dividend and the tax additions were deleted. The deeming provision targets taxation in the hands of the registered shareholder.

---

---

Issues: Whether Section 2(22)(e) of the Income-tax Act, 1961 attracts deemed dividend where the recipient of the payment/loan/advance is not a registered shareholder of the closely held lending company.

Analysis: Section 2(22)(e) provides an inclusive definition of "dividend" by treating certain payments by closely held companies-loans or advances to a shareholder, payments to a concern in which such shareholder has substantial interest, or payments made for the individual benefit of such shareholder-as dividend to the extent of accumulated profits. The provision contains exclusions for amounts advanced in the ordinary course of the lending business and for set-offs. Authorities interpreting the provision (including the binding line of decisions beginning with Rameshwarlal Sanwarmal and subsequent Division Bench rulings) construe the clause to tax the recipient who is a shareholder; the reference to "beneficial owner" and other amendments do not displace the requirement that the recipient must be a shareholder (i.e., a registered shareholder) for Section 2(22)(e) to be invoked. Where facts show the recipient is not the lending company's shareholder or there is no loan/advance to the shareholder (for example, amounts represent business transactions or defalcations not reflected as advances), the statutory requirements for deeming dividend under clause (e) are not satisfied. The cited precedents and statutory construction support that such payments, if they are within clause (e), are to be taxed in the hands of the shareholder and not in the hands of a non-shareholder recipient.

Conclusion: Section 2(22)(e) does not apply where the recipient of the payment/loan/advance is not a registered shareholder of the lending closely held company; therefore the appeals challenging Tribunal orders that deleted additions on this ground fail in favour of the respondent (assessee).

---