Deemed dividend cannot be taxed on a non-shareholder firm; business income accrues only when development rights crystallise.

Deemed dividend under section 2(22)(e) could not be taxed in the hands of a partnership firm that was not the registered shareholder of the payer-company, and there was no finding that the partners held the shares on the firm's behalf; the addition was deleted. In relation to a joint development arrangement, the security deposit did not accrue as business income in the relevant year because no conveyance had been executed and the licence to enter upon the land was granted only later, when the income was offered to tax. The High Court held that no substantial question of law arose and the Revenue's appeal failed.

---

---

Issues: (i) Whether a security deposit received by a partnership firm could be treated as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 when the firm was not the registered shareholder of the company and there was no finding that the shares were held by the partners on behalf of the firm; (ii) Whether the amount received as security deposit under a joint development arrangement constituted business income in the relevant assessment year or accrued only when the licence to enter upon the land was actually granted.

Issue (i): Whether a security deposit received by a partnership firm could be treated as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 when the firm was not the registered shareholder of the company and there was no finding that the shares were held by the partners on behalf of the firm.

Analysis: Section 2(22)(e) broadens the concept of dividend by including certain loans or advances, but the charge remains attracted in the hands of the shareholder. The Tribunal recorded that the assessee-firm was not the registered shareholder of the payer-company and that the Revenue had not shown that the partners held the shares for and on behalf of the firm. In the absence of such foundational facts, the deeming provision could not be invoked against the firm.

Conclusion: The addition as deemed dividend was rightly deleted and the issue was answered in favour of the assessee.

Issue (ii): Whether the amount received as security deposit under a joint development arrangement constituted business income in the relevant assessment year or accrued only when the licence to enter upon the land was actually granted.

Analysis: On the facts found, no conveyance had been executed when the deposit was received, the land and development rights were treated as stock in trade, and the transaction for development crystallised only when the licence to enter upon the land was granted. The Tribunal further noted that the assessee had offered the income to tax in the later assessment year when the licence was granted. The finding that no income accrued in the relevant year was a possible view and did not give rise to a substantial question of law.

Conclusion: The proposed addition as business income in the relevant assessment year was not sustainable and the issue was answered in favour of the assessee.

Final Conclusion: Both proposed questions of law were held not to arise, and the appeal failed in entirety.

Ratio Decidendi: Deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 is taxable in the hands of the shareholder and cannot be fastened on a non-shareholder assessee; business income accrues only when the underlying transaction is complete so as to create a real right to receive the amount in that year.

---