Strict construction of deemed dividend rules excluded a firm that was not a registered shareholder from tax liability.

Section 2(22)(e) was construed strictly: "shareholder" was held to mean the registered shareholder only, not a beneficial owner or a firm merely because its partners held shares in their own names. Because the respondent-firm was not entered in the companies' share registers and the loans were not advanced to the registered shareholders in their capacity as shareholders, the loans or deposits could not be treated as deemed dividend in the firm's hands. The deemed-dividend provision therefore did not apply to the firm, and the appeal failed against the Revenue.

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Issues: Whether loans or deposits advanced by companies to a firm could be treated as deemed dividend in the hands of the firm under section 2(22)(e) of the Income-tax Act, 1961 when the firm was not a registered shareholder and only its partners held the shares in their own names.

Analysis: The provision creating deemed dividend liability was held to require strict construction. The expression "shareholder" was read as referring to the registered shareholder only, not to a beneficial owner or to a firm merely because its partners held the shares. The Companies Act, 1956 was noted as not recognizing any trust or beneficial interest in shares for this purpose. On the facts, the respondent-firm was not entered in the share register, and the loans were not advanced to the registered shareholders in their capacity as shareholders of the companies concerned.

Conclusion: The deemed-dividend provision did not apply to the respondent-firm, and the appeal failed against the Revenue.

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