Deemed dividend principles: company funds routed through a conduit can be taxable when they benefit a shareholder directly.

A company's payment to an intermediary can fall within deemed dividend rules if, on the facts, the intermediary is only a conduit for the shareholder's borrowing. Section 2(6A)(e) of the Indian Income-tax Act, 1922 covers not only direct loans to a shareholder, but also payments made on behalf of a shareholder or for the shareholder's individual benefit. Here, the shareholder's admissions and the surrounding circumstances showed that funds were borrowed through the intermediary and passed on to him, so the company's advance was treated as made for his individual benefit and was assessable as dividend in his hands.

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Issues: Whether a company's loan to an intermediary, subsequently passed on to the shareholder, constituted a payment for the individual benefit of the shareholder and was therefore assessable as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922.

Analysis: Section 2(6A)(e) covers three distinct situations: direct advance or loan to a shareholder, payment on behalf of a shareholder, and payment for the individual benefit of a shareholder. The company had not advanced the money directly to the shareholder, so the matter turned on whether the advance to the intermediary was for the shareholder's individual benefit. The shareholder's own admissions showed that whenever he needed money he obtained it through the intermediary, who in turn borrowed from the company and passed the funds on as loans. The surrounding circumstances, including the manner in which the loans were raised and passed on, established that the intermediary was acting as a conduit and that the company's payment was made to facilitate the shareholder's borrowing.

Conclusion: The transaction fell within section 2(6A)(e) as a payment by the company to a third party for the individual benefit of the shareholder, and the amount was rightly treated as dividend in the hands of the assessee.

Ratio Decidendi: A payment by a company to a third party is taxable as deemed dividend if, on the facts, it is made for the individual benefit of a shareholder, including where the third party serves merely as a conduit for passing the company's funds to the shareholder.

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