Deemed dividend under section 2(22)(e) fails where share transfer, beneficial ownership, and commercial expediency are established.

Deemed dividend under section 2(22)(e) could not be sustained where the assessee produced the share transfer deed and annual return to show that he had ceased to hold the requisite beneficial interest in the lending company on the relevant date. The deeming fiction applies only when its foundational facts are proved, and it cannot rest on suspicion or account inconsistencies alone. The Tribunal also noted that the funds were moved within the group for business requirements, carried interest, and were linked to a commercial project, which indicated commercial expediency rather than a gratuitous benefit. On these facts, the addition was deleted.

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Issues: Whether the addition made as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 was sustainable where the assessee claimed that his shares had been transferred before the relevant advance and that the transaction was in the nature of commercial expediency between group companies.

Analysis: The assessee had produced the annual return filed with the Registrar of Companies and the share transfer deed to show that, on the relevant date, he held only one share and had ceased to have the requisite beneficial holding in the lending company. The Revenue's objection rested mainly on the belated filing of the annual return and surrounding inconsistencies in the accounts, but the documentary record was accepted by the statutory authority and was not shown to be false or fabricated. The Tribunal held that the deeming fiction in section 2(22)(e) can operate only when the foundational facts are proved and cannot be invoked on mere suspicion. It also accepted that the funds moved within the group for business requirements, carried interest, and were linked to a commercial project, which supported the conclusion that the transaction was not a gratuitous benefit to the assessee.

Conclusion: The addition under section 2(22)(e) was not sustainable and the Revenue's challenge failed.

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