Deemed dividend under section 2(22)(e) does not apply to a commercial inter-company loan supported by consideration.

The Tribunal considered whether an inter-company loan could be taxed as deemed dividend in the hands of a common shareholder under section 2(22)(e) of the Income-tax Act, 1961. It found that the transaction was supported by commercial consideration: the assessee had also advanced funds to the lender company, and the borrowing carried interest at 12%. On that basis, the advance was treated as a business transaction rather than a gratuitous payment for the assessee's individual benefit, so the deeming fiction did not apply. The addition was deleted.

---

---

Issues: Whether the amount advanced by one company to another, in which the assessee was a common shareholder, could be taxed as deemed dividend in the assessee's hands under section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The addition rested on the view that the loan advanced by the lender company to the borrowing company, both connected through the assessee's shareholding, attracted the deeming fiction. The Tribunal examined the actual nature of the transaction and the surrounding facts. It noted that the assessee had himself advanced funds to the lender company, that the inter-company borrowing carried interest at 12%, and that the transaction was in substance a business transaction rather than a gratuitous payment for the individual benefit of the assessee. Relying on the principle that deemed dividend applies to gratuitous advances and not to advances supported by commercial consideration, the Tribunal held that the earlier orders could not justify the addition without examining the transaction on merits.

Conclusion: The amount could not be treated as deemed dividend in the assessee's hands, and the addition was deleted.

---