Deemed dividend liability rests with the shareholder alone, so revision based on taxing a non-shareholder recipient failed.

Section 2(22)(e) deemed dividend was held taxable only in the hands of the registered shareholder, not in the hands of a non-shareholder company that merely received the loan. The Tribunal noted that the deeming fiction enlarges the definition of dividend but does not extend liability to a concern that is not the shareholder, even where a common shareholder has substantial interest in both entities. On that legal position, the Principal Commissioner's view that the assessment was erroneous and prejudicial for want of enquiry was unsustainable, and the revisionary assumption of jurisdiction under section 263 failed.

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Issues: Whether revision under section 263 was valid where the Principal Commissioner treated a loan received by the assessee-company from another company as deemed dividend, and whether the assessment order was erroneous and prejudicial to the interests of the Revenue for want of enquiry.

Analysis: The assessee-company received a loan from a private company in which the common shareholder held substantial interest in both entities. The Tribunal noted that the legal fiction in section 2(22)(e) enlarges the definition of dividend only and does not extend to treating a concern, which is not the registered shareholder, as the recipient of deemed dividend. On the facts, the loan could at best be assessed as deemed dividend in the hands of the shareholder and not in the hands of the company that received the loan. Since the Principal Commissioner's revision proceeded on an incorrect appreciation of this legal position, the assessment order could not be said to be both erroneous and prejudicial to the interests of the Revenue.

Conclusion: The revisionary order under section 263 was unsustainable and was quashed in favour of the assessee.

Final Conclusion: The Tribunal held that a loan to a concern cannot be taxed as deemed dividend in the hands of a non-shareholder recipient company merely because a common shareholder has substantial interest, and therefore the revisionary assumption of jurisdiction failed.

Ratio Decidendi: Deemed dividend under section 2(22)(e) can be brought to tax only in the hands of the shareholder and not in the hands of a concern that is not the registered shareholder; a revision under section 263 cannot survive when it rests on a legally unsustainable view of the assessment order.

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