Deemed dividend under section 2(22)(e) applies only to a registered and beneficial shareholder, not a non-shareholder recipient.

Section 2(22)(e) deems certain loans or advances as dividend only when the recipient is a shareholder of the lender company. The provision was construed strictly, and the deemed dividend charge was confined to the shareholder in whose hands the payment is made or for whose benefit it is made; it cannot be assessed in the hands of a non-shareholder concern. The expression "such shareholder" was read to require the same person to be both the registered shareholder and the beneficial owner of the shares. On that construction, a person who satisfies only one of those conditions does not fall within the charge.

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Issues: (i) Whether deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender company. (ii) Whether the words "such shareholder" in Section 2(22)(e) refer to a shareholder who is both a registered shareholder and the beneficial shareholder.

Issue (i): Whether deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender company.

Analysis: The provision was held to create a deeming fiction that must be strictly construed. Reading the clause with its legislative history and object, the legal fiction was confined to dividend taxation in the hands of the shareholder of the lending company. The Court held that the provision does not indicate any intent to tax a non-shareholder concern as recipient of deemed dividend, and that the charge remains linked to the shareholder who controls the concern or for whose benefit the payment is made.

Conclusion: Deemed dividend cannot be assessed in the hands of a person other than a shareholder of the lender company.

Issue (ii): Whether the words "such shareholder" in Section 2(22)(e) refer to a shareholder who is both a registered shareholder and the beneficial shareholder.

Analysis: The Court relied on the prior construction of the word "shareholder" under the earlier provision and held that the expression "shareholder" in Section 2(22)(e) continues to mean a registered shareholder, while the qualifying words require that the same person must also be the beneficial owner of the shares. A person who is only a beneficial owner but not a registered shareholder, or only a registered shareholder but not a beneficial owner, does not satisfy the statutory condition.

Conclusion: "Such shareholder" refers to a person who is both a registered shareholder and a beneficial shareholder.

Final Conclusion: The deemed dividend addition was unsustainable and the Revenue's appeal failed.

Ratio Decidendi: Section 2(22)(e) applies only where the loan or advance is made to a person who is both the registered shareholder and beneficial owner of shares, and deemed dividend under that provision is taxable only in the hands of a shareholder of the lender company.

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