Search-based block assessment and deemed dividend principles apply where routed company payments benefit a controlling shareholder.

Search-based material and cash-flow analysis can justify block assessment under Chapter XIV-B where undisclosed income is detected as a result of search, and the special assessment is upheld when the evidence is not from routine scrutiny alone. Payments by a closely held company routed through partnership firms for the controlling shareholder's personal benefit may also be treated as deemed dividend under section 2(22)(e), especially where the factual findings show the firms acted as conduits for the shareholder's investment or benefit. Such factual findings are not to be disturbed unless perverse.

---

---

Issues: (i) Whether the impugned sum could be assessed in block assessment under Chapter XIV-B as undisclosed income detected as a result of search. (ii) Whether the payments routed through the partnership firms to the assessee constituted deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

Issue (i): Whether the impugned sum could be assessed in block assessment under Chapter XIV-B as undisclosed income detected as a result of search.

Analysis: The search yielded the diary and the ensuing cash-flow inquiry that exposed the movement of funds from the company to the firms and then to the assessee for investment in bonds. The material did not arise from a regular scrutiny alone but from search-based detection, and the assessment was made under the special block assessment provisions applicable to undisclosed income found as a result of search.

Conclusion: The amount was rightly brought to tax in block assessment as undisclosed income; the objection to invocation of Chapter XIV-B failed.

Issue (ii): Whether the payments routed through the partnership firms to the assessee constituted deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The controlling shareholder had substantial voting power in the company, the companies were closely held, and the Tribunal found on facts that the payments were routed through the firms as conduits for the assessee's benefit to enable purchase of RBI Relief Bonds. The timing of the payments, the withdrawals from the capital accounts, and the corresponding debit balance supported the conclusion that the transfers were not mere repayments of loans but payments for the assessee's individual benefit. The question whether a payment was for the shareholder's benefit was treated as one of fact, and the High Court ought not to have interfered with a non-perverse factual finding.

Conclusion: The payments were correctly treated as deemed dividend under section 2(22)(e), and the Revenue's case succeeded.

Final Conclusion: The High Court's interference with the Tribunal's factual findings was unwarranted, and the Revenue was entitled to sustain the block assessment on the basis that the routed payments constituted deemed dividend.

Ratio Decidendi: Where search material and connected cash-flow analysis establish that a closely held company's payments were routed through intermediaries for the shareholder's individual benefit, the payments may be assessed as deemed dividend under section 2(22)(e), and factual findings to that effect are not open to interference unless perverse.

---