Deemed dividend provisions do not apply to a non-shareholder concern merely because of common beneficial shareholding.

A loan or advance to a concern cannot be taxed as deemed dividend under section 2(22)(e) unless the recipient itself is a shareholder in the lender company with the requisite beneficial interest. Common shareholding through the same individual is not enough to attract the provision in the hands of a non-shareholder concern. On that interpretation, the deemed-dividend addition was held unsustainable and deleted in favour of the assessee.

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Issues: Whether a loan advanced to a concern, which was not a shareholder in the lender company, could be taxed as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 merely because the same individual was a beneficial shareholder in both entities.

Analysis: The provision covers loans or advances to a shareholder who is a beneficial owner of requisite voting power, and also to a concern in which such shareholder has the prescribed interest. On the facts, the assessee was not a shareholder in the lender company, even though the common individual shareholder held substantial interest in both companies. The issue was governed by the settled interpretation that deemed dividend cannot be assessed in the hands of a non-shareholder concern merely because of common shareholding linkage.

Conclusion: The addition under section 2(22)(e) of the Income-tax Act, 1961 was not sustainable and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded and the impugned deemed-dividend addition was deleted.

Ratio Decidendi: A loan or advance cannot be treated as deemed dividend in the hands of a recipient concern unless the recipient itself is a shareholder in the lender company; the existence of a common beneficial shareholder is insufficient by itself.

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