Deemed dividend cannot be taxed in a non-shareholder company's hands, but lack of inquiry on a liability justified partial revision.

Section 2(22)(e) deemed dividend could not be applied to tax a recipient company that was not itself the registered shareholder, so revision under section 263 was unjustified on the unsecured loan issue. On the alleged bogus liability in the name of Darsh Developers Private Limited, the Assessing Officer had made no inquiry and no effective rebuttal was shown before the Tribunal, so the assessment was vulnerable to revision on that limited point. The revisionary order was therefore upheld only in part, with relief to the assessee on the deemed dividend issue and sustenance of revision on the unexamined liability issue.

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Issues: (i) Whether the revisionary order under section 263 of the Income-tax Act, 1961 could be sustained on the deemed dividend issue under section 2(22)(e) in respect of the unsecured loan received from the concern in which the common shareholder held interest; (ii) Whether the revisionary order under section 263 could be sustained on the issue of the alleged bogus liability in the name of Darsh Developers Private Limited for want of inquiry by the Assessing Officer.

Issue (i): Whether the revisionary order under section 263 of the Income-tax Act, 1961 could be sustained on the deemed dividend issue under section 2(22)(e) in respect of the unsecured loan received from the concern in which the common shareholder held interest.

Analysis: The assessee was not the registered shareholder of the lending company. The material facts were found to be identical to the earlier coordinate bench decision on the same legal question, where it was held that the deeming fiction in section 2(22)(e) applies to the shareholder who has the requisite interest and cannot be extended to tax the recipient company which is not itself the shareholder. On that reasoning, the assessment order was not held to be erroneous or prejudicial to the interests of the Revenue on this issue.

Conclusion: The revision under section 263 was unjustified on the deemed dividend issue and the assessee succeeded on this issue.

Issue (ii): Whether the revisionary order under section 263 could be sustained on the issue of the alleged bogus liability in the name of Darsh Developers Private Limited for want of inquiry by the Assessing Officer.

Analysis: The record showed that this liability was not examined by the Assessing Officer and no satisfactory explanation was placed before the revisionary authority. The issue was also not pressed before the Tribunal with any effective rebuttal. In these circumstances, the failure to make inquiry rendered the assessment vulnerable to revision on this limited aspect.

Conclusion: The revision under section 263 was sustained on the bogus liability issue and the assessee failed on this issue.

Final Conclusion: The Tribunal upheld the revision only in part, reversing it on the deemed dividend question but sustaining it on the unexamined bogus liability issue, resulting in partial relief to the assessee.

Ratio Decidendi: Section 2(22)(e) cannot be invoked to treat a loan as deemed dividend in the hands of a recipient company that is not the shareholder, but revision under section 263 is sustainable where the Assessing Officer failed to make inquiry into a material liability issue causing prejudice to the Revenue.

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