Tribunal Confirms Rs. 6 Lakh Addition as Deemed Dividend; Lending Not Key Business of Company, Appeal Dismissed.

The Tribunal upheld the decision of the CIT(A) and the AO, confirming the addition of Rs. 6 lakhs as deemed dividend under section 2(22)(e) of the Income Tax Act to the assessee's income. The Tribunal determined that the lending of money was not a substantial part of M/s. Avanti Overseas Pvt. Ltd.'s business, as the income from interest and lease rental constituted only a small percentage of the company's total turnover and net profit for the relevant year. Consequently, the loan could not be excluded from being deemed a dividend, and the assessee's appeal was dismissed.

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Issues Involved:
1. Addition of Rs. 6 lakhs as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Determination of whether the lending of money was a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd.

Detailed Analysis:

1. Addition of Rs. 6 lakhs as deemed dividend under section 2(22)(e):

The assessee, holding more than 10% shares in M/s. Avanti Overseas Pvt. Ltd., received a loan of Rs. 6 lakhs from the company. The Assessing Officer (AO) treated this loan as deemed dividend under section 2(22)(e) of the Income Tax Act, as the company had adequate accumulated profits. The AO determined that the main business of the company was not money-lending, thus the loan could not be excluded from being deemed dividend under the exception provided in sub-clause (ii) of section 2(22)(e).

The CIT(A) upheld the AO's decision, confirming the addition of Rs. 6 lakhs to the total income of the assessee. The CIT(A) reasoned that the company's primary business was export, and the income from money-lending was minimal compared to the total income, thus not constituting a substantial part of the business.

2. Determination of whether the lending of money was a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd.:

The assessee argued that the lending of money was a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd., and hence, the loan should not be treated as deemed dividend. The assessee provided figures showing that income from lease rent and interest was a significant portion of the company's total profits over the last ten years.

However, the CIT(A) and the Tribunal found that only the figures for the relevant year should be considered. The Tribunal noted that the gross receipts from interest and lease rental were only 2.26% of the total turnover for the year under consideration, and the net income from these activities was only 16.25% of the total net profit. Thus, the money-lending business did not constitute a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decision, stating that the condition stipulated in sub-clause (ii) of section 2(22)(e) was not satisfied, and the loan was rightly treated as deemed dividend. The appeal by the assessee was dismissed.

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