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Issues: Whether unsecured loans advanced by a closely held company to its director could be excluded from deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 on the footing that lending of money was a substantial part of the company's business and the advance was made in the ordinary course of such business.
Analysis: The company and the assessee did not hold a money-lending licence, no income from money-lending activity was shown, and the balance-sheet revealed that the assessee had taken a substantial portion of the company's available loan funds. The claimed interest receipt was inconsistent with the record, and the surrounding facts did not show that lending of money formed a substantial part of the company's business. The exception in clause (ii) of section 2(22)(e) therefore was not attracted. The payment satisfied the ingredients of deemed dividend, and the absence of any basis to disturb the concurrent findings of the authorities below supported the addition.
Conclusion: The loan amount was correctly treated as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, and the addition was sustained.
Ratio Decidendi: To escape the mischief of section 2(22)(e), the assessee must establish that lending of money was a substantial part of the company's business and that the advance was made in the ordinary course of that business; absent such proof, a loan to a substantial shareholder/director is taxable as deemed dividend to the extent of accumulated profits.
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