Court rules lending activity not substantial for exclusion under Income Tax Act.

The High Court dismissed the appeal under Section 260A of the Income Tax Act, 1961, regarding the addition of a deemed dividend to the assessee's total income. The court held that the exclusionary clause (ii) of Section 2(22)(e) did not apply as the lending activity was not a substantial part of the lending companies' business. Since the assessee received loans exclusively from these companies and the lending was not a significant aspect of their operations, the court upheld the Assessing Officer's decision to treat the loan as deemed dividend.

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Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Application of exclusionary clause (ii) of Section 2(22)(e) to determine if a loan is made in the ordinary course of business.

Analysis:
1. The case involved an appeal under Section 260A of the Income Tax Act, 1961, regarding the addition of a deemed dividend to the total income of the assessee. The Assessing Officer treated a specific amount as deemed dividend under Section 2(22)(e) of the Act, leading to subsequent appeals and judgments.

2. The exclusionary clause (ii) of Section 2(22)(e) was a crucial aspect in determining whether the loan given to the assessee by two private limited companies qualified as a deemed dividend. The clause requires that the loan must be made in the ordinary course of the company's business, and the lending of money should be a substantial part of the company's business.

3. The High Court emphasized that for the exclusionary provision to apply, the lending of money must constitute a substantial part of the company's business. This determination is based on factual analysis, considering whether the lending activity is a significant aspect of the company's operations.

4. In this case, it was established that the assessee held more than 10% shareholding in the lending companies and received loans exclusively from them. The court found that the lending activity was not a part of the company's business, and it did not constitute a substantial part of their operations.

5. The court clarified that the term 'substantial part of the business' implies a significant involvement in lending activities by the company. The absence of organized lending activities with entities other than the assessee indicated that the exclusionary clause was not applicable in this scenario.

6. Ultimately, the court dismissed the appeal, stating that no substantial question of law arose from the case. The decision was based on the failure to establish that the exclusionary provision of Section 2(22)(e) applied, leading to the restoration of the Assessing Officer's order treating the loan as deemed dividend.

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