Deemed dividend can include a temporary shareholder loan from a closely held company when accumulated profits and no business-lending exception are shown.

A loan or advance by a closely held company to a shareholder falls within deemed dividend to the extent of accumulated profits, and its temporary character does not exclude it from section 2(6A)(e) of the Income-tax Act, 1922. The statutory exception applies only if the loan is made in the ordinary course of business and money-lending forms a substantial part of the company's business; those conditions were not proved on the facts. The amount was therefore rightly treated as dividend in the shareholder's hands, and the reference was answered in the affirmative.

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Issues: Whether a temporary loan or advance made by a closely held company to a shareholder can be treated as dividend under section 2(6A)(e) of the Income-tax Act, 1922, and whether the statutory exception for loans made in the ordinary course of business where money-lending is a substantial part of the company's business applies.

Analysis: Section 2(6A)(e) brings within the meaning of dividend any payment by way of advance or loan to a shareholder, to the extent of accumulated profits, and the provision is not confined to permanent distributions. The character of the payment as temporary does not take it outside the clause. The account and the payment of interest showed that the amount was a loan. The exception applies only where both conditions are satisfied: the loan is made in the ordinary course of business and lending of money forms a substantial part of the company's business. On the facts, those conditions were not established.

Conclusion: The sum treated by the revenue was rightly regarded as dividend in the assessee's hands under section 2(6A)(e), and the answer to the reference is in the affirmative.

Final Conclusion: A shareholder's temporary borrowing from a closely held company can fall within deemed dividend if supported by accumulated profits, unless the statutory business-lending exception is proved to apply.

Ratio Decidendi: Under section 2(6A)(e) of the Income-tax Act, 1922, any loan or advance by a closely held company to a shareholder is taxable as dividend to the extent of accumulated profits, irrespective of its temporary character, unless the statutory exception for loans made in the ordinary course of a business substantially consisting of money-lending is satisfied.

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