Deemed dividend exclusion applies where money-lending is a substantial business and the shareholder loan is advanced in ordinary course.

A shareholder's loan was held outside deemed-dividend treatment where the company showed that money-lending formed a substantial part of its business and the advance was made in the ordinary course of that business. The record reflected repeated advances across assessment years, receipt of interest, prior assessments treating that interest as business income, and a shift from factory operations to lending activity. On that material, the advance was treated as part of the company's money-lending business rather than a disguised dividend distribution. A belated affidavit was rejected, but the existing record was sufficient. The addition on deemed-dividend footing was deleted.

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Issues: Whether the loan advanced by the company to the shareholder was exempt from deemed-dividend treatment under section 2(6A)(e) of the Indian Income-tax Act, 1922 because the lending of money formed a substantial part of the company's business and the advance was made in the ordinary course of that business.

Analysis: The record showed that the company had repeatedly advanced money in several assessment years, had received interest on such advances, and its assessments for earlier years treated the interest as business income. The company's business profile also changed over time, with the factory operations closing and the proceeds being deployed in lending activities. On this material, the advance in question was found to have been made as part of the company's money-lending business rather than as a dividend distribution disguised as a loan. The request to rely on a belated affidavit was declined, but the existing record was held sufficient to decide the issue.

Conclusion: The assessee was entitled to the benefit of the exclusion in section 2(6A)(e), and the amount of Rs. 52,617 could not be assessed as deemed dividend.

Final Conclusion: The addition made on the footing of deemed dividend was deleted and the assessee succeeded in the appeal.

Ratio Decidendi: A shareholder's loan is excluded from deemed-dividend treatment where the company proves that money-lending is a substantial part of its business and the advance was made in the ordinary course of that business.

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