Deemed dividend exclusion applies where shareholder loans arise in ordinary money-lending business and interest is actually paid.

Loans advanced to a shareholder were held outside deemed dividend treatment because the lender's money-lending activity formed a substantial part of its business and the advance fell within the ordinary course of that business; the borrower also paid interest, supported by TDS certificates and ledger entries, showing no gratuitous benefit. On those facts, the addition under section 2(22)(e) was unsustainable. The High Court further found that the Tribunal's conclusions were factual and disclosed no substantial question of law under section 260A, so the revenue's challenge failed and the deletion of the addition was left undisturbed.

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Issues: (i) Whether loans advanced to a shareholder were taxable as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, where the lender's money-lending activity constituted a substantial part of its business and interest was paid on the borrowings. (ii) Whether, on the facts found by the Tribunal, any substantial question of law arose for consideration in the revenue's appeal under section 260A of the Income-tax Act, 1961.

Issue (i): Whether loans advanced to a shareholder were taxable as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, where the lender's money-lending activity constituted a substantial part of its business and interest was paid on the borrowings.

Analysis: The Tribunal found that the assessee had paid interest on the borrowed sums, supported by TDS certificates and ledger entries, and therefore had not derived any gratuitous benefit from the company. It further noted that the lender carried on money lending as a substantial part of its business, bringing the transaction within the statutory exclusion for advances made in the ordinary course of business. On these facts, the advance was held to fall outside the mischief of deemed dividend.

Conclusion: The loan transactions were not chargeable as deemed dividend under section 2(22)(e) and the addition was unsustainable.

Issue (ii): Whether, on the facts found by the Tribunal, any substantial question of law arose for consideration in the revenue's appeal under section 260A of the Income-tax Act, 1961.

Analysis: The findings recorded by the Tribunal were factual, consistent with the assessee's earlier year's case, and based on the statutory exclusion applicable to business advances in a money-lending business. In the absence of any contrary material, the appeal did not disclose a debatable legal issue warranting interference.

Conclusion: No substantial question of law arose for determination.

Final Conclusion: The revenue's challenge failed and the Tribunal's deletion of the addition was left undisturbed.

Ratio Decidendi: A loan advanced to a shareholder is not deemed dividend where it is advanced in the ordinary course of a lender's business and lending money forms a substantial part of that business, especially when the borrower pays interest and receives no gratuitous benefit.

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