Advance received by Managing Director / shareholder held deemed dividend u/s 2(22)(e) though repaid within two months.
In a recent judgment Hon’ble Bombay High Court has upheld that business advance received by the Managing Director/shareholder of the company though repaid within two months constituted “deemed dividend” within the meaning of section 2(22)(e) of the Income Tax Act, 1961 (the Act). The purpose for which the advance is utilized is important not the purpose for which the advance is made.
ABCAUS Case Law Citation:
4693 (2025) (08) abcaus.in HC
Important Case Laws relied upon by Parties:
CIT Versus. Creative Dyeing and Printing P. Ltd.
In the instant case, the appellant assessee had challenged the order passed by the ITAT in upholding the order of the Assessing Officer (AO) treating the advance granted to the Assessee by the company as a deemed dividend under Section 2(22)(e) of the Act and brought the same to tax.
The issue involved in the instant tax appeal was whether a business advance granted by a Company to its shareholder, who does not actually utilize the said advance for execution of job work for the company can be treated as deemed dividend under Section 2(22)(e) of the Act?
The assessee was the Managing Director and a substantial shareholder in a company. The assessee had a proprietary concern which normally do the job work for the company. The proprietary concern had a running account with the company and there were continuous business transactions between the Assessee and the company in the course of the business.
The said company received a very large order for which job work was to be done by the said proprietary concern of the assessee. The assessee requested for an advance from the company against pending expected orders and during the relevant Assessment Year the company gave the advance in question to the assessee.
However, the said order did not materialised and the said transaction got cancelled. The assessee returned the said advance within two months in the same financial year.
Before the AO the assessee claimed that the advance was received by him in the course of business and was returned in the same financial year. However, the Assessing Officer passed assessment order under Section 143(3) of the Act treating the said advance as deemed dividend under Section 2(22) (e) of the Act and brought the same to tax.
The CIT(A) and ITAT confirmed the orders of Assessing Officer.
Before the Hon’ble High Court the assessee submitted that advance taken for business purposes cannot be treated as deemed dividend under provisions of Section 2(22)(e) of the Act. That the order passed by the ITAT acknowledged the position that the advance was taken for business purposes. That such advance taken for business purposes need not be proved to be actually utilized for execution of a particular business transaction.
It was further submitted that assessee had series of business transactions with the company and parties had maintained a running account. The Assessee was performing job works for the company which had not been disputed in any of the impugned orders. Therefore advance paid to the assessee for business purposes need not be demonstrated to having been spent on execution of any particular job work. That if parties have running business account, even if amount of advance was used for some other purpose, the same would still constitute a business advance and cannot amount to deemed dividend under Section 2(22)(e) of the Act.
It was contended that once it was accepted that the advance was granted for job work, how it was actually spent is immaterial. Therefore, even if, it was assumed that the amount of advance was used for payment of personal Income tax, the same would not convert the amount of such advance as deemed dividend. That Section 2(22)(e) applies only when a shareholder, who had no business dealing with the company, receives an advance.
It was also submitted that the case was squarely covered by the CBDT Circular No. 19/2017 dated 12 June 2017 issued after taking into consideration ratio of several judgments. That Circular provides for exclusion of advances made to shareholders, which are granted for business purposes, from being treated as deemed dividend.
The Hon’ble High Court noted that the assessee had not disputed the position that he had utilized the amount of advance for payment of personal Income-tax under Kar Vivad Samadhan Scheme (KVSS).
The Hon’ble High Court also noted that the ITAT recorded one finding in favour of the Assessee that the money in question was received as advance in connection with execution of machining job work by the Assessee. However, the ITAT held that the Assessee did not utilize the said advance for executing the machining job work.
The Hon’ble High Court opined that CBDT Circular 19/2017 applies only in case where the advance/loan is actually utilized for the purpose of job work. The Circular was issued after taking note of judgments in the past holding that trading advances in nature of commercial transactions would not fall within the ambit of provisions of Section 2(22)(e) of the Act. The Circular gives 3 illustrations. The first illustration is about advance made by a company to a sister concern, which is adjusted against the dues for job work done by that sister concern. The second illustration is about advance made by a company to its shareholder to install plant and machinery at shareholder’s premises to enable him to do job work for the company, so that the company could fulfill an export order. The third illustration is about the floating security deposit given by a company to its sister concern against the use of electricity generators belonging to the sister concern.
The Hon’ble High Court pointed out that the common thread that runs in all three illustrations cited in the said Circular is that the amount of loan/advance is actually utilized by the sister concern/shareholder for execution of the job work, or for installation of plant and machinery, or for actual use of electricity generators. Thus, utilization of advance for execution of a particular business transaction is a sine qua non for exclusion of the amount of loan or advance from the ambit of Section 2(22)(e) of the Act. Therefore, the key is not the purpose for which the advance is made. The real key is the purpose for which the advance is utilized. It needs to be demonstrated by the sister concern or shareholder that the advance made for business transaction is actually utilized for execution of such business transaction.
The Hon’ble High Court further observed that in view of the Hon’ble Supreme Court decision, mere repayment of the advance within the same financial year does not make the case of the assessee any better. It was held by the Apex Court that even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed as a “dividend” if the other conditions factually exist.
The Hon’ble High Court distinguished the judgments of Punjab and Haryana High Court and Delhi High Court relied upon by the assessee. In all those cases, the amount of advance was utilized for actual execution of business transaction, which element was absent in the present case.
The Hon’ble High Court also held that mere maintenance of running account by the Assessee with the company or demonstration by the assessee of continuous business transactions between the Assessee and the company cannot be a reason enough for drawl of an inference that the amount of advance was actually utilized for execution of business transaction. On the other hand, there was specific admission on the part of the assessee that the amount of advance was utilized for payment of Income-tax by the assessee.
Accordingly, the question of law was answered against the assessee and in favour of the Revenue. Resultantly, the appeal was dismissed.
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