Trade advances are not deemed dividend u/s 2(22)(e). They do not fall within the ambit of the word ‘advance’

Trade advances are not deemed dividend u/s 2(22)(e) as they do not fall within the ambit of the word ‘advance’

Trade advances are not deemed dividend

Circular No. 19/2017

F.No. 279/Misc./140/2015/ITJ
Government of India
Ministry of Finance
Central Board of Direct Taxes

New Delhi, Dated 12th June, 2017

Sub: Settled View on section 2(22)(e) of the Income Tax Act, trade advances -reg.

Section 2(22) clause (e) of the Income  Tax Act,  1961 (the Act) provides that “dividend” includes any payment by a company, not being a company in which the public are substantially interested, of any sum  by  way  of advance or loan to  a  shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits holding not less than ten per  cent of the voting power, or to any  concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated  profits.

2. The Board has observed that some Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22) (e) of the Such views have attained finality.

2.1  Some illustrations/examples of trade advances/commercial transactions held to be not covered under section 2(22)(e) of the Act are as follows:

(i) Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do not to fall within the definition of deemed dividend under section 2(22)(e) of the (CIT vs. Creative Dyeing & Printing Pvt. Ltd. , Delhi High Court).

(ii) Advance was made by a company to its shareholder to install plant and machinery at the shareholder’s premises to enable him to do job work for the company so that the company could fulfil an export order. It was held that as  the assessee proved business expediency, the advance was not covered by section 2(22)(e) of the (CIT vs Amrik Singh, P&H High Court)

(iii) A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22) (e) ofthe Act. (CIT, Agra vs Atul Engineering Udyog, Allahabad High Court)

3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts /Tribunals may be withdrawn/not pressed upon.

4. The above may be brought to the notice of all

5. Hindi version follows.

(Neetika Bansal)
Deputy Secretary to Government of India

Copy to:

  1. The Chairperson, Members and officers ofthe CBDT ofthe rank of Under Secretary and
  2. OSD to Revenue
  3. All Chief Commissioners oflncome-Tax & All Directors General oflncome-Tax with a request to bring to the attention of all officers.
  4. The Comptroller and Auditor General
  5. The Director General oflncome-Tax, NADT, Nagpur.
  6. The DGIT (Systems), ARA Centre, Jhandewalan Extension, New Delhi.
  7. The DGIT (Vigilance), New Delhi.
  8. The ADG (PR. PP & OL) for circulation as per usual mailing
  9. ADG-4 (Systems) for uploading on lTD
  10. Database Cell for uploading on
  11. for uploading on
  12. Hindi section for translation in Hindi
  13. Guard File

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