2026 (1) TMI 451 - AT - Income Tax

Closely held company payments as trade advances vs deemed dividend under s. 2(22)(e); addition set aside for fresh verification.

The dominant issue was whether amounts received by an assessee from a closely held company were taxable as deemed dividend under s. 2(22)(e) on the basis ... Deemed dividend u/s 2(22)(e) - company advanced to the assessee from the accumulated profits in the reserves and surplus account - AO was of the opinion that the loan received by the assessee falls within the purview of Section 2(22)(e) HELD THAT:- CIT(A) extracted the CBDT Circular No. 19/2017 dated 12-06-2017 wherein it was categorically held that trade advances in the nature of commercial transaction would not fall within the ambit of the provisions of Section 2(22)(e) of the Act relying upon various High Court judgments. Therefore in our considered view, CIT(A) is not correct in stating that confirming the addition u/s. 2(22)(e) of the Act. However to meet the ends of justice, we deem it fit to set-aside the matter back to the file of Jurisdictional Assessing Officer with a direction to the assessee to produce the copies of the loan repaid by the assessee in the subsequent year and the A.O. is directed to pass fresh order. Appeal filed by the Assessee is allowed for statistical purpose. Issues: (i) Whether the loan/advance of Rs. 56,09,615/- received by the shareholder-director is taxable as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.Analysis: The appeal challenges confirmation of addition treating the transaction as deemed dividend under Section 2(22)(e). The record shows the company had accumulated profits from which the advance was made and that there were mutual financial accommodations between the shareholder-director and the company, including repayments in other years. The Tribunal noted the relevance of CBDT Circular No. 19/2017 which clarifies that trade advances in the nature of commercial transactions do not fall within the ambit of Section 2(22)(e). Given that the lower authorities did not accept the assessee's explanation or evaluate supporting evidence of the commercial nature and subsequent repayment, the Tribunal found it inappropriate to sustain the addition without fresh factual adjudication by the Assessing Officer.Conclusion: The matter is set aside to the Assessing Officer for fresh consideration of the assessee's submissions and documentary evidence on the nature of the transaction; the appeal is allowed for statistical purposes and the confirmation of addition is not sustained at this stage. The result is in favour of the assessee.Ratio Decidendi: Where a shareholder-director advance is claimed to be a commercial trade transaction and there is evidence of mutual financial accommodation and repayments, the characterization as deemed dividend under Section 2(22)(e) cannot be sustained without fresh factual enquiry; trade advances in the nature of commercial transactions fall outside Section 2(22)(e) as clarified by CBDT Circular No. 19/2017.