Trade advances for software services are outside deemed dividend under Section 2(22)(e) when linked to genuine business transactions.

Amounts received from a sister concern for software testing and development in the ordinary course of business were not treated as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The factual record showed that the payments were made for commercial services and were later adjusted against bills raised by the assessee, indicating a trade transaction rather than a loan or advance. The court also relied on the settled principle that trade advances arising from genuine business dealings fall outside deemed dividend, consistent with CBDT Circular No. 19/2017 clarifying that Section 2(22)(e) does not apply to commercial transactions.

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Issues: Whether amounts received from a sister concern towards software testing and development in the regular course of business could be treated as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The concurrent factual findings of the lower authorities were that the payments were made for software testing and development and were subsequently adjusted against bills raised by the assessee, showing a normal business arrangement rather than a loan or advance. The Court also relied on the settled position that trade advances arising from commercial transactions do not fall within the ambit of deemed dividend, and noted the Central Board of Direct Taxes Circular No.19/2017 dated 12.06.2017 clarifying that Section 2(22)(e) does not apply to trade advances or commercial transactions.

Conclusion: The receipts were not liable to be treated as deemed dividend under Section 2(22)(e), and the question was answered in favour of the assessee.

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