TaxTMI 
TaxTMI 
2025 (8) TMI 845
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....ax. 2) The issue involved in the present appeal is 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 ? 3) A brief factual background under which the appeal arises is narrated thus : The Assessee was the Managing Director and a substantial shareholder in Ghatge Patil Industries Limited (GPIL), which is company engaged in the business of manufacturing castings and other components. Tata Engineering and Locomotives Company Limited (TELCO) was amongst the major customers of GPIL, who used to place orders on J. B. Patil & Sons (Engineering Division), which was the proprietary concern of the Assessee. According to Assessee, he had a running account with GPIL and there was continuous business transactions between the Assessee and GPIL. GPIL had received a very large order from TELCO exceeding Rs. 9 crores. The value of machining charges and castings to be supplied by the Assessee to GPIL was to the tune of Rs. 5.66 crores and the total value of orders already placed by GPIL with the Assessee was to the....
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....disputed in any of the impugned orders. That therefore advance paid to the Assessee by the GPIL 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 is 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. That once it is accepted that the advance was granted for job work, how it is actually spent is immaterial. That therefore even if, it is assumed that the amount of advance is used for payment of 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 has no business dealing with the company, receives an advance. That the provision has no application in a case of a shareholder is running business account with the company. 6) Mr. Padvekar would further submit that the present case is squarely covered by the Circular dated 12 June 2017 issued after taking into consideration ratio of several judgments. That Circular provides for exclusion of advances made to sharehol....
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....tion in the present appeal is whether the advance of Rs. 71 lakh granted by GPIL to the Assessee can be treated as deemed dividend under provisions of Section 2(22)(e) of the Act. Provisions of Section 2(22)(e) of the Act are extracted below for facility of reference:- (22) 'dividend' includes: (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, 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; 10) There is no dispute to the positio....
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....o Rs. 69,05,920/- was returned back to GPIL on 8th & 11th February, 1998. Therefore, the payment of Rs. 71 lakhs by GPIL to M/s. J.B. Patil & Sons (Engg. Div.) cannot be said to be business advance as claimed by assessee." 13) The Assessee has not disputed the position that he has utilized the amount of advance for payment of Income-tax under Kar Vivad Samadhan Scheme (KVSS). In fact, the Appeal Memo, Assessee has specifically contended as under:- "Since the Appellant had a deadline to meet for payment of taxes by 30/12/1997, he asked for an advance against the pending and expected orders from GPI." 14) In Appeal, CIT(A) refused to believe the story put forth by the Assessee that the advance was received to execute orders received from GPIL for supply of motor parts of TELCO. The CIT(A) has recorded following findings:- "21. During the course of appellate proceedings Shri Deshpande and Shri Kulkarni were requested to co-relate the advance given to the appellant by M/s. Ghatge Patil Industries Ltd. Inquires were made by the undersigned with M/s. Ghatge Patil Industries Ltd. and information received from them were furnished to the appellant for his comments al....
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....n 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 ITAT held as under:- "The money in question was received as advance in connection with execution of machining job work by the assessee. It is undisputed that the assessee did not at the time of receipt of advance execute this machining job work. This money which was legally due to the assessee only after execution of the machining job work had been received ahead of the time when it is due to be paid. The expression 'advance' used in sec. 2(22)(e) would cover an advance of this nature. Therefore, all the conditions laid down u/s. 2(22)(e) are fulfilled in the present case and the revenue authorities were justified in treating the amount in question as dividend in the hands of the assessee." 16) Much is sought to be made out of the finding recorded by the ITAT that the money in question was received as advance in connection with execution of machining job work by the Assessee. It is contended that once the purpose of receipt of advance is accepted as busine....
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....22)(e) of the Act. (CIT vs Amrik Singh, P&H High Court) [NJRS] 2015-LL-0429-5, ITA No. 347 of 2013. iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. 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) of the Act. (CIT. Agra vs Atul Engineering Udyog, Allahabad High Court) [NJRS] 2014-LL-0926-121, ITA No. 223 of 2011. 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. 17) In our view, the Circular dated 12 June 2017 applied only in c....
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....of any job work for GPIL. In our view, therefore, the amount of the said advance has rightly been treated as deemed dividend under provisions of Section 2(22)(e) of the Act. 20) Mere repayment of the advance within the same financial year does not make the case of the Assessee any better. The Apex Court has dealt with issue of return of advance in same Previous Year in Smt. Tarulata Shyam Versus. Commissioner of Income-tax (supra). The issue before the Apex Court is formulated in the judgment as under:- "Whether any payment by a company not being a company in which the public are substantially interested within the meaning of section 23 A, of any sum by way of advance or loan to a shareholder, not exceeding the accumulated profits possessed by the company is to be deemed as his dividend under section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922, even if that advance or loan is subsequently repaid in its entirety during the relevant previous year in which it was taken, is the only question that falls to be determined in this appeal by special leave." 21) The Apex Court has answered the question by holding as under:- "In our opinion, th....
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....n had proved a tangible business expediency between the Assessee and the company. On the other hand, the Assessee, himself has admitted in the present case, that he has utilized the amount of advance for payment of Income-tax under KVSS. 23) The Assessee has relied on judgment of Delhi High Court in CIT Versus. Creative Dyeing and Printing P. Ltd. (supra) in which the amount of advance was utilized for expansion of plant and machinery by the Assessee-Company and in the light of that position, the Delhi High Court held that the transaction in question was a business transaction, which had benefited both the Assessee as well as the Company granting the advance. In the present case, the amount of advance was not utilized for purposes of any job work for GPIL and therefore there is no question for GPIL benefiting from such advance. The advance on the contrary is utilized for discharge of personal liability of Income-tax by the Assessee. The judgment in CIT Versus. Creative Dyeing and Printing P. Ltd., therefore, has no application to the facts of the present case. 24) We have also gone through the judgments in CIT Versus. Raj Kumar (supra), CIT Versus. Deepak Vegpro Pvt Ltd. (sup....