Case Note & Summary
The dispute arose under Section 260A of the Income-tax Act, 1961 against an order of the Income-tax Appellate Tribunal, Pune Bench, dated 31 March 2003, which had dismissed the assessee's appeal and confirmed the treatment of an advance of Rs. 71 lakh as deemed dividend under Section 2(22)(e). The assessee was the managing director and a substantial shareholder in Ghatge Patil Industries Limited, a company engaged in manufacturing castings and components. The assessee's proprietary concern, J. B. Patil & Sons (Engineering Division), had continuous business transactions with the company and received job work orders. The company had received a large order from Tata Engineering and Locomotives Company Limited exceeding Rs. 9 crores, and the assessee claimed outstanding orders of Rs. 73,58,973 as of 26 December 1997. The assessee requested an advance of Rs. 71 lakh against pending orders to meet a tax payment deadline of 30 December 1997. The company granted the advance on 26 December 1997. However, the Assessing Officer found from bank records that the assessee had paid Rs. 70,80,000 on the same day towards taxes under the Kar Vivad Samadhan Scheme for assessment year 1995-96, not for execution of any job work. The advance was repaid in part on 8 and 11 February 1998 totaling Rs. 69,05,920, within the same financial year. The Assessing Officer passed an assessment order under Section 143(3) on 29 March 2001 treating the entire advance as deemed dividend under Section 2(22)(e). The Commissioner of Income-tax (Appeals), Kolhapur, confirmed this by order dated 27 September 2001, and the ITAT dismissed the assessee's further appeal. The present appeal was admitted on 22 November 2004 on the substantial question of law whether a business advance against pending orders and repaid within two months could be deemed dividend. Before the High Court, the assessee contended that the advance was a genuine business advance under a running account, that actual utilization for a specific job work was immaterial, and that Circular dated 12 June 2017 excluded business advances from deemed dividend. The Revenue argued that all ingredients of Section 2(22)(e) were satisfied, that the assessee admitted using the advance for tax payment, that the advance was a personal benefit, and that repayment in the same year did not matter, relying on Smt. Tarulata Shyam v. Commissioner of Income-tax. The court extracted Section 2(22)(e) and noted undisputed facts that the assessee held more than 10% voting power in the company and had received the advance. The court observed that the Assessing Officer had recorded findings that the amount was not used for business but for payment of personal income tax under KVSS. The provided excerpt ends without recording the final operative order of the High Court, but the lower authorities had consistently held that the advance constituted deemed dividend because it was not utilized for business purposes.
Headnote
A) Income Tax - Deemed Dividend - Business Advance - Section 2(22)(e), Income-tax Act, 1961 - The appeal concerned whether an advance of Rs. 71 lakh granted by Ghatge Patil Industries Limited to its substantial shareholder and managing director against pending orders could be treated as deemed dividend when the assessee admitted receipt of the advance to meet a deadline for payment of taxes by 30 December 1997 and the Assessing Officer found that the advance was utilized on 26 December 1997 to pay Rs. 70,80,000 towards taxes under Kar Vivad Samadhan Scheme, not for execution of any job work. The court extracted Section 2(22)(e), noting that it deems any payment by a company to a beneficial shareholder holding at least 10% voting power as dividend to the extent of accumulated profits, irrespective of the purpose stated by the parties. The Assessing Officer and CIT(A) held that the advance was a temporary loan for personal tax liability and not a business advance, and the ITAT confirmed that treatment. The substantial question of law admitted was whether a business advance repaid within two months could still be deemed dividend. Held that the advance must be assessed on actual utilization and not merely on the label of business advance; the admitted use for payment of income tax under KVSS supported the lower authorities' conclusion that the payment fell within Section 2(22)(e) as a deemed dividend (Paras 1-14).
Issue of Consideration
Whether a business advance of Rs. 71 lakh granted by a company to its shareholder against pending orders and repaid within two months constituted deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961 when the advance was actually used for payment of personal income tax under Kar Vivad Samadhan Scheme and not for execution of job work.
Law Points
- Advance by company to shareholder holding not less than 10% voting power is deemed dividend if made out of accumulated profits irrespective of business purpose unless actual business utilization established
- repayment in same financial year does not negate deemed dividend
- Circular dated 12 June 2017 excludes business advances but actual utilization remains relevant
- Section 2(22)(e) applies to payments to shareholder or concern with substantial interest
