Circular of CBDT on trade advances not to be deemed dividend under s. 2.22.e. Clear and mandatory instructions to withdraw appeals, not to file appeals, not to make addition, and to rectify orders in accordance with accepted legal position will go a long way in reducing litigation

[CA DEV KUMAR KOTHARI]

Relevant provisions: Section 2 (22) ( e)

Circular No. 19/2017 vide F.No. 279/Misc./140/2015/ITJ Dated 12th June, 2017

Earlier article:

Section 2(22)(e) cannot be invoked in relation to trade, business or other commercial advances paid to shareholders an Article By: - CA DEV KUMAR KOTHARI  published on February 17, 2017

Some of relevant judgments:

COMMISSIONER OF INCOME TAX-I Versus AMRIK SINGH PROP M/s NEXO PRODUCTS INDIA 2015 (8) TMI 1262 - SUPREME COURT

COMMISSIONER OF INCOME TAX Versus M/s CREATIVE DYEING & PRINTING PVT. LTD. - 2009 (9) TMI 43 - DELHI HIGH COURT

COMMISSIONER OF INCOME TAX Versus SHRI RAJ KUMAR - 2009 (5) TMI 17 -  DELHI HIGH COURT

Deputy Commissioner Of Income-Tax. Versus Lakra Brothers. - 2006 (4) TMI 190 - ITAT CHANDIGARH-A

Recent circular:

Recent circular no. 19/2017 vide F.No. 279/Misc./140/2015/ITJ, Dated 12th June, 2017 issued by CBDT is reproduced below with highlights added for analysis:

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) (sic. and)  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. - ([NJRS] 2009-LL-0922-2, ITA No. 2500[2009) = 2009 (9) TMI 43 - 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 - [NJRS] 2015-LL-0429-5, ITA No. 3470[2013 = 2015 (4) TMI 1174 - PUNJAB AND HARYANA 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) of the Act. (CIT, Agra vs Atul Engineering Udyog, Allahabad High Court -  [NJRS] 2014-LL-0926-121, ITA No. 223 0[2011 = 2014 (10) TMI 41 - 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

Observations of author:

Whether, a loan or advance is in nature of deemed dividend or not is essentially a question of fact. In case of commercial advances, there is corresponding obligation of payee to carry out some work, supply goods or render services etc. There is no release of money by the company who pays such sum to shareholder under such arrangements. However, revenue has been disputing the same for long time. In fact matter has been settled by the Supreme Court. The Circular has been issued thereafter only. However, there is no reference to the judgments of the Supreme Court, in which some of judgments referred to in the Circular have been upheld.  For example case of Amrik Singh (supra.)

Circular must have been issued long ago:

It is desirable that CBDT must issue circulars to convey acceptable legal position as soon as possible to avoid un-necessary litigation. This can even be  without any judicial ruling ( say from Tribunal) when it is noticed that some disputes are being raised in assessment which are not desirable. In case of judgment of Tribunal, which are accepted by revenue (in jurisdiction of any Pr. CIT) and appeal is not filed, such accepted judgments of Tribunal must be conveyed by Pr. CIT to CBDT and CBDT can issue circular that on such issues department should not raise further litigation and litigation already initiated should be withdrawn.

Circular must also cover future course of action:

It is desirable that the Circulars must clearly state what is accepted legal position and administrative decision on such issues. 

It is desirable that the Circulars must also cover future course of action like no further addition or disallowance should be made, no further appeal should be filed, appeals already filed must be withdrawn.

Rectification based on accepted legal position should be directed:

The Circular should also provide that in view of accepted legal position, the AO, CIT(A), CIT and Tribunal can consider the matter as rectifiable u/s 154 or 254 as the case may be. If orders passed which are not in accordance with accepted legal position are rectified by concerned authority, there will be lot of reduction in litigation and justice will be rendered expeditiously.

 The Circular under reference cover some of such aspects:

In paragraph 3 the circular provide that henceforth:

appeals may not be filed on this ground by Officers of the Department 

Appeals already filed, in Courts /Tribunals may be withdrawn/not pressed upon.

  The Circular to be fully effective must have

a.  used word ‘shall’ instead of ‘may’

b.  Directed to withdraw appeals on such issues so that pending cases are reduced, legal costs of revenue and assessee are reduced.

c.  Provided for rectification of orders in accordance with accepted legal position.

d.  Provided that on such issues further action adverse to assessee shouldnot be taken by tax authorities by way of additions in assessment, rectification, revision, reassessment and enhancement by CIT(A).

Un-necessary litigation due to suspicion:

On reading of several judgments on the issue we find that in many cases, S.2(22) ( e ) was invoked only because of deep rooted nature of doubting  by revenue authorities, due to which they doubt business transactions and disregard them and take a decision to make addition or disallowances. Really revenue authorities have tendency of doubting genuine transactions of businessman  and making additions and disallowances.

Now it is well recognized that in government departments there is lot of corruption and public money is siphoned by different practices. This is the reason that government officers have tendency to doubt business deals as take decisions adverse to businessman.

The thinking of government officers need to be changed. They must have respect to tax payers , particularly businessman who take initiatives to commence a business, provide employment to others, take risks of business. They must also recognize that in business “HONESTY IS THE BEST POLICY”  is well recognized and followed.

The government officers do not act properly and always doubt businessman and that is a possible reason of some cases of tax avoidance. It is unfortunate that a taxpayer who is regularly paying huge amount of tax is doubted for small tax avoidance.

Earlier article:

In earlier article author had discussed in details some of case laws, readers may refer the same and other judgments on this issue available on this website.