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2025 Supreme(Bom) 1105
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ALOK ARADHE, CJ, SANDEEP V. MARNE, J.
Jaykumar B. Patil (Deceased) through L/H Shri Nitin J. Patil - Appellant
Versus
Joint Commissioner of Income Tax, Kolhapur - Respondent
Income Tax Appeal No. 669 of 2003
Decided On : 07-08-2025
Advocate Appeared:
For the Appellants : R.S. Padvekar, Tanzil Padvekar, Tejal P. Kharkar
For the Respondent: Arjun Gupta
Business advances must be utilized for their intended purpose; failure to do so results in classification as deemed dividends under Section 2(22)(e) of the Income Tax Act.
Headnote:(A) Income Tax Act, 1961 - Section 260A and Section 2(22)(e) - Deemed dividend - Appellant challenged ITAT's order treating advance from a company as deemed dividend - ITAT confirmed lower authority's findings due to non-utilization for job work - The circular dated 12 June 2017 clarifying that business advances used for unrelated purposes do not qualify for exclusion under section 2(22)(e) - Key findings included concurrent affirmations regarding the advance being utilized for personal tax liabilities rather than business operations. (Paras 10, 18, 24)
(B) The court emphasized that mere maintenance of a running account does not justify the exclusion of treated advances from deemed dividends if not used for the intended business purposes. (Paras 25, 26)
Facts of the case:
The Assessee received an advance of Rs. 71 lakh from GPIL in December 1997, claimed for business transactions but was used for tax payments. The advance was returned shortly after, leading to tax disputes.
Findings of Court:
The Appellate Tribunal confirmed the nature of the advance as deemed dividend due to its non-utilization for business transactions, upholding assessments across multiple levels.
Issues: The primary issue concerned whether the business advance can be considered deemed dividend under the provisions of section 2(22)(e) when not utilized for job work.
Ratio Decidendi: The Court ruled that the purpose of the advance must align with its utilization; non-utilization for business transactions legitimizes the deemed dividend classification under Section 2(22)(e).
Result: Appeal dismissed.
| Table of Content |
|---|
| 1. appeal challenges deemed dividend classification. (Para 1 , 2) |
| 2. factual background of advance from gpil. (Para 3 , 4) |
| 3. assessee's arguments against deemed dividend. (Para 5 , 6) |
| 4. revenue's counterarguments regarding dividends. (Para 7) |
| 5. overview of disputed tax law provisions. (Para 9 , 10) |
| 6. court's observations on advance utilization. (Para 11 , 12 , 14) |
| 7. interpretation of circular on trade advances. (Para 15 , 16) |
| 8. court distinguishes cases of business utilization. (Para 17 , 18) |
| 9. legislative intent on advances and repayments. (Para 19 , 20) |
| 10. examination of precedents regarding dividend classification. (Para 21 , 22 , 23 , 24) |
| 11. final considerations on the facts and law. (Para 25 , 26) |
| 12. appeal dismissed; ruling on deemed dividend upheld. (Para 27) |
JUDGMENT :
SANDEEP V. MARNE, J.
1. By this Appeal filed under the provisions of Section 260A of the Income-tax Act, 1961 (the Act), the Assessee challenges Order dated 31 March 2003 passed by the Income-Tax Appellate Tribunal, Pune Bench, Pune (ITAT) in ITA No. 49/PN/2002. The ITAT has dismissed the appeal of the Assessee and has confirmed the order of Commissioner of Income-tax (Appeals), Kolhapur [CIT(A)] who in turn had upheld the order of the Assessing Officer treating the advance granted to the Assessee by the company as a deemed dividend under Section 2(22)(e) of the Act and brought the same to tax.
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 tune of Rs. 1.18 crores. According to Assessee, the value of orders outstanding upto 26 December 1997 was Rs. 73,58,973/-.
4. The Assessee requested for an advance from GPIL against pending expected orders as he had to meet a deadline for payment of taxes by 30 December 1997. GPIL gave an advance of Rs. 71 lakh to the Assessee on 26 December 1997. It appears that TELCO did not go ahead with the orders placed with GPIL and the said transaction got cancelled. Assessee returned the advance of Rs. 71 lakh to GPIL on 11 February 1998 i.e. in the same financial year. The Assessee claims that the advance was received by him in the course of business and was returned in the same financial year. However, the Assessing Officer made an assessment order under Section 143(3) of the Act on 29 March 2001 treating the advance taken by the Assessee from GPIL as deemed dividend under Section 2(22) (e) of the Act and brought the same to tax. The Assessee preferred appeal before CIT(A) who substantially agreed with views of the Assessing Officer and confirmed treatment of the advance as deemed dividend vide order dated 27 September 2001. The Assessee preferred further appeal before ITAT, which has confirmed the orders of Assessing Officer and CIT(A). The Assessee has accordingly preferred the present appeal which came to be admitted by order dated 22 November 2004 on following substantial question of law :-
“Whether o
