1. Appeal against ITAT order holding advance from sister concern not deemed dividend under Section 2(22)(e). (Para 1 , 2 )
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2026 Supreme(Online)(Mad) 13186
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Anita Sumanth, Mummineni Sudheer Kumar, JJ
Commissioner of Income Tax – 1, Chennai – Appellant
Versus
Ready Test Go Pvt. Ltd – Respondent
T.C.A.No.303 of 2011
Advocates:
For the Appellants/Petitioners: Harshini, V. Pushpa
For the Respondents: Vijaya Raghavan
For the Appellants/Petitioners: Harshini, V. Pushpa
For the Respondents: Vijaya Raghavan
Trade advances and commercial transactions made in the ordinary course of business between business entities do not fall within the ambit of 'loan' or 'advance' under Section 2(22)(e) of the Income-Tax Act, 1961 and therefore cannot be treated as deemed dividends.
Headnote:(A) Income Tax - Deemed Dividend - Section 2(22)(e) - Trade advances and commercial transactions made in the ordinary course of business, such as payments for software testing and development adjusted against bills, do not constitute a 'loan' or 'advance' for the purpose of deemed dividends. (Para 5, 9)
(B) Statutory Interpretation - CBDT Circulars - Circular No. 19/2017 clarifies that trade advances in the nature of commercial transactions are not covered under Section 2(22)(e) of the Act, following decisions of various Courts that have attained finality. (Para 9, 10)
Issues: Whether advances received from a sister concern in the ordinary course of business amount to deemed dividend under Section 2(22)(e) of the Income-Tax Act, 1961.
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Table of Contents
2. Revenue argued advance was deemed dividend; assessee contended it was business transaction and not shareholder. (Para 3 )
3. Court held normal business transactions do not constitute loan or advance within Section 2(22)(e). (Para 9 )
4. Trade advances in ordinary course of business are not deemed dividend under Section 2(22)(e) of the Act. (Para 10 )
5. Tax case appeal dismissed; questions answered in favor of assessee. (Para 11 )
6. Whether advances from sister concern in ordinary course of business constitute deemed dividend under Section 2(22)(e)?
No, trade advances or commercial transactions in ordinary course of business are not deemed dividend under Section 2(22)(e) of the Act. (Para 5 , 7 , 8 , 9 , 10 , 11 )
7. Whether the assessee must be a shareholder in the lender company for Section 2(22)(e) to apply?
Yes, Section 2(22)(e) applies only when the assessee is a shareholder in the lending company, and not otherwise. (Para 3 , 6 , 7 )
8. Can the CBDT circular No.19/2017 be relied upon to exclude trade advances from deemed dividend?
Yes, CBDT Circular No.19/2017 clarifies that trade advances or commercial transactions are not covered under Section 2(22)(e) and such views have attained finality. (Para 9 , 10 )
Prayer : Appeal filed under Section 260A of the Income-Tax Act, 1961 against the order of the Income-Tax Appellate Tribunal, Chennai ‘C’ Bench dated 10.02.2011 made in ITA 1016/Mds/2010 for assessment year 2006 – 07.
JUDGMENT
(Delivered by DR. ANITA SUMANTH, J)
This is a Tax Case (Appeal) filed by the Revenue for assessment year 2006 – 07 and has been admitted on 17.08.2011 on the following two questions of law:-
(i) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the advance of Rs.8,32,31,520/- received by the assessee from its sister concern in which the Directors of the assessee company were substantially interested would not amount to deemed dividend within the meaning of Section 2(22)(e) of the Act?
(ii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that such advances could not be treated as loan/advance within the meaning of section 2(22)(e) on the ground that they were made in the ordinary course of business, without appreciating that there was no such exclusion from the meaning of “advance” occurring in Section 2(22) (e) of the Act for amount paid to the assessee far ahead of the time at which the amounts were due to be paid?
2. The assessee/respondent had filed a return in time. While completing the assessment, the assessing authority noted that the assessee had received a sum of Rs.8,32,31,520/- from its sister concern Cybernet Software Systems (CSS) and proposed to bring the same to tax as deemed dividend under Section 2 (22) (e) of the Income-Tax Act, 1961 (Act).
3. The contentions of the assessee / respondent were two fold; firstly, that the company was not a shareholder in CSS and secondly, that the amounts were received in the course of business and hence would not come within the ambit of Section 2(22)(e), which specifically addresses the receipt of only deemed dividend.
4. Overriding the submissions of the assessee, an order of assessment came to be passed on 02.12.2008, as against which, a first appeal has been filed. The Commissioner of Income Tax (Appeals) accepted the second argument relating to the amounts having been paid in the course of business. Relying upon the decision of the Delhi High Court in CIT v Ambassador Travels P Ltd, (173 Taxman 407 (Delhi)) and CIT v Vikramjit Sen and Rajiv Shakdher, (181 Taxman 155), the CIT (Appeals) took the view that the provisions of Section 2(22)(e) of the Act were not applicable in cases of consideration paid on account of normal business transactions.
5. There is a specific finding in the first appellate order to the effect that the amounts in question had been advanced by CSS to the assessee towards software testing and development and had subsequently been adjusted against bills raised by the assessee. Hence, and as such mutual payments constituted normal incidents of business, the finding of fact is that the payments were towards pure business / trading transactions, and the provisions of Section 2(22)(e) of the Act would not stand attracted.
6. Aggrieved by the aforesaid order, an appeal was filed by the Revenue before the Income-Tax Appellate Tribunal (Tribunal / ITAT), which confirmed the order of the CIT (Appeals) finding support from the decision of the Bombay High Court in the case of CIT v Universal Medicare Pvt Ltd, (324 ITR 263) and a decision of the Special Bench of the Tribunal to the effect that the provision of Section 2(22)(e) would not stand attracted when the assessee is not a shareholder in the other company.
7. The Tribunal further confirms the factual finding of the CIT(Appeals) to the effect that the transactions, on account of which the amounts were paid, comprised regular business transactions, made in the ordinary course of business and did not constitute a loan or advance to bring the amounts within the sweep of Section 2(22)(e) of the Act.
8. The order of the CIT(Appeals) was thus confirmed, as against
