Business Advance Granted To Shareholder Not Utilised For Company Work Will Be Treated As Deemed Dividend Under Income Tax Act: Bombay HC
The Bombay High Court has held that where a company grants an advance to one of its shareholders and such advance is not demonstrated to have been utilised for the business of the company, the amount would be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Court declined to interfere with the order of the Income Tax Appellate Tribunal (ITAT), which had...
The Bombay High Court has held that where a company grants an advance to one of its shareholders and such advance is not demonstrated to have been utilised for the business of the company, the amount would be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Court declined to interfere with the order of the Income Tax Appellate Tribunal (ITAT), which had upheld the addition of such advances as a deemed dividend.
A Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne was hearing an appeal filed by the legal heir of late Shri Jaykumar B. Patil, a shareholder in a private company, against the order of the ITAT affirming the Assessing Officer's decision. The Assessing Officer had treated certain advances received by the assessee from the company as deemed dividend, on the ground that they were not shown to be related to the business purposes of the company.
The appellant contended that the amounts were received for business purposes and thus fell outside the scope of Section 2(22)(e). However, the Revenue maintained that no material had been produced to establish that the advance was utilised for or connected with the company's business.
Accepting the contentions of the Revenue, the Court observed that utilization of an advance for the execution of a particular business transaction is a sine qua non for exclusion of the amount of the loan or advance from the ambit of Section 2(22)(e) of the Act:
“… the key is not the purpose for which the advance is made. The real key is the purpose for which the advance is utilized. It needs to be demonstrated by the sister concern or shareholder that the advance made for a business transaction is actually utilized for the execution of such business transaction,” the Court observed.
The Court refused to accept the argument of the assessee that advance received for business transaction need not be utilized for business and can be utilized for any other purpose, observing that such an interpretation would lead to absurdity where sister concerns/ shareholders would continue to receive advances from the company and utilize the same for personal purposes of shareholders/proprietors/directors and seek exemption from payment of Income tax.
Further, the Court held that mere maintenance of a running account by the Assessee with the GPIL or continuous business transactions between the Assessee and GPIL cannot be a reason enough for drawing of an inference that the amount of advance was actually utilized for the execution of a business transaction.
Accordingly, the Court dismissed the appeal, affirming that all the ingredients of Section 2(22)(e) of the Act are satisfied in the present case.
Case Title: Shri Jaykumar B. Patil v. Joint Commissioner of Income Tax (INCOME TAX APPEAL NO. 669 OF 2003)