Income : Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : A.Y. 1996-97 : Trade advance to shareholder, etc. : Not assessable as deemed dividend.

Reported :

36. Income : Deemed dividend : S. 2(22)(e) of Income-tax Act,
1961 : A.Y. 1996-97 : Trade advance to shareholder, etc. : Not assessable as
deemed dividend.

[CIT v. Raj Kumar, 318 ITR 462 (Del.)]

The assessee was in the business of manufacturing
customised kitchen equipments. He was also the managing director and held
nearly 65% of the paid-up share capital of a company C. A substantial part of
the business of the assessee, was obtained through C. For this purpose, C
could pass on the advance received from its customers to the assessee to
execute the job work entrusted to the assessee. The Assessing Officer held
that the advance money received by the assessee is in the nature of the loan
given by C to the assessee and accordingly is deemed dividend within the
meaning of the provisions of S. 2(22)(e) of the Income-tax Act, 1961. He
therefore made the addition by treating the advance money as the deemed
dividend income of the assessee. The Tribunal deleted the addition.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) The word ‘advance’ has to be read in conjunction
with the word ‘loan’. Usually attributes of a loan are that it involves the
positive act of lending, coupled with acceptance by the other side of the
money as loan : it generally carries interest and there is an obligation of
repayment. On the other hand in its widest meaning the term ‘advance’ may or
may not include lending. The word ‘advance’ if not found in the company of
or in conjunction with the word ‘loan’ may or may not include the obligation
of repayment. If it does, then it would be a loan.

(ii) The word ‘advance’ which appears in the company of
the word ‘loan’ could only mean such advance which carries with it an
obligation of repayment. Trade advances which are in the nature of money
transacted to give effect to a commercial transaction would not fall within
the ambit of the provisions of S. 2(22)(e) of the Act.

(iii) The trade advance given to the assessee by C could
not be treated as deemed dividend u/s. 2(22)(e) of the Act.”