· Section 2(22)(e) of the Act provides that ‘dividend’ includes any payment by a company, not being a company in which the public is substantially interested, of any sum by way of advance or loan to a shareholder, or any payment by any such company on behalf of any such shareholder, to the extent to which the company possesses accumulated profits.
· The Board has observed that various Courts have held that trade advances in the nature of commercial transactions would not fall within the ambit of provisions of section 2(22)(e) of the Act. The Board has, therefore, in the Circular, discussed some transactions, which would not be covered under the definition of ‘dividend’ as per section 2(22)(e). These are as under:
(a) Advances made by a company to its sister concern and adjusted against the dues for job work done by the sister concern – Delhi High Court in the case of CIT vs. Creative Dyeing & Printing Pvt. Ltd.
(b) Advances made by a company to its shareholder to install plant & machinery at the shareholder’s premises to enable him to do job work for the company so that the company could fulfill an order – Punjab & Haryana High Court in the case of CIT vs. Amrik Singh
(c) A floating security deposit given by a company to its sister concern against the use of electricity generators belonging to the sister concern – Allahabad High Court in the case of CIT vs. Atul Engineering Udyog
· In view of above judgments, the Board has accepted the 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. Therefore, the Board has directed that appeals may not be filed by the Department on this issue, and the appeal already filed may be withdrawn or not pressed upon.
For further reading, refer the attachment.
Further Reading