Section 2(22)(e) cannot be invoked in relation to trade, business or other commercial advances paid to shareholders

[CA DEV KUMAR KOTHARI]

Relevant provisions: Section 2 (22) ( e)

Some of relevant judgments:

COMMISSIONER OF INCOME TAX-I Versus AMRIK SINGH PROP M/s NEXO PRODUCTS INDIA 2015 (8) TMI 1262 - SUPREME COURT

COMMISSIONER OF INCOME TAX Versus M/s CREATIVE DYEING & PRINTING PVT. LTD. - 2009 (9) TMI 43 - DELHI HIGH COURT

COMMISSIONER OF INCOME TAX Versus SHRI RAJ KUMAR - 2009 (5) TMI 17 -  DELHI HIGH COURT

Deputy Commissioner Of Income-Tax. Versus Lakra Brothers. - 2006 (4) TMI 190 - ITAT CHANDIGARH-A

Commercial or business advances:

Commercial or business advances are advance money paid by the payer to payee for execution of some contract which can be for rendering of services , supply of goods and / or services. The advance payment is made for commercial expediency as the payee also need to have some assurance of commitment and also money which he require in execution of contract. Even advances to employees are made against remuneration payable to employee or agents.

An advance can be made for a particular purpose and another advance can be made to the same payee for another purpose. For example :

a. an employer can extend advance to his employee for meeting some exigencies, another advance can be made against his dues in near future against his retirement benefits.

b. An advance can be made for purchase of properties from payee,

c. An advance can be made for supply of goods,

d. An advance can be made for rendering of services by payee himself or his organization.

Payee of advance receives advance for particular purpose:

In such situations advance is paid for particular purpose and is a commercial advance to perform specified/ agreed terms and conditions of agreement. These payments have nothing to do with other capacity or relationship between the payer and the payee which they may have.  For example, the payee may be a director or shareholder of  payer company.  The advance so made is not an advance made to director or shareholder but the advance so made  is for specific purpose and against commercial obligations undertaken by the payee.

Deeming provisions of S. 2(22) ( e ) cannot be applied to such advances:

A commercial advance is not a loan or advance to shareholder or in capacity of shareholder. The advance is given in capacity of vendor, supplier, contractor, professional, agent or an employee. Therefore, provisions to treat such loan or advance as deemed dividend shall not be attracted in case of such commercial advances.

Case of Shri Amrik Singh:

Question  whether advance paid for doing some job work  by a shareholder on behalf of company can be deemed to be dividend u/s 2 (22) (e) arose in his case. The Tribunal held that amount paid by company in which assessee had substantial interest and the company also  had accumulated surplus, cannot be deemed to be dividend as the amount was paid by company to shareholder under a contract for doing job work in premises and with facilities of shareholder and such work was carried out by shareholder for the company. Therefore, S. 2 (22) (e) cannot be invoked. The High Court and the Supreme Court also upheld the judgment of Tribunal.

Care required:

There must be honest and genuine contract of commercial nature. The advance must be proved to be for a commercial contract, the payee must have capacity to perform such contract, and he must have willingness of performing such contract.  Entering into contract, in suspicious circumstances which shows unwillingness of performance  of such contract and then refund of advance may lead to conclusion that the contract was a  smoke screen just to avoid a deeming provision of s. 2 (22) (e) or similar other provisions which may attract taxability of advance received.