S. 2(22)(e): “Trade Advances” are not “loans & advances”
The assessee held 50% of the shares of a closely held company. The assessee’s books showed that he had taken an “unsecured loan” of Rs. 47 lakhs from the company. The AO assessed the said amount as “deemed dividend” u/s 2(22)(e) though the CIT (A) & Tribunal deleted it on the ground that there was a running business relationship between the assessee and the company and the said amount was not a loan but was the result of those business transactions. The department filed an appeal before the High Court. HELD dismissing the appeal:
(i) S. 2(22)(e) provides that any “loan or advance” by a closely held company to a substantial shareholder shall be assessed as “deemed dividend“. The purpose is to tax accumulated profits distributed in the form of loans. Bearing this purpose in mind, the word “advance” has to be read in conjunction with the word “loan”. The attributes of a loan are that it involves a 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 re-payment. The term “advance” may or may not include lending. The word “advance” if not found in conjunction with the word “loan” may or may not include the obligation of repayment. If it does then it would be a loan. Applying the doctrine of noscitur a sociis, the word “advance” means such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to a commercial transactions do not fall within the ambit of s. 2(22)(e) (CIT Vs. Raj Kumar 318 ITR 462 followed);
(ii) The fact that the assessee has himself shown the amount in his books of accounts as “unsecured loan”, is not determinative of the true nature of transaction. (India Discount Co Ltd 75 ITR 191 (SC) followed).