The company advanced money to a sister concern against job work and the officer says it is a deemed dividend. Is there anything binding on him that says a trade advance is not?
Yes. The Board's own position is that trade advances in the nature of commercial transactions fall outside the word 'advance' in s.2(22)(e), that the courts have settled it, and that its officers are not to file appeals on the ground and are to withdraw or not press those already filed. It binds the department, not the courts — and it is about trade advances in the nature of commercial transactions, not about related-party payments at large.
Decided by the CBDT Circulars & Instructions (Central Board of Direct Taxes, Ministry of Finance, Department of Revenue; signed by Neetika Bansal, Deputy Secretary to the Government of India) on 2017-06-12, reported as Circular No. 19/2017 dated 12 June 2017; F.No. 279/Misc./140/2015/ITJ. It bears on section 2(22)(e), section 2(22) of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the single most useful document in a s.2(22)(e) reply where the money moved for a business reason, because it is the department's own concession and the assessee is entitled to hold the officer to it. It also supplies three worked fact patterns to argue by analogy from — an advance adjusted against job-work dues, an advance to a shareholder to install plant so he could do job work for the company, and a floating security deposit against the use of a sister concern's generators — each of them a decided High Court case the Board accepts as good. What it does not do is create a statutory exception: the exclusions printed in s.2(22) are still only the money-lending carve-out and the set-off, so the point remains one about the meaning of 'advance or loan' and therefore turns on the findings of fact the record supports.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 2(22)(e) deems a payment by a company in which the public are not substantially interested, by way of advance or loan to a shareholder holding not less than ten per cent of the voting power, or to a concern in which such a shareholder has a substantial interest, or a payment on behalf or for the individual benefit of such a shareholder, to be a dividend to the extent of the company's accumulated profits; the circular sets the clause out in full in its first paragraph. The Board then records - and this is the whole of its stated premise - that some Courts in the recent past have held that trade advances in the nature of commercial transactions do not fall within s.2(22)(e), and that such views have attained finality. It issued this circular on that footing, under the same file number as the series of 'settled view' circulars the Board issued between 2015 and 2018 to stop the department litigating points the case law had closed.
It is a settled position that trade advances in the nature of commercial transactions do not fall within the word 'advance' in s.2(22)(e). Officers of the department are not henceforth to file appeals on this ground, and appeals already filed in Courts or Tribunals may be withdrawn or not pressed (para 3). The Board sets out three illustrations of trade advances or commercial transactions held not to be covered (para 2.1): an advance by a company to a sister concern adjusted against dues for job work done by the sister concern, held to be an amount advanced for a business transaction and outside the definition of deemed dividend (CIT v. Creative Dyeing & Printing Pvt. Ltd., Delhi High Court); an advance by a company to its shareholder to install plant and machinery at the shareholder's premises so that he could do job work for the company and enable it to fulfil an export order, where the assessee having proved business expediency the advance was not covered (CIT v. Amrik Singh, Punjab and Haryana High Court); and a floating security deposit given by a company to its sister concern against the use of the sister concern's electricity generators, in an arrangement under which the company used gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates, held to be a business transaction arising in the normal course of business between two concerns (CIT, Agra v. Atul Engineering Udyog, Allahabad High Court).
The circular does not construe the sub-clause. It rests entirely on the finality of the case law: the Board observes that some Courts have held trade advances in the nature of commercial transactions to be outside s.2(22)(e), that those views have attained finality, and draws the administrative consequence. The three illustrations are chosen to show the range of what has been held to be commercial - adjustment against dues for work done, an advance that enabled the recipient to perform for the payer, and a deposit securing the use of the recipient's assets within a reciprocal supply arrangement - and each turned on a finding that the payment answered a business purpose rather than a distribution of profits. The construction underlying that line of decisions is not in the circular and should not be attributed to it: it is the Delhi High Court's in CIT v. Raj Kumar [2009] 181 Taxman 155 / 318 ITR 462, reading 'advance' in the company of 'loan' as an advance carrying an obligation of repayment, and it is the courts that have supplied that link. The Delhi High Court did so in Pr. CIT v. Dwarka Prasad Aggarwal [2022] 140 taxmann.com 32 (Delhi), where it treated this circular as based upon the decisions of various High Courts and cited Raj Kumar and CIT v. F. Praveen [2008] 220 CTR 639 (Mad.) alongside it.
In view of the above it is, a 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. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon.
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Handle my notice → Ask a CA on WhatsAppYes. The Board's own position is that trade advances in the nature of commercial transactions fall outside the word 'advance' in s.2(22)(e), that the courts have settled it, and that its officers are not to file appeals on the ground and are to withdraw or not press those already filed. It binds the department, not the courts — and it is about trade advances in the nature of commercial transactions, not about related-party payments at large. This was decided by the CBDT Circulars & Instructions (Central Board of Direct Taxes, Ministry of Finance, Department of Revenue; signed by Neetika Bansal, Deputy Secretary to the Government of India) and bears on section 2(22)(e), section 2(22) of the Income Tax Act 1961. It is reported as Circular No. 19/2017 dated 12 June 2017; F.No. 279/Misc./140/2015/ITJ. This is the single most useful document in a s.2(22)(e) reply where the money moved for a business reason, because it is the department's own concession and the assessee is entitled to hold the officer to it. It also supplies three worked fact patterns to argue by analogy from — an advance adjusted against job-work dues, an advance to a shareholder to install plant so he could do job work for the company, and a floating security deposit against the use of a sister concern's generators — each of them a decided High Court case the Board accepts as good. What it does not do is create a statutory exception: the exclusions printed in s.2(22) are still only the money-lending carve-out and the set-off, so the point remains one about the meaning of 'advance or loan' and therefore turns on the findings of fact the record supports. If it applies to you, the first step is this: Quote paragraph 3 of the circular in the reply and ask the officer in terms to apply it — it is a Board direction that appeals on this ground are not to be filed and pending ones are to be withdrawn or not pressed, so an addition made in the teeth of it is made against the department's own instruction.
Section 2(22)(e) deems a payment by a company in which the public are not substantially interested, by way of advance or loan to a shareholder holding not less than ten per cent of the voting power, or to a concern in which such a shareholder has a substantial interest, or a payment on behalf or for the individual benefit of such a shareholder, to be a dividend to the extent of the company's accumulated profits; the circular sets the clause out in full in its first paragraph. The Board then records - and this is the whole of its stated premise - that some Courts in the recent past have held that trade advances in the nature of commercial transactions do not fall within s.2(22)(e), and that such views have attained finality. It issued this circular on that footing, under the same file number as the series of 'settled view' circulars the Board issued between 2015 and 2018 to stop the department litigating points the case law had closed. The matter was decided on 2017-06-12 by the CBDT Circulars & Instructions (Central Board of Direct Taxes, Ministry of Finance, Department of Revenue; signed by Neetika Bansal, Deputy Secretary to the Government of India). On those facts the CBDT Circulars & Instructions held as follows. It is a settled position that trade advances in the nature of commercial transactions do not fall within the word 'advance' in s.2(22)(e). Officers of the department are not henceforth to file appeals on this ground, and appeals already filed in Courts or Tribunals may be withdrawn or not pressed (para 3). The Board sets out three illustrations of trade advances or commercial transactions held not to be covered (para 2.1): an advance by a company to a sister concern adjusted against dues for job work done by the sister concern, held to be an amount advanced for a business transaction and outside the definition of deemed dividend (CIT v. Creative Dyeing & Printing Pvt. Ltd., Delhi High Court); an advance by a company to its shareholder to install plant and machinery at the shareholder's premises so that he could do job work for the company and enable it to fulfil an export order, where the assessee having proved business expediency the advance was not covered (CIT v. Amrik Singh, Punjab and Haryana High Court); and a floating security deposit given by a company to its sister concern against the use of the sister concern's electricity generators, in an arrangement under which the company used gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates, held to be a business transaction arising in the normal course of business between two concerns (CIT, Agra v. Atul Engineering Udyog, Allahabad High Court).
The circular does not construe the sub-clause. It rests entirely on the finality of the case law: the Board observes that some Courts have held trade advances in the nature of commercial transactions to be outside s.2(22)(e), that those views have attained finality, and draws the administrative consequence. The three illustrations are chosen to show the range of what has been held to be commercial - adjustment against dues for work done, an advance that enabled the recipient to perform for the payer, and a deposit securing the use of the recipient's assets within a reciprocal supply arrangement - and each turned on a finding that the payment answered a business purpose rather than a distribution of profits. The construction underlying that line of decisions is not in the circular and should not be attributed to it: it is the Delhi High Court's in CIT v. Raj Kumar [2009] 181 Taxman 155 / 318 ITR 462, reading 'advance' in the company of 'loan' as an advance carrying an obligation of repayment, and it is the courts that have supplied that link. The Delhi High Court did so in Pr. CIT v. Dwarka Prasad Aggarwal [2022] 140 taxmann.com 32 (Delhi), where it treated this circular as based upon the decisions of various High Courts and cited Raj Kumar and CIT v. F. Praveen [2008] 220 CTR 639 (Mad.) alongside it. In the words reproduced by the source cited on this page: "In view of the above it is, a 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. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon."
It was decided by the CBDT Circulars & Instructions on 2017-06-12 and is reported as Circular No. 19/2017 dated 12 June 2017; F.No. 279/Misc./140/2015/ITJ. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 2(22)(e), section 2(22), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. It is a settled position that trade advances in the nature of commercial transactions do not fall within the word 'advance' in s.2(22)(e). Officers of the department are not henceforth to file appeals on this ground, and appeals already filed in Courts or Tribunals may be withdrawn or not pressed (para 3). The Board sets out three illustrations of trade advances or commercial transactions held not to be covered (para 2.1): an advance by a company to a sister concern adjusted against dues for job work done by the sister concern, held to be an amount advanced for a business transaction and outside the definition of deemed dividend (CIT v. Creative Dyeing & Printing Pvt. Ltd., Delhi High Court); an advance by a company to its shareholder to install plant and machinery at the shareholder's premises so that he could do job work for the company and enable it to fulfil an export order, where the assessee having proved business expediency the advance was not covered (CIT v. Amrik Singh, Punjab and Haryana High Court); and a floating security deposit given by a company to its sister concern against the use of the sister concern's electricity generators, in an arrangement under which the company used gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates, held to be a business transaction arising in the normal course of business between two concerns (CIT, Agra v. Atul Engineering Udyog, Allahabad High Court). It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 2(22)(e), section 2(22) of the Income Tax Act 1961, and was decided by Central Board of Direct Taxes, Ministry of Finance, Department of Revenue; signed by Neetika Bansal, Deputy Secretary to the Government of India. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Match the facts to one of the three illustrations before arguing by analogy: adjustment against dues for work actually done, an advance that enabled the recipient to perform for the payer, or a deposit securing the use of the recipient's assets. An advance that fits none of them is a harder case and should be argued as one. Build the commercial record the circular assumes — the contract or work order behind the advance, the adjustment entries against dues, reciprocal movement of funds, interest where interest was agreed, and accounting that treats the item as trade rather than as a loan account. Do not stretch it to a running current account merely because two group companies keep one; the circular speaks of trade advances in the nature of commercial transactions and says nothing wider. Remember what it binds. A circular binds the income-tax authorities and may be relied on by an assessee where it is beneficial; it does not bind the Tribunal or a court, so in appeal run CIT v Raj Kumar and the three decisions the circular itself names alongside it.
Still good law. The circular was read in full from the primary text in a subscription research database, which carries it under its number, file number and date, with no 'as corrected by' annotation; nothing withdrawing, superseding or modifying it was located, and the three decisions it rests on are given by the Board itself as having attained finality. It has been applied by a High Court: in Pr. CIT v. Dwarka Prasad Aggarwal [2022] 140 taxmann.com 32 (Delhi), IT Appeal Nos. 174 to 181 of 2018, decided 13 February 2018, the Delhi High Court referred to it as guiding the income-tax authorities that trade advances in the nature of commercial transactions do not fall within 'advance' in s.2(22)(e), and dismissed the revenue's appeals; the revenue's special leave petitions against that order were dismissed as withdrawn for low tax effect, Pr. CIT (Central)-2 v. Dwarka Prasad Aggarwal [2022] 140 taxmann.com 33 / 288 Taxman 16 (SC), 12 May 2022 - a withdrawal on tax effect, not an affirmance on the merits. Two things to keep in view. The circular predates the Finance Act 2018, which for payments made on or after 1 April 2018 moved the charge on a s.2(22)(e) dividend to the company by way of dividend distribution tax at thirty per cent, and the Finance Act 2020, which abolished that tax and put the amount back on the shareholder - neither of which touches the question the circular answers, which is whether the payment is an 'advance' at all. And the successor clause under the Income-tax Act 2025 is still not established: the department's navigator maps s.2 to s.2 without going down to clause (22), and a phrase search on the operative words of s.2(22)(e) returns only documents under the 1961 Act. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a CBDT circular, not a judgment: it binds the income-tax authorities and not the courts, and an assessee may rely on it because it is beneficial. It has now been read in full from the primary text and is four paragraphs long. Three points of precision. It does not construe s.2(22)(e); it records that some Courts have held trade advances in the nature of commercial transactions to be outside the clause, that those views have attained finality, and directs the department not to appeal on the ground - so an assessee relying on it is relying on the case law with an administrative direction on top, not on a departmental construction of the sub-clause. The three illustrations are named without citations, and the third is easy to state wrongly: the security deposit in Atul Engineering Udyog sat inside a reciprocal arrangement in which the company generated electricity from gas available to it from GAIL and supplied it to the sister concern at concessional rates, and that reciprocity is what made it a business transaction. And the noscitur a sociis reasoning usually offered with this circular - that 'advance' takes its colour from 'loan' and so means money carrying an obligation of repayment - is not in the circular at all; it comes from CIT v. Raj Kumar [2009] 181 Taxman 155 / 318 ITR 462 (Delhi), which the Delhi High Court cited alongside the circular in Dwarka Prasad Aggarwal. The signatory named in earlier sourcing, Neetika Bansal, Deputy Secretary, is not printed with the text in the research database and is not confirmed here. The circular names the three decisions without citations, and none of the three judgments was read for this entry - Creative Dyeing, Amrik Singh and Atul Engineering Udyog are described here as the Board describes them. It gives no test for what makes an advance 'in the nature of a commercial transaction'; the three examples are illustrations and not a definition, and each rests on a finding of fact. It does not say what happens where a payment has both a commercial and a distributive character, nor what evidence establishes business expediency. It does not address a running current account between related concerns, which is where most of the litigation now is, and it says nothing about advances made before it issued in cases already assessed. Its successor clause under the Income-tax Act 2025 has still not been identified. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
It is a settled position that trade advances in the nature of commercial transactions do not fall within the word 'advance' in s.2(22)(e). Officers of the department are not henceforth to file appeals on this ground, and appeals already filed in Courts or Tribunals may be withdrawn or not pressed (para 3). The Board sets out three illustrations of trade advances or commercial transactions held not to be covered (para 2.1): an advance by a company to a sister concern adjusted against dues for job work done by the sister concern, held to be an amount advanced for a business transaction and outside the definition of deemed dividend (CIT v. Creative Dyeing & Printing Pvt. Ltd., Delhi High Court); an advance by a company to its shareholder to install plant and machinery at the shareholder's premises so that he could do job work for the company and enable it to fulfil an export order, where the assessee having proved business expediency the advance was not covered (CIT v. Amrik Singh, Punjab and Haryana High Court); and a floating security deposit given by a company to its sister concern against the use of the sister concern's electricity generators, in an arrangement under which the company used gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates, held to be a business transaction arising in the normal course of business between two concerns (CIT, Agra v. Atul Engineering Udyog, Allahabad High Court).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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