The company advanced money to me against goods I was to supply. Is that a 'loan or advance' under s.2(22)(e)?
No. The word 'advance' in s.2(22)(e) takes its colour from the word 'loan' next to it, so it means an advance carrying an obligation of repayment. Money moved to give effect to a genuine commercial transaction — a trade advance — is outside the clause.
Decided by the High Court (Vikramajit Sen J and Rajiv Shakdher J) on 2009-05-14, reported as ITA No. 1130/2007 (Delhi High Court); arising out of ITA No. 4125/Del/1999. It bears on section 2(22)(e) of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters.
This is the most commonly useful defence to a deemed dividend addition, because a great many of these additions are made on running trade balances between a shareholder and his company. The Delhi High Court's reasoning here is the source of the rule, and the CBDT accepted the same position in Circular 19/2017.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, Raj Kumar, was the proprietor of M/s Premier Engineering Corporation and held 65 per cent of the shares of Continental Equipment India (Pvt.) Ltd. In the assessment year 1996-97 he received Rs. 14,59,770 from that company. The Assessing Officer treated Rs. 12,28,517, being the company's accumulated profits, as deemed dividend under s.2(22)(e). The assessee's case was that the money represented trade advances against customised kitchen equipment which his proprietary concern manufactured and supplied to the company. The Commissioner (Appeals) deleted the addition and the Tribunal sustained the deletion, holding the payment to be a trade advance and not a loan or advance within the clause.
The Revenue's appeal was dismissed. Trade advances representing money transacted to give effect to a commercial transaction do not fall within s.2(22)(e). There was no order as to costs (para 12).
The Court read the two words 'loan' and 'advance' together. Standing alone, 'advance' is wide enough to cover a payment that carries no obligation of repayment; read in the company of 'loan', it must be confined to advances of the same character, that is, advances carrying an obligation of repayment (para 10.5). The Court then applied that reading to the purpose of the clause, which is to reach distributions of accumulated profits dressed up as loans, and held that money passing to give effect to a commercial transaction is not such a distribution (para 10.9). The Court drew support from the Bombay High Court's decision in Nagindas M. Kapadia, where sums received towards purchases had been excluded from the scope of dividend.
Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not, in our view, fall within the ambit of the provisions of Section 2(22)(e) of the Act.
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Handle my notice → Ask a CA on WhatsAppNo. The word 'advance' in s.2(22)(e) takes its colour from the word 'loan' next to it, so it means an advance carrying an obligation of repayment. Money moved to give effect to a genuine commercial transaction — a trade advance — is outside the clause. This was decided by the High Court (Vikramajit Sen J and Rajiv Shakdher J) and bears on section 2(22)(e) of the Income Tax Act 1961. It is reported as ITA No. 1130/2007 (Delhi High Court); arising out of ITA No. 4125/Del/1999. This is the most commonly useful defence to a deemed dividend addition, because a great many of these additions are made on running trade balances between a shareholder and his company. The Delhi High Court's reasoning here is the source of the rule, and the CBDT accepted the same position in Circular 19/2017. If it applies to you, the first step is this: Build the commercial story first: purchase orders, invoices, delivery challans, the ledger showing the advance being squared against supplies. The character of the payment is a question of fact and it is decided on this paper.
The assessee, Raj Kumar, was the proprietor of M/s Premier Engineering Corporation and held 65 per cent of the shares of Continental Equipment India (Pvt.) Ltd. In the assessment year 1996-97 he received Rs. 14,59,770 from that company. The Assessing Officer treated Rs. 12,28,517, being the company's accumulated profits, as deemed dividend under s.2(22)(e). The assessee's case was that the money represented trade advances against customised kitchen equipment which his proprietary concern manufactured and supplied to the company. The Commissioner (Appeals) deleted the addition and the Tribunal sustained the deletion, holding the payment to be a trade advance and not a loan or advance within the clause. The matter was decided on 2009-05-14 by the High Court (Vikramajit Sen J and Rajiv Shakdher J). On those facts the High Court held as follows. The Revenue's appeal was dismissed. Trade advances representing money transacted to give effect to a commercial transaction do not fall within s.2(22)(e). There was no order as to costs (para 12).
The Court read the two words 'loan' and 'advance' together. Standing alone, 'advance' is wide enough to cover a payment that carries no obligation of repayment; read in the company of 'loan', it must be confined to advances of the same character, that is, advances carrying an obligation of repayment (para 10.5). The Court then applied that reading to the purpose of the clause, which is to reach distributions of accumulated profits dressed up as loans, and held that money passing to give effect to a commercial transaction is not such a distribution (para 10.9). The Court drew support from the Bombay High Court's decision in Nagindas M. Kapadia, where sums received towards purchases had been excluded from the scope of dividend. In the words reproduced by the source cited on this page: "Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not, in our view, fall within the ambit of the provisions of Section 2(22)(e) of the Act." The decision followed or applied CIT v. Nagindas M. Kapadia (Bombay) — relied upon for the exclusion of sums received towards purchases.
It was decided by the High Court on 2009-05-14 and is reported as ITA No. 1130/2007 (Delhi High Court); arising out of ITA No. 4125/Del/1999. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 2(22)(e), 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. The Revenue's appeal was dismissed. Trade advances representing money transacted to give effect to a commercial transaction do not fall within s.2(22)(e). There was no order as to costs (para 12). It arises in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters, on section 2(22)(e) of the Income Tax Act 1961, and was decided by Vikramajit Sen J and Rajiv Shakdher J. 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. Show that the sum was adjusted against goods or services and not repaid as money. An advance that is simply returned in cash looks like a loan. Cite CBDT Circular 19/2017 alongside this judgment. It directs officers not to file appeals on this ground and to withdraw those already filed, which is a strong point before the CIT(A) as well as the Tribunal. Check the accumulated profits ceiling as a fallback ground even if you expect to win on the character of the payment.
Still good law. The same position was accepted by the CBDT in Circular No. 19/2017 dated 12 June 2017, which lists trade advances in the nature of commercial transactions as outside s.2(22)(e) and directs that appeals on this ground be not filed and those already filed be withdrawn or not pressed. That circular cites Creative Dyeing & Printing, Amrik Singh and Atul Engineering Udyog rather than this judgment, but the principle is the same. Later judicial treatment of this particular decision was not searched. 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.
Two separate retrievals of paragraph 10.5 returned slightly different wording; the version recorded here is the one returned by an exact-phrase search of the page and is the one that reads as a complete sentence. The quote used below is from paragraph 10.9, which contains the words 'in our view' and is plainly the Court's own. 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.
The Revenue's appeal was dismissed. Trade advances representing money transacted to give effect to a commercial transaction do not fall within s.2(22)(e). There was no order as to costs (para 12).
TaxSphere, “CIT v Shri Raj Kumar”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-raj-kumar-trade-advance-not-deemed-dividend/ (validity last checked 2026-09-07)
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