The company advanced money to me against pending job-work orders and I repaid the whole of it within two months, in the same year. The Assessing Officer has still treated it as deemed dividend. I have a running account with the company and I am relying on Circular 19/2017 — is that enough?
No. The Bombay High Court held that a trade advance escapes s.2(22)(e) only if the money is actually applied to the business transaction it was said to be for; the stated purpose is not the test, the actual utilisation is. Neither the existence of a running account nor repayment within the same financial year makes any difference.
Decided by the High Court (Alok Aradhe CJ and Sandeep V. Marne J (judgment per Sandeep V. Marne J)) on 2025-08-07, reported as Income Tax Appeal No. 669 of 2003 (Bombay High Court, Ordinary Original Civil Jurisdiction); Neutral Citation 2025:BHC-OS:13175-DB. It bears on section 2(22)(e), section 260A of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters.
This is the Revenue-side boundary of the trade-advance argument, and the library needs it beside CIT v Raj Kumar and Circular 19/2017. The Court read the Circular narrowly: it looked at the three illustrations the Board itself gave and found that in every one of them the money was actually spent on the job work, the plant, or the generators. So an assessee who takes an advance described as a business advance and then uses it to pay his own tax, or to buy an asset, or to meet a personal liability, cannot shelter behind the Circular. The finding is also treated as one of fact, concurrent across three authorities, and therefore beyond interference under s.260A — which means the fight has to be won before the Assessing Officer on the money trail, not later on law. Note the year: the advance was made in December 1997, so the deemed dividend was taxed in the shareholder's own hands. For a payment on or after 1 April 2018 and before 1 April 2020 the charge sat on the company under s.115-O; from 1 April 2020 it is back in the shareholder's hands. State the regime for your year before you advise on incidence.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee was the Managing Director and a substantial shareholder, holding more than ten per cent of the voting power, in Ghatge Patil Industries Limited (GPIL), a manufacturer of castings and components. He also ran a proprietary concern, J. B. Patil & Sons (Engineering Division), which did machining job work for GPIL, and the two had a running account. GPIL had received an order from TELCO exceeding Rs 9 crores, of which machining charges and castings worth about Rs 5.66 crores were to come to the assessee. Facing a deadline of 30 December 1997 for payment of tax under the Kar Vivad Samadhan Scheme, the assessee asked GPIL for an advance against pending and expected orders, and on 26 December 1997 GPIL advanced Rs 71 lakh. On the same date the assessee paid Rs 70,80,000 towards his KVSS liability. The TELCO orders were cancelled and Rs 69,05,920 was repaid to GPIL on 8 and 11 February 1998, within the same financial year. By an order under s.143(3) dated 29 March 2001 the Assessing Officer treated the Rs 71 lakh as deemed dividend under s.2(22)(e). The CIT(A) confirmed it on 27 September 2001, recording that no advance of that magnitude had ever been given before, that the bulk TELCO orders had been received in March and April 1997 while the advance was made only in December, and that the advance was recalled within a month. The Tribunal (ITA No. 49/PN/2002, order dated 31 March 2003) confirmed the addition while recording that the money had been received as an advance in connection with machining job work. The appeal was admitted on 22 November 2004 on the question whether a business advance of Rs 71 lakh against pending orders, repaid within two months, constituted deemed dividend.
The question of law was answered against the assessee and in favour of the Revenue and the appeal was dismissed. Utilisation of the advance for execution of the particular business transaction is a sine qua non for taking a loan or advance outside s.2(22)(e); the test is not the purpose for which the advance is made but the purpose for which it is actually applied (paras 18 and 26). Circular No. 19/2017 does not assist where the money was not so applied (para 17). Mere maintenance of a running account, or proof of continuous business dealings, does not permit an inference that the advance was used for a business transaction (para 25). Repayment within the same financial year makes no difference (para 20). The concurrent findings of fact that the advance was not used for any job work could not be disturbed under s.260A (para 26).
The Court set out s.2(22)(e) at paragraph 9 and found the shareholding and voting-power conditions admitted (para 10). It then traced the concurrent findings: the Assessing Officer's finding that Rs 71 lakh was taken as a temporary loan to pay KVSS tax, a personal liability (para 12); the assessee's own admission in the appeal memorandum that he asked for the advance because he had a deadline to meet for payment of taxes (para 13); and the CIT(A)'s detailed reasons for disbelieving the trade-advance story — no advance of that magnitude in the three preceding years, the TELCO bulk orders having come in March and April 1997 while the advance came in December, the advance being recalled within a month, and only Rs 39,52,376 of machining charges having been received in the whole year (para 14). Turning to Circular No. 19/2017, which it reproduced in full at paragraph 16, the Court examined the Board's own three illustrations and found the common thread to be that in each the money was actually used — for the job work, for installing plant and machinery, or for using the generators — so that actual utilisation is the condition of exclusion (paras 17 and 18). It rejected as leading to absurdity the submission that an advance received for a business transaction may be applied to any purpose at all (para 19). On repayment, it set out the question and the answer in Smt. Tarulata Shyam, in which the Supreme Court held that the legislature deliberately did not make the subsistence of the loan on the last day of the previous year a pre-requisite for the statutory fiction (paras 20 and 21). It then distinguished each authority the assessee relied on — Amrik Singh, where a finding of tangible business expediency had been recorded (para 22); Creative Dyeing and Printing, where the advance was used for expansion of plant and machinery so that the company itself benefited (para 23); and Raj Kumar, Deepak Vegpro, Ambassador Travels and Atul Engineering Udyog, in all of which the advance was applied to an actual business transaction (para 24).
Therefore, the key is not the purpose for which the advance is made. The real key is the purpose for which the advance is utilized.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Bombay High Court held that a trade advance escapes s.2(22)(e) only if the money is actually applied to the business transaction it was said to be for; the stated purpose is not the test, the actual utilisation is. Neither the existence of a running account nor repayment within the same financial year makes any difference. This was decided by the High Court (Alok Aradhe CJ and Sandeep V. Marne J (judgment per Sandeep V. Marne J)) and bears on section 2(22)(e), section 260A of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 669 of 2003 (Bombay High Court, Ordinary Original Civil Jurisdiction); Neutral Citation 2025:BHC-OS:13175-DB. This is the Revenue-side boundary of the trade-advance argument, and the library needs it beside CIT v Raj Kumar and Circular 19/2017. The Court read the Circular narrowly: it looked at the three illustrations the Board itself gave and found that in every one of them the money was actually spent on the job work, the plant, or the generators. So an assessee who takes an advance described as a business advance and then uses it to pay his own tax, or to buy an asset, or to meet a personal liability, cannot shelter behind the Circular. The finding is also treated as one of fact, concurrent across three authorities, and therefore beyond interference under s.260A — which means the fight has to be won before the Assessing Officer on the money trail, not later on law. Note the year: the advance was made in December 1997, so the deemed dividend was taxed in the shareholder's own hands. For a payment on or after 1 April 2018 and before 1 April 2020 the charge sat on the company under s.115-O; from 1 April 2020 it is back in the shareholder's hands. State the regime for your year before you advise on incidence. If it applies to you, the first step is this: Build the utilisation trail first: bank statements showing the advance going out to the counterparty, purchase orders, job cards, invoices raised against the advance. A purpose recital in a board resolution or a letter will not carry the point on its own.
The assessee was the Managing Director and a substantial shareholder, holding more than ten per cent of the voting power, in Ghatge Patil Industries Limited (GPIL), a manufacturer of castings and components. He also ran a proprietary concern, J. B. Patil & Sons (Engineering Division), which did machining job work for GPIL, and the two had a running account. GPIL had received an order from TELCO exceeding Rs 9 crores, of which machining charges and castings worth about Rs 5.66 crores were to come to the assessee. Facing a deadline of 30 December 1997 for payment of tax under the Kar Vivad Samadhan Scheme, the assessee asked GPIL for an advance against pending and expected orders, and on 26 December 1997 GPIL advanced Rs 71 lakh. On the same date the assessee paid Rs 70,80,000 towards his KVSS liability. The TELCO orders were cancelled and Rs 69,05,920 was repaid to GPIL on 8 and 11 February 1998, within the same financial year. By an order under s.143(3) dated 29 March 2001 the Assessing Officer treated the Rs 71 lakh as deemed dividend under s.2(22)(e). The CIT(A) confirmed it on 27 September 2001, recording that no advance of that magnitude had ever been given before, that the bulk TELCO orders had been received in March and April 1997 while the advance was made only in December, and that the advance was recalled within a month. The Tribunal (ITA No. 49/PN/2002, order dated 31 March 2003) confirmed the addition while recording that the money had been received as an advance in connection with machining job work. The appeal was admitted on 22 November 2004 on the question whether a business advance of Rs 71 lakh against pending orders, repaid within two months, constituted deemed dividend. The matter was decided on 2025-08-07 by the High Court (Alok Aradhe CJ and Sandeep V. Marne J (judgment per Sandeep V. Marne J)). On those facts the High Court held as follows. The question of law was answered against the assessee and in favour of the Revenue and the appeal was dismissed. Utilisation of the advance for execution of the particular business transaction is a sine qua non for taking a loan or advance outside s.2(22)(e); the test is not the purpose for which the advance is made but the purpose for which it is actually applied (paras 18 and 26). Circular No. 19/2017 does not assist where the money was not so applied (para 17). Mere maintenance of a running account, or proof of continuous business dealings, does not permit an inference that the advance was used for a business transaction (para 25). Repayment within the same financial year makes no difference (para 20). The concurrent findings of fact that the advance was not used for any job work could not be disturbed under s.260A (para 26).
The Court set out s.2(22)(e) at paragraph 9 and found the shareholding and voting-power conditions admitted (para 10). It then traced the concurrent findings: the Assessing Officer's finding that Rs 71 lakh was taken as a temporary loan to pay KVSS tax, a personal liability (para 12); the assessee's own admission in the appeal memorandum that he asked for the advance because he had a deadline to meet for payment of taxes (para 13); and the CIT(A)'s detailed reasons for disbelieving the trade-advance story — no advance of that magnitude in the three preceding years, the TELCO bulk orders having come in March and April 1997 while the advance came in December, the advance being recalled within a month, and only Rs 39,52,376 of machining charges having been received in the whole year (para 14). Turning to Circular No. 19/2017, which it reproduced in full at paragraph 16, the Court examined the Board's own three illustrations and found the common thread to be that in each the money was actually used — for the job work, for installing plant and machinery, or for using the generators — so that actual utilisation is the condition of exclusion (paras 17 and 18). It rejected as leading to absurdity the submission that an advance received for a business transaction may be applied to any purpose at all (para 19). On repayment, it set out the question and the answer in Smt. Tarulata Shyam, in which the Supreme Court held that the legislature deliberately did not make the subsistence of the loan on the last day of the previous year a pre-requisite for the statutory fiction (paras 20 and 21). It then distinguished each authority the assessee relied on — Amrik Singh, where a finding of tangible business expediency had been recorded (para 22); Creative Dyeing and Printing, where the advance was used for expansion of plant and machinery so that the company itself benefited (para 23); and Raj Kumar, Deepak Vegpro, Ambassador Travels and Atul Engineering Udyog, in all of which the advance was applied to an actual business transaction (para 24). In the words reproduced by the source cited on this page: "Therefore, the key is not the purpose for which the advance is made. The real key is the purpose for which the advance is utilized." The decision followed or applied Smt. Tarulata Shyam v. Commissioner of Income-tax — applied, on repayment within the previous year; CIT v. Amrik Singh (P&H) — distinguished; CIT v. Creative Dyeing and Printing P. Ltd. (Delhi) — distinguished; CIT v. Raj Kumar; CIT v. Deepak Vegpro Pvt Ltd.; CIT v. Ambassador Travels P. Ltd.; CIT, Agra v. Atul Engineering Udyog — distinguished; CBDT Circular No. 19/2017 dated 12 June 2017 — construed and applied narrowly.
It was decided by the High Court on 2025-08-07 and is reported as Income Tax Appeal No. 669 of 2003 (Bombay High Court, Ordinary Original Civil Jurisdiction); Neutral Citation 2025:BHC-OS:13175-DB. 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), section 260A, 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The question of law was answered against the assessee and in favour of the Revenue and the appeal was dismissed. Utilisation of the advance for execution of the particular business transaction is a sine qua non for taking a loan or advance outside s.2(22)(e); the test is not the purpose for which the advance is made but the purpose for which it is actually applied (paras 18 and 26). Circular No. 19/2017 does not assist where the money was not so applied (para 17). Mere maintenance of a running account, or proof of continuous business dealings, does not permit an inference that the advance was used for a business transaction (para 25). Repayment within the same financial year makes no difference (para 20). The concurrent findings of fact that the advance was not used for any job work could not be disturbed under s.260A (para 26). It arises in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters, on section 2(22)(e), section 260A of the Income Tax Act 1961, and was decided by Alok Aradhe CJ and Sandeep V. Marne J (judgment per Sandeep V. Marne 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. If part of the advance was used for the business transaction and part was not, quantify the split at the outset and concede the second part rather than defending the whole; the Court's objection was to an advance used wholly for a personal liability. Do not rest the case on the running account. Show, transaction by transaction, that the particular debit corresponded to goods or services actually supplied. Do not argue that repayment before the year end cures the charge. Tarulata Shyam, applied here, forecloses it. Check whether the deemed dividend for your year is chargeable on the company under s.115-O (payments from 1 April 2018 to 31 March 2020) or on the shareholder (before 1 April 2018 and from 1 April 2020), and frame the objection to the right assessee.
Validity check could not be completed. Decided 7 August 2025 and uploaded 12 August 2025. I did not check later treatment: no citator search was run, and I do not know whether a special leave petition has been filed. The reasoning is consistent with the Supreme Court in Smt. Tarulata Shyam, which the judgment quotes, but the narrow reading of Circular No. 19/2017 has not, so far as I could see, been tested elsewhere. 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.
Read from the indiankanoon print view in three passes — paragraphs 1 to 15, then 16 to 21, then 22 to 27. The print view carries the running document footer ('Uploaded on - 12/08/2025') inside the body text, and the judgment's own footnote markers appear inline against the case names in paragraph 6, so the citations there read as 'CIT-I, Ludhiana Vs. Amrik Singh4' and the like. The repayment figures tabulated in paragraph 10 total Rs 69,05,920 against an advance of Rs 71 lakh; the judgment does not explain the difference beyond the reference to 'adjusting nominal bills' in the Assessing Officer's finding quoted at paragraph 12. Note the internal tension the Court had to work with: the Tribunal had found as a fact (quoted at paragraph 15) that the money WAS received as an advance in connection with machining job work, and the appeal was nonetheless dismissed because the money was not so applied. 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 question of law was answered against the assessee and in favour of the Revenue and the appeal was dismissed. Utilisation of the advance for execution of the particular business transaction is a sine qua non for taking a loan or advance outside s.2(22)(e); the test is not the purpose for which the advance is made but the purpose for which it is actually applied (paras 18 and 26). Circular No. 19/2017 does not assist where the money was not so applied (para 17). Mere maintenance of a running account, or proof of continuous business dealings, does not permit an inference that the advance was used for a business transaction (para 25). Repayment within the same financial year makes no difference (para 20). The concurrent findings of fact that the advance was not used for any job work could not be disturbed under s.260A (para 26).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
You gave particulars, paid by cheque and got a confirmation. Has the burden shifted?
The Tribunal recalled its whole order on my miscellaneous application. Will that recall survive?
The shares are in the Karta's name, not the HUF's. Does s.2(22)(e) still catch a loan to the HUF?
We run a shopping mall. Is the income business income or income from house property?