Loan or Deemed Dividend? ITAT Sends Back Rs. 56 Lakh Deemed Dividend Case for Fresh Review

The case had been filed by Snehal Rajvibhai Patel before the Income Tax Appellate Tribunal (ITAT) Ahmedabad, challenging an order passed by the CIT(A)/NFAC on May 19, 2025.

Snehal works in a company named M/s. SPC Life Sciences Pvt. Ltd was placed in the role of Managing Director. 35.26% of the company’s shares are held by Snehal. The company had given her a loan of Rs. 56 lakh during the year. During the assessment year 2013-14, Snehal disclosed her total income of 6,847,390 in her return. The return was processed under Section 143(1) of the Income Tax Act.

The tax officer said that since she is a major shareholder and the company has enough reserves, the loan should be treated as a dividend and therefore should be taxed. Hence, as a result, the tax authority made an addition of Rs. 56,09,615 to her income, saying it should be taxed as a “deemed dividend” under Section 2(22)(e) of the Income Tax Act.

The aggrieved Snehal, with the addition made by the tax authorities, approached CIT(A), where she argued that the loan was part of normal commercial/financial dealings between her and the company. Additionally, she has returned all the loan money to the company in previous years. To support her claim, she also cited CBDT Circular 19/2017, which says that commercial/trade advances should not be treated as deemed dividends. However, she did not attend the personal hearing before CIT(A). In conclusion, CIT(A) rejected her argument because she did not submit any documents to prove her argument that the transactions performed were commercial in nature. Also, the circular she referenced did not align with the present case based on the instances given. Hence, the CIT(A) upheld the Rs. 56,09,615 addition.

Thereafter, she approached the ITAT Ahmedabad; there, the tribunal noted that CIT(A) was not correct in rejecting the referenced CBDT Circular No. 19/2017 dated June 12, 2017, wherein it was categorically held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of Section 2(22)(e) of the Act. It ruled that CIT(A) was not right in upholding the addition; the case just wants a proper examination of the documents showing the credit amount was paid back. Hence, in the final decision, the tribunal remanded the case to the tax authorities for fresh examination of documents and the case. Snehal has been directed to submit proof of repayment and other necessary documents. The tax authorities must pass a fresh order after verifying all details.