High Court Upholds Deemed Dividend u/s 2(22)(e) on Advance Used to Pay KVSS Taxes; Repayment in Same Year Irrelevant:

High Court Upholds Deemed Dividend u/s 2(22)(e) on Advance Used to Pay KVSS Taxes; Repayment in Same Year Irrelevant

The controversy arose out of an advance of Rs. 71 lakh received on 26.12.1997, ostensibly against machining job orders. Within the same financial year, most of the sum was repaid, Rs. 39.47 lakh on 08.02.1998 and Rs. 29.58 lakh on 11.02.1998. The record, however, revealed that the money had been withdrawn to pay Rs. 70.80 lakh in taxes under the Kar Vivad Samadhan Scheme (KVSS), related to disputed additions of earlier years. The Assessing Officer treated the advance as a deemed dividend under Section 2(22)(e), and this was affirmed by the first appellate authority.

On further appeal, the Tribunal noted that while the advance was described as against job work, it was in fact never applied to any such work. Instead, it was diverted to discharge the assessee’s own tax liability under KVSS. This gave rise to the question whether a quickly repaid “business advance” could still be taxed as deemed dividend when its actual application was unrelated to business purposes.

Issue Before HC: Whether an advance received in the name of business/job work, but utilized for personal KVSS tax payments and repaid in the same year, falls within the scope of “deemed dividend” u/s 2(22)(e)? HC's Decision: The Court held that the test under Section 2(22)(e) hinges on the actual use of the funds, not merely their stated purpose. CBDT’s Circular of 12.06.2017 was clarified to protect only genuine commercial advances, such as those adjusted against job work, applied toward plant or machinery, or held as security deposits. Since the assessee admittedly used the funds for paying KVSS dues and not for job work, the trade-advance exclusion was unavailable.

The Court further ruled that repayment within the same year does not change the character of the advance. Relying on the Supreme Court’s judgment in Smt. Tarulata Shyam, it reiterated that subsequent repayment cannot undo the deeming fiction of Section 2(22)(e). With all forums having consistently found that the advance was misapplied for tax payments, the High Court dismissed the appeal and decided the substantial question of law in favour of the Revenue.

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