M/s. Prasad Film Laboratories Pvt. Ltd. v. ACIT [I.T.T.A. Nos. 142, 144 and 180 of 2008]
Background: The appellant made regular payments to its parent company during the course of business, which were treated by the Assessing Officer as deemed dividends under Section 2(22)(e) of the Income Tax Act. The ITAT remanded the matter back to assessees whether accumulated profits existed on the date of each such payment. The appellant challenged this remand order, arguing that the payments were trade advances made in the ordinary course of business and not in the nature of loans or advances to shareholders.
Decision: The High Court held that trade advances made during normal business transactions do not fall within the ambit of deemed dividend under Section 2(22)(e). It relied on various judgments, including Creative Dyeing and Raj Kumar, and CBDT Circular No. 19/2017, which clarified that commercial trade advances are outside the scope of deemed dividend. The ITAT’s remand was held to be uncalled for, and the Court allowed the appeal, holding the payments were not to be treated as dividend. The significance of this judgment lies in the reaffirmation of the principle that Section 2(22)(e) must be strictly construed and applied only in cases where a shareholder derives a direct benefit in the form of loans or advances from a closely held company out of accumulated profits. It does not extend to situations where payments are made as part of ongoing commercial transactions which are essential for business operations.
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