Income Tax | Sale Proceeds Of Vintage Cars Taxable Unless Assessee Proves Personal Use | Bombay High Court
Safiya Malik
The High Court of Judicature at Bombay Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne has dismissed an appeal challenging the treatment of a financial advance as deemed dividend. The Court held that the statutory conditions under Section 2(22)(e) of the Income-tax Act, 1961 were fully met and directed that the advance granted be treated as taxable dividend. The Bench concluded that repayment of the amount within the same financial year did not alter its taxability once the legal requirements were satisfied.
The proceedings arose out of an appeal filed under Section 260A of the Income-tax Act, 1961, challenging an order passed by the Income Tax Appellate Tribunal (ITAT), Pune Bench. The Tribunal had upheld the order of the Commissioner of Income-tax (Appeals), Kolhapur [CIT(A)], which in turn confirmed the order of the Assessing Officer treating an advance of Rs. 71 lakhs granted by Ghatge Patil Industries Limited (GPIL) to its Managing Director and substantial shareholder as deemed dividend under Section 2(22)(e) of the Act.
The appellant, Managing Director and substantial shareholder of GPIL, was engaged in the business of manufacturing castings and components. Tata Engineering and Locomotives Company Limited (TELCO) was a major customer of GPIL. TELCO placed orders on the proprietary concern of the appellant, J. B. Patil & Sons (Engineering Division). According to the appellant, he maintained a running account with GPIL, reflecting continuous business transactions.
In December 1997, GPIL received a large order from TELCO exceeding Rs. 9 crores, of which machining charges and castings worth Rs. 5.66 crores were to be supplied by the appellant’s concern. As per the appellant, orders worth Rs. 1.18 crores had already been placed by GPIL, and pending orders amounted to Rs. 73,58,973 as of 26 December 1997. The appellant sought an advance from GPIL against expected orders, citing the need to meet a deadline for payment of taxes by 30 December 1997.
On 26 December 1997, GPIL advanced Rs. 71 lakhs to the appellant. However, TELCO subsequently cancelled its orders. The appellant repaid Rs. 71 lakhs to GPIL on 11 February 1998 within the same financial year. The Assessing Officer, in an order dated 29 March 2001 under Section 143(3), held that the advance was a deemed dividend under Section 2(22)(e). CIT(A) confirmed this view by order dated 27 September 2001, and ITAT upheld the same in its order dated 31 March 2003.
The substantial question of law framed for determination was whether the business advance of Rs. 71 lakhs against pending orders and repaid within two months constituted deemed dividend under Section 2(22)(e).
On behalf of the appellant, it was argued that the advance was given for business purposes and could not be treated as deemed dividend. Counsel submitted that the ITAT itself acknowledged the advance as being connected with job work, and that once the nature of the advance was accepted as business, actual utilization for the stated purpose was immaterial. It was contended that since there existed a running account of transactions, the advance should be treated as business-related and exempt from Section 2(22)(e). Reliance was placed on CBDT Circular dated 12 June 2017, which excluded business advances from deemed dividend classification. Judicial precedents including CIT v. Raj Kumar, CIT v. Deepak Vegpro Pvt. Ltd., CIT v. Creative Dyeing & Printing P. Ltd., CIT v. Amrik Singh, and others were cited.
The Revenue opposed the appeal, contending that all conditions of Section 2(22)(e) were satisfied. It was argued that the appellant admitted to having utilized the advance for payment of personal income tax under the Kar Vivad Samadhan Scheme (KVSS). The Revenue maintained that repayment of the advance in the same year was irrelevant, citing the Supreme Court judgment in Smt. Tarulata Shyam v. CIT. It was urged that the advance was for the personal benefit of the shareholder and not a genuine business transaction.
The Court observed that “there is no dispute to the position that the Assessee, at the relevant time, was a shareholder of GPIL and a person entitled to beneficial owner of shares and that he held shares in excess of 10% of voting power in GPIL.” It recorded that the advance of Rs. 71 lakhs was undisputedly received on 26 December 1997 and repaid on 8 and 11 February 1998.
The Court noted that the appellant had admitted in the memorandum of appeal that the advance was sought to meet a tax liability deadline. The Assessing Officer had found that the appellant utilized the entire advance for payment of Rs. 70,80,000 towards taxes under KVSS on the same day of receipt. The Court cited the Assessing Officer’s finding that “it is therefore clear that the loan of Rs. 71 lakhs was taken not for any business purpose, but for payment of taxes which is the personal liability of the proprietor.”
The Court also considered the findings of CIT(A), who had rejected the claim that the advance was connected to TELCO orders. CIT(A) noted that “never before any advance of this magnitude was given to him for executing the job.” Further, CIT(A) held that the claim linking the advance to TELCO orders was inconsistent with facts, since orders were placed months earlier and the advance was recalled within a month. The CIT(A) also recorded that “this advance received by the appellant on 26/12/1997 was immediately used for payment of taxes of Rs. 70,80,000 on the same date under KVSS.”
The ITAT, while acknowledging that the advance was received in connection with job work, held that the appellant did not utilize it for that purpose. The Tribunal stated: “The money in question was received as advance in connection with execution of machining job work by the assessee. It is undisputed that the assessee did not at the time of receipt of advance execute this machining job work.”
On the appellant’s reliance on the CBDT Circular dated 12 June 2017, the Court stated that “the Circular dated 12 June 2017 applied only in case where the advance/loan is actually utilized for the purpose of job work.” It explained that the illustrations cited in the Circular involved actual utilization of the advance for execution of work, installation of machinery, or use of business assets. The Court clarified: “Thus, utilization of advance for execution of a particular business transaction is a sine qua non for exclusion of the amount of loan or advance from the ambit of Section 2(22)(e) of the Act.”
The Court rejected the appellant’s contention that utilization for business was not necessary, observing that “such interpretation sought to be canvassed on behalf of the Assessee would lead to absurdity where shareholders would continue to receive advances from the company and utilize the same for personal purposes and seek exemption.” It recorded that in the present case, the advance was admittedly utilized for personal tax payment and not for business.
Regarding repayment within the same financial year, the Court relied on the Supreme Court’s decision in Smt. Tarulata Shyam, noting: “Even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed as a ‘dividend’ if the other four conditions factually exist.”
The Court distinguished precedents cited by the appellant, including CIT v. Amrik Singh and CIT v. Creative Dyeing and Printing P. Ltd., on the ground that in those cases, the advances were found to have been actually utilized for business purposes. It stated that “in the present case, the amount of advance was not utilized for purposes of any job work for GPIL and therefore there is no question for GPIL benefiting from such advance.”
The Bench concluded: “Mere maintenance of running account by the Assessee with the GPIL or demonstration by the Assessee before us of continuous business transactions between the Assessee and GPIL cannot be a reason enough for drawl of an inference that the amount of advance was actually utilized for execution of business transaction.”
The Court held that all statutory requirements under Section 2(22)(e) of the Act were fulfilled. It stated: “In our view, all the ingredients of Section 2(22)(e) of the Act are satisfied in the present case.” The Bench further recorded: “There are concurrent findings of fact recorded in the three orders that the amount of advance was not utilized by the Assessee for execution of any job work for GPIL. We cannot interfere in the said findings of fact in exercise of appellate jurisdiction under Section 260A of the Act.”
Accordingly, the Court directed that the substantial question of law be answered against the assessee and in favour of the Revenue. It ordered: “The question of law is accordingly answered against the Assessee and in favour of the Revenue. Resultantly, the appeal stands dismissed.”
Advocates Representing the Parties
For the Appellant: Mr. R. S. Padvekar with Mr. Tanzil Padvekar and Ms. Tejal P. Kharkar, Advocates
For the Respondent: Mr. Arjun Gupta, Advocate
Case Title: Shri Jaykumar B. Patil (Deceased) Through L/H Shri Nitin J. Patil v. Joint Commissioner of Income Tax, Special Range-4, Kolhapur
Neutral Citation: 2025: BHC-OS:13175-DB
Case Number: Income Tax Appeal No. 669 of 2003
Bench: Chief Justice Alok Aradhe & Justice Sandeep V. Marne
