SKP's Comments
The CBDT Circular clarifies that the grant of trade advances, which are in the nature of commercial transactions, would not be treated as ‘advance’ in the context of Dividend Taxation Provision (DTP) of the Act. This is a welcome clarification beneficial to the taxpayers and shall put to rest the ongoing litigation in this regard.
It is also fair acknowledgement by the CBDT that DTP is not intended to operate in a manner that it prohibits any commercial transaction between a company and Shareholder/Concern.
While DTP applies to ‘loan’ and ‘advance’, the CBDT Circular is restricted to ‘trade advances’. It does not expressly discuss the position in respect of loans or non-trade advances given by a company to Shareholder/Concern out of commercial expediency. Ideally, going by the spirit behind the Circular, loan transactions carried out under commercial expediency should stand excluded from DTP. The Courts have consistently upheld this position, but the CBDT Circular has not thrown light on this aspect.
As an example, the Circular refers to a transaction of security deposit where the Court held that DTP is not attracted if the deposit was given on account of a transaction arising in the ordinary course of business. While one may argue that DTP should not apply to deposits at all, it may also be possible to take a position that the term ‘trade advances’ in the CBDT Circular could cover any loan or advance provided in the ordinary course of business.
However, this position could be debatable and for cases of loans, taxpayers may have to continue to rely upon existing court rulings to defend their positions regarding non-applicability of DTP.
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