Payments to Parent Company during Normal Course of Business Cannot Be Treated as Dividend or Advance: Telangana HC [Read Order]

In the case of M/s Prasad Film Laboratories Pvt. Ltd. which had filed appeals challenging the common order passed by the Income Tax Appellate Tribunal (ITAT), Hyderabad Bench, for multiple assessment years.

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According to the ITAT, the Assessing Officer was also required to compute accumulated profit on each date whenever the payment was made and, hence, the ITAT remitted the matter back to the Assessing Officer to reconsider the whole issue afresh and to find out whether there was any credit balance available in the running account maintained by the appellant with the parent company on each day basis.

The assessee argued that the payments were purely business transactions carried out regularly in the normal course of its operations and were recorded as such in its books of accounts. It contended that treating such payments as deemed dividend was contrary to the true intent of the law and the settled judicial position.

The bench, comprising Justice P. Sam Koshy and Justice Narsing Rao Nandikonda, examined precedents laid down by the Delhi High Court and other courts, confirming that trade advances or payments arising from ordinary commercial transactions do not fall within the ambit of ‘advance or loan’ under Section 2(22)(e).

The Court also took note of CBDT Circular No. 19 of 2017, which clarified that trade advances in the nature of commercial transactions do not attract Section 2(22)(e). It referred to judgments such as CIT vs. Raj Kumar and CIT vs. Creative Dyeing & Printing Pvt. Ltd. and confirmed that payments made to give effect to genuine business activities cannot be deemed dividend.

While setting aside the ITAT order, the Court ruled that the Assessing Officer’s treatment of such payments as advances or deemed dividends was unwarranted and contrary to settled principles and the binding CBDT circular.

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It noted that “In view of the aforesaid Circular of the Central Board of Direct Taxes, the whole issue would stand laid to rest thereby resulting in the remand order made by the ITAT itself totally uncalled for and the consequential orders, if any, on the said issue detrimental to the interest of the assessee would also be rendered bad in law.”

The appeals were allowed, the ITAT’s order was quashed, and the question of law was answered in favour of the assessee observing that “the payments so made by the appellant to the parent company would not amount to be treated as dividend or as advances made.”

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