Bombay High Court rules that shareholder advances count as deemed dividend if not used for business operations

The Bombay High Court has held that advances granted by a company to its shareholder, if not demonstrated to have been utilised for the company’s business, will be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.

A Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne dismissed an appeal filed by the legal heir of late Shri Jaykumar B. Patil, upholding the Income Tax Appellate Tribunal’s ruling.

The Court stressed that it is not the purpose of the advance but its actual utilisation that determines exclusion from the deemed dividend provisions.

Mere maintenance of a running account or ongoing transactions, it held, cannot establish business use.