Purposive interpretation for statute interpretation

In this case you shall learn about interpretation of statutes and that advances to shareholders from companies during the course of business cannot be taxed as income tax. The Court arrived at its judgement by adopting Purposive Interpretation of Section 2(22)(e) of the Income Tax Act, 1961.
TITLEACIT Indore Vs. Pravin C. Pandya
CITATION(2013) 60 SOT 133 (URO) (Indore)(Trib.)
COURTITAT Indore Bench
JUDGES/CORAMJoginder Singh and R.C. Sharma


The present case is an apt example of Purposive Interpretation of a statute. Purposive Construction is a modern principle of construction of a statue and is an approach to statutory and constitutional interpretation under which common law courts interpret a legal enactment in light of the purpose for which it was enacted. The ratio of the present case re-iterates that the words used in a particular legislation piece must be understood in the light of the whole legislation and the statement of objects and reasons.


The facts of the case are as follows: An assessee was engaged in the business of trading pesticides, bio-fertilizers, and organic manure. The assessee was also a 60% shareholder in M/s Jayvin Sales Private Limited. He received loans/advances of an amount of Rs. 15,80,965/-  from the said company. The assessee declared an income of Rs. 34,72,4000/- in his returns filed on 25.09.2008. The assessee’s case was selected for scrutiny and he was required to furnish various details including the requirement to produce the ledger of M/s Jayvin in his books, which he did.

On perusal of the details, a part of the said advances from the company to the assessee, to an extent of Rs. 14,63,400/-, was treated as deemed divided under Section 2(22)(e) of the Income Tax Act, 1961 and were added to the assessee’s income by the Assessing Officer (or AO). When the said act of the AO was appealed against by the assessee, the CIT(A) deleted the addition. Finally, the Revenue appealed which led to the present case.


The main issue in the case was: Whether or not the advances/loans, as advanced by M/s Jayvin Sales Private Limited, would fall within the ambit of Section 2(22)(e) of the Income Tax Act, 1961.

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Summary of Court Decisions and Judgement

An order was passed on 23.01.2013 by the learned first appellate authority, the Commissioner of Income Tax (Appeals) which deleted the addition of Rs. 14,63,400/- made by the AO and held the AO was not justified in invoking provisions of Section 2(22)(e).

The aggrieved Revenue appealed against the order before the Income Tax Appellate Tribunal at its Indore Bench. It was held by the learned Tribunal bench that trade advances would not fall within ambit of section 2(22)(e) of the Incomes Tax Act, 1961 and accordingly upheld the order passed by the CIT(A).


It was the contention of assessee that the provisions of Section 2(22)(e) were not applicable to his case. A bare perusal of Section 2(22)(e) of the Income Tax Act may highlight that a payment would be a dividend if it satisfied the conditions given therein. And clearly, the advance made by M/s Jayvin satisfied the conditions laid down under the Section. In other words, the stand of the assessee was supported by the law that the Section was not applicable to trade transaction. Furthermore, the transaction in this case was an advance by the company in the normal course of business of the assessee, which was supported by evidence produced by the assessee as well as the law in the Income Tax Act.

It might be contended that the words used in the impugned legislation are subjective. However, as has been repeatedly established, the words of a particular law must be understood and read in the light of the whole law. Purposive interpretation must be applied in cases as the present one.

Thus, from the facts, evidence and law available related to the case it was clear that the impugned business transaction of advances was outside the ambit of Section 2(22)(e) of the Income Tax Act, 1961. The same was held by the ITAT in its final decision on the matter.

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The Tribunal was correct in its judgement and it had appropriately examined the concerned statute as well as the facts and materials involved in the case. The Tribunal was of the opinion that the word ‘advance’ which appeared in the vicinity of the word ‘loan’ could only mean such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to commercial transaction would not fall within the ambit of the provisions of section 2(22)(e) of the Act. The ITAT correctly gave its judgement in favour of the assessee.