By TIOL News Service

NEW DELHI, MAR 18, 2016: THE issue is: Whether credit entry made against cheque which was not encashed by vendor is to be treated as extinguishment of liability and hence to be construed as trading receipts in the hands of assessee even if parties have not waived their right to receive payment. NO is the answer.

Facts of the case:

The assessee is engaged in the business of real estate which has multiple on-going projects of construction as well as it is also selling upon plots of land. It had filed the return declaring total income of Rs.3,40,64,22,522/. The case of the assesse was selected for scrutiny and notice u/s 143(2) was issued. During assessment, the AO noted that stale cheques of Rs.3,92,27,312/- were outstanding for clearance in the bank account of the assesse and therefore they were standing in stale cheque account in the books. The amount of old cheques for more than 3 years were also outstanding of Rs.2,57,29,937/-. The nature of these accounts was that the cheques were issued to the vendors/buyers originally by debiting the vendors account and consequently, credited to the various bank accounts from which cheques are issued. Later on, at the close of the year, when these cheques were not cleared because of any reason because of non-presentation by the parties in their banks the entry was passed in the books of accounts by crediting stale cheque account and debiting the bank account. During the F.Y 2005-06, Rs.38,04,671/- amount of such cheques were transferred in stale cheques account and an amount of Rs.1,64,53,036/- was cleared on account of presentation of those stale cheques by various vendors. During the assessment proceedings, AO was not satisfied that these accounting transactions treated this amount as revenue receipt of the assesse because, according to him, this amount had a direct nexus with the sale or business of the assesse and thereby made an addition of Rs.3,92,27,313/-. On appeal, the CIT(A) deleted the addition to the extent of Rs.18,21,798/- of whatever cheques cleared from the bank account of the assesse subsequently. However, balance amounts were confirmed by CIT(A) because most of the cheques were outstanding for clearance for more than three years.

After hearing the parties, the Tribunal held that:

++ as per the accounting practice, it is apparent that this stale account cheque is appearing in the balance sheet of the company and details with the name, address, cheque numbers, date of cheque and the party to whom it is issued is available on record. The accounting entry by debiting the bank account and credited in the stale cheque account is an accepted corporate accounting practices for the controlling of day-to-day bank balance and reconciling it with the balance shown by bank in the account of the assesse. The basic intent and object of maintaining this account is that assesse can identify the cheques which have been issued to various vendors and other parties if deposited by them in the bank account after the due date prescribed under the Negotiable Instrument Act or for the reason that those cheques have become ineligible for clearance then they can be identified and subsequent validation etc. or any other corrective measure can be initiated. It is not the case of the AO that the details of those stale cheques with respect to the party, amount, date of issue of cheque, bank from which it is issued, is not available and the parties have waived their right to receive these sums. Furthermore, we fail to understand that accounting entries, which are passed in the books of accounts for the purpose of better control of the account and which is a practice being followed by various large corporate when there are voluminous banking transactions, can generate an income which is chargeable to tax. It is also incomprehensible that cheques are issued to the vendors who could not for reasons best known to them did not present the cheques in those bank accounts can create an income chargeable to tax in the hands of the assesse company who has issued the cheques. We are mindful of the fact that these cheques are outstanding for more than three years but nonetheless the liability of the assesse company has not extinguished, the cheques issued in the name of various parties whose existence is not doubted and it is also admitted that they have not waived their right to receive this amount and assesse is showing this amount in its balance sheet as liability and has not written it back to the profit and loss account of the assessee. Further there are regular addition and subtraction from these accounts which shows that the liabilities do exist and are continuing. It is not at all the case of the Revenue that cheques have not been handed over to the parties and are lying with the company;

++ on a specific query from the Bench, it was accepted by the DR that cheques are not lying with the company and it was confirmed by the AR that cheques have already been issued in the past years to the respective parties. This statement is also appreciated on looking at the movement of the account tabulated in the assessment order that stale cheque account is just an accounting entry for the control purposes. This statement is also appreciated on looking at the movement of the account tabulated in the assessment order that stale cheque account is just an accounting entry for the control purposes. Further, the CIT(A) has confirmed this addition merely because these cheques are outstanding for long period and, therefore, it has become a trading receipt, is erroneous. The first reason is that it is not at all the receipt of any sum by the assesse but it is just an accounting entry; the second reason is the inflow of the cheque or outflow of the money has not occurred during the year but in past; and thirdly, merely because the cheques have been issued to the parties before three years and has not been encashed by those parties cannot go against the assesse when full details of those parties along with the details of payments against which the cheques have been issued is available on record. Further, if the liability remains unpaid for more than three years cannot extinguish that liability because assesse is year on year confirming its liability in stale cheque account by showing it into the balance sheet. Therefore, it cannot be said that by action on both the parties, the liability has extinguished. Furthermore, the AO could not find any evidence that the parties to whom the cheques have not been issued and not presented in the bank account of the assesse do not exist. Further, the accounting entries also show that there is no income occurring during the year in the hands of the assesse as during the year addition to that stale cheque account is only Rs.38,04,671/- and assesse has shown a clearing during the year of Rs.1,64,53,036/- from that account. Therefore, we reverse the finding of the CIT(A) and deleted the addition of Rs.3,67,27,062/- made on account of credit balance in stale cheque account.

(See 2016-TIOL-399-ITAT-DEL)