By TIOL News Service

ALLAHABAD, DEC 14, 2017: THE issue is - Whether mere issuance of cheque that was subsequently cancelled and returned without ever being ever presented for encashment, will never constitute payment of any sum, and hence will not attract the notional provision of Section 2(22)(e). YES IS THE VERDICT.

Facts of the case:

During A.Y 1995-96, the assessee disclosed a credit balance of Rs. 3,75,26,099/- standing in the name of a sister concern of the assessee, Goel Investments ltd. During assessment proceedings, the AO proposed to tax the said amount treating the same to be deemed dividend u/s 2(22)(e). The assessee objected to the said proposal and submitted that it had shown credit balance of Rs. 3,76,26,009/- of GIL on account of a cheque having been issued by GIL to Vasulinga Sugar & General Mill Ltd. That cheque had not been accepted by the said Vasulinga Sugar & General Mill Ltd. and returned back to GIL. However, the reversal/rectification entries were made in the next financial year and, therefore, the entries did not represent any real transaction of payment of money. It was only an accounting entry. However, the AO had rejected the explanation furnished by assessee and treated the aforesaid amount as deemed dividend u/s 2(22)(e) of the Act. On appeal, the CIT(A) accepted the contention of assessee on the reasoning that the said entries did not represent payment of any money by the GIL to the assessee. On further appeal, the ITAT held that since there was no out flow of fund from the lender to the borrower, the question of repayment of the loan or advance before the end of the accounting year or at any future date did not arise and mere entry made in the books of account by assesse showing as credit on the basis of the cheque issued, which was not encashed and was subsequently cancelled, did not bring it within the ambit of the provisions of Section 2(22)(e) of the Act.

High Court held that,

++ from the plain reading of Section 2(22)(e), it transpires that the legislature seeks to tax certain payments made by specified persons as deemed dividend by treating such payments to be dividend payment on notional basis. Mere issuance of a cheque that was subsequently cancelled and returned without ever being ever presented for encashment and without any money having been paid against the same to the assessee, it could never constitute payment of any sum. The assessee never came gained receipt of any amount of money against the aforesaid cheque from GIL. No money passed through from GIL to the assessee. Notwithstanding the fact the cheque was subsequently cancelled and returned, the provision of Section 2(22)(e) never got attracted to the facts of the case for a simple reason that no amount of money was ever received by the assessee. To apply a notional provision of the statute, the revenue should have shown to exist actual fact of payment and it could not have inferred notional or deemed dividend on a notional payment in absence of express intention to that effect expressed by the legislature. Thus in absence of satisfaction of statutory precondition of "payment" of "any sum", to the assessee, the provision of Section 2(22)(e) was never attracted.

(See 2017-TIOL-2554-HC-ALL-IT)