Section 2.22.e deemed dividend though cheque was not deposited but returned and cancelled - un-necessary litigation by revenue

[CA DEV KUMAR KOTHARI]

Links and references:

S.2.22 e of Income-tax Act, 1961.

The Commissioner of Income Tax Bareilly And Another Versus M/s Associated Metals Co. Ltd.  2017 (12) TMI 369 - ALLAHABAD HIGH COURT and Cases referred:

The Commissioner of Income Tax-22 Versus Pravin Bhimshi Chheda - 2014 (7) TMI 141 - BOMBAY HIGH COURT

Commissioner of Income-tax Versus Smt. Savithiri Sam - 1997 (9) TMI 629 - MADRAS HIGH COURT

Cheque:

A holder of cheque does not receive a payment merely on receipt of cheque. The payment is made by drawer of cheque when it is honoured on presentation. A person receiving cheque also has option to deposit or not to deposit and when to deposit the cheque.

In any case when a cheque is merely issued by drawer which was not even presented for payment, but was returned and cancelled does not amount a payment made by drawer and money received by the holder of cheque. Payment is made and money is received only when on presentation of cheque, bank pays against the cheque either in cash, in case of a cheque payable in cash or by debiting the account of drawer of cheque and crediting the account of payee in case of a transfer cheque or by remitting money payable on cheque through clearing system when cheque is depositing in some other bank. The payment is made only when the account of drawer of cheque is debited by the drawee bank and payment is received only when the banker of holder of cheque credit the account of holder/ payee of cheque.

Though on issue of cheque legal and commercial obligations are created and it is expected that on presentation of cheque it will be cleared. However, before the event of presentation to drawee bank and actual payment by drawee bank  the cheque held is only an instrument held by the holder.

Cheques and possible events:

A cheque can be issued with understanding that it will be deposited after some time or on happening of some event. If such event does not occur, the holder of cheque is liable to return the cheque.

Post-dated cheques (PDC) are also issued which can be deposited only on or after the date of cheque.

The drawer of cheque can issue stop payment instructions to the drawee bank.

Therefore, merely on issue of cheque, it cannot be construed as payment made.

Substantially interested shareholder imply related concerns:

The fiction of deemed dividend is usually applicable in case of related parties. The shareholder must have minimum shareholding (presently 10%). This will be possible only in case of group concerns or persons being related parties.  In such cases there can be even verbal or implied understanding that the cheque will be presented in specific circumstances. Therefore, mere issue of cheque, and particularly when the payee/ drawee of cheque does not deposit the cheque but return the cheque to drawer, it cannot , as per common sense and also in commercial sense be called that a payment has been made.

Therefore, particularly in case of related persons, mere issue of cheque does not amount to payment and release of money by company issuing cheque in favour of payee/ drawee of cheque.

Importance of Bank Reconciliation Statement (BRS) and learning from the case:

At year end BRS is prepared to reconcile balance as per own books of account and as per books of account of bank (reflected in bank statement or bank pass book). In Bank account cheques deposited and cleared should only be debited in bank account. A cheque not at all deposited or deposited but returned unpaid should not be debited in bank account. Because debiting such amount of such cheque will amount to inflating bank balance which is not in bank and which is also not found credited by bank even few days after the close of previous year.

 If some cheques received were not at all deposited, they should not be debited in bank account. In case it has wrongly been debited, proper course is to make a reversal entry.

If a reversal entry is not made result would be inflated bank balance and inflated balance in account of person who issued cheque and whose account has been credited.

 Recent case before Allahabad High Court - Associated Metals Co. Ltd. (supra)

In this case controversy arose because the assessee had entered the amount of cheque received in Bank book and therefore the balance of drawer of cheque was increased and liability was shown in balance sheet. Whereas the cheque was never deposited in bank and was returned to drawer and cancelled.

Finding amount credited in account of drawer of cheque, the AO examined and found that the cheque was issued by a company in which assessee was substantially interested. although assessee explained that the cheque was not deposited and not realized and was returned and cancelled but entry was made in next year.  The AO did not accept the explanation and  considered the amount as ‘deemed dividend’ u.s. 2.22.e .

On first appeal the CIT(A) deleted the addition. The revenue preferred appeal before the Tribunal and Tribunal also confirmed order of CIT(A).  From judgment we find that the Tribunal has held as follows(highlights added by author):-

"There is no dispute to the fact that the assessee has shown the credit balance in its books of account in the name of GIL as on 31st March, 1995. However, the assessee has stated that a cheque of ₹ 3,80,00,000/- was issued by GIL to Vasulinga Sugar and General Mills Limited being cheque no. 129000 dated 28th March, 1995, on Bank of India. There is no dispute to the fact that the said cheque was cancelled and was never presented for payment as is evidence from page no.4 of the paper book filed by the ld. D.R. Now the question comes as to whether entries made by the assessee in its books of account showing the balance in the name of GIL could be deemed that a loan or advance has been made to the assesse by GIL on the basis of the above cheque. We are of the considered view that the mere issue of cheque does not create any legal right nor any legal obligation and as such no relationship of lender or borrower, debtor or creditor, comes into existence unless and until the cheque is presented to the bank and is honoured. Therefore, the transaction of the payment by way of loan or advance is completed only the borrower.

In the case before us, there is no dispute to the fact that there was no actual out flow of money as the cheque was not presented for payment. Since in the case before us, there is 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 does not arise and the mere entry made in the books of account by the assesse showing as credit on the basis of the cheque issued, which was not encashed and was subsequently cancelled, does not bring it within the ambit of the provisions of Section 2(22)(e) of the Act."

Question of fact:

The finding recorded by the Tribunal are finding of facts. These are based on accounts, and documents presented to Revenue authorities and the Tribunal. There is no mistake or perversity in facts found by the Tribunal. Even Revenue has not challenged as wrong or perverse,  facts as found by Tribunal as can be seen from questions framed in application which are as follows:

"(1) Whether the Provisions of Section 2(22)(e) of the Act applies to the facts and circumstances of the case?

(2) Whether on the facts and in the circumstances of the case, the amount of ₹ 3,80,00,000/- could be treated as a deemed dividend within the meaning of Section 2(22)(e) of the Act?

(3) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in deleting the addition of ₹ 3,80,00,000/- made by the A.O. as deemed dividend u/s 2(22)(e) of the Act?"

The Tribunal is final fact finding authority. When  CIT(A)  and Tribunal have concurrently found that there was no payment made and  merely  cheque was issued and the cheque was in fact not even deposited but returned and cancelled. Therefore, S. 2.22. e was not attracted.

We also find that there are other judgments on similar issues and they appears to have been accepted by revenue.

Therefore, the Revenue should not have preferred appeal against order of Tribunal. 

Ruling of the Allahabad High Court:

On consideration of plain language of provision Court held that there was no payment made by company as cheque was issued but not presented and was returned and cancelled. The precondition in provision is ’payment’ and payment means ‘actual payment’ .The High Court also referred and followed other two judgments as mentioned in links and references. The observations and judgment are analysed below ( with highlights added):

a.  From the plain reading of Section 2(22)(e) it transpires 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.

b.   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.

c.   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.

d.   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.

e.  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.

f.  The Madras High Court in the case of Commissioner of Income Tax Vs. Smt. Savithiri Sam reported in (1998) 114 CTR (Mad) 17, construed 'payment' used in Section 2(22)(e) to be physical/actual payment. When s. 2(22)(e) itself introduces a fiction, it is improper  to introduce another fiction and construe a payment as equivalent to a constructive payment.

g.  In the case of Commissioner of Income Tax-22 Vs. Pravin Bhimshi Chheda reported in (2014) 48 Taxmann.com 151 (Bombay), also it was found by the Tribunal, on analysis of   transaction  that  there is no flow of fund or any benefit from M/s Swati Energy and Projects Pvt. Ltd. to M/s Sujyoti Enterprises or to its partner. And t the Tribunal concluded that this is not a loan or advance so as to attract section 2(22)(e).

h.  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.

i.   The questions raised in this appeal are answered in the negative i.e. against the revenue and in favour of the assessee.

j.  The appeal lacks merit and is dismissed. .

Learning from the case:

There was mistake in account that a cheque received but not deposited and realised but returned to drawer was also credited in account of drawer and inflated bank balance and credit balance in account of drawer of cheque was shown. The wrong entry should have been reversed. If the amount was not credited in account of drawer and debited to bank account it would not have raised the controversy.

There appears be a case of window dressing adopted by the assessee and his related parties. By such window dressing, excessive balances of assets at two places were shown. Such window dressing are not desirable and must be avoided. Such window dressing can cause tax liability as well as litigation.

 

 

2017 (12) TMI 369 - ALLAHABAD HIGH COURT

The Commissioner of Income Tax Bareilly And Another Versus M/s Associated Metals Co. Ltd.

Income Tax Appeal No. 532 of 2011

Dated: - 01 December 2017

Deemed dividend addition u/s 2(22)(e) - Held that:- From the plain reading of Section 2(22)(e) it transpires 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. - Decided in favour of the assessee.

Judgment / Order

Hon'ble Bharati Sapru And Hon'ble Saumitra Dayal Singh, JJ.

For the Appellant : S.S.C. I.T.

For the Respondent : R.R.Agrawal,Suyash Agrawal

ORDER

This appeal has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act), against the order of the Income Tax Appellate Tribunal, Lucknow Bench dated 30.11.2005 for the Assessment Year 1995-96 on the following questions of law:-

"(1) Whether the Provisions of Section 2(22)(e) of the Act applies to the facts and circumstances of the case?

(2) Whether on the facts and in the circumstances of the case, the amount of ₹ 3,80,00,000/- could be treated as a deemed dividend within the meaning of Section 2(22)(e) of the Act?

(3) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in deleting the addition of ₹ 3,80,00,000/- made by the A.O. as deemed dividend u/s 2(22)(e) of the Act?"

At the very outset, learned counsel for the revenue states that the question no.2 covers the entire controversy raised by the revenue.

For the previous year relevant to the Assessment Year 1995-96 the assessee disclosed a credit balance of ₹ 3,75,26,099/- standing in the name of a sister concern of the assessee, Goel Investments ltd. (hereinafter referred to as the GIL). During the assessment proceedings, the Assessing Officer proposed to tax the said amount treating the same to be deemed dividend under Section 2(22)(e) of the Act.

The assessee objected to the said proposal and it submitted that it had shown credit balance of ₹ 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 Assessing Officer had rejected the explanation furnished by the assessee and treated the aforesaid amount as deemed dividend under Section 2(22)(e) of the Act.

Upon the appeal, the CIT (Appeals) allowed the assessee appeal on the reasoning that the aforesaid entries do not represent payment of any money by the GIL to the assessee. Upon further appeal by the revenue, the Tribunal has held as below:-

"There is no dispute to the fact that the assessee has shown the credit balance in its books of account in the name of GIL as on 31st March, 1995. However, the assessee has stated that a cheque of ₹ 3,80,00,000/- was issued by GIL to Vasulinga Sugar and General Mills Limited being cheque no. 129000 dated 28th March, 1995, on Bank of India. There is no dispute to the fact that the said cheque was cancelled and was never presented for payment as is evidence from page no.4 of the paper book filed by the ld. D.R. Now the question comes as to whether entries made by the assessee in its books of account showing the balance in the name of GIL could be deemed that a loan or advance has been made to the assesse by GIL on the basis of the above cheque. We are of the considered view that the mere issue of cheque does not create any legal right nor any legal obligation and as such no relationship of lender or borrower, debtor or creditor, comes into existence unless and until the cheque is presented to the bank and is honoured. Therefore, the transaction of the payment by way of loan or advance is completed only the borrower.

In the case before us, there is no dispute to the fact that there was no actual out flow of money as the cheque was not presented for payment. Since in the case before us, there is 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 does not arise and the mere entry made in the books of account by the assesse showing as credit on the basis of the cheque issued, which was not encashed and was subsequently cancelled, does not bring it within the ambit of the provisions of Section 2(22)(e) of the Act."

Sri Shubham Agarwal, learned counsel for the revenue submits that the cheque having admittedly been issued by GIL to the assessee, the transaction was covered under Section 2(22)(e) of the Act and it represented deemed dividend that had been rightly subjected to tax.

Opposing the aforesaid argument, Sri R.R. Agarwal, learned senior counsel assisted by Sri Ankur Agarwal, learned counsel for the assessee submits that the provision of Section 2(22)(e) of the Act is a deeming provision. It can apply only upon fulfilment of statutory conditions mentioned therein. No amount can be treated as deemed dividend unless there is actual payment.

Having considered the argument so advanced, we note Section 2(22)(e) of the Act reads as below:-

"2. In this Act, unless the context otherwise requires,-

(22) dividend includes:-

(a).........

(b)........

(c)........

(d).......

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;"

(emphasis supplied)

From the plain reading of Section 2(22)(e) it transpires 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.

In this regard, we further find that the Madras High Court in the case of Commissioner of Income Tax Vs. Smt. Savithiri Sam reported in (1998) 114 CTR (Mad) 17, construed 'payment' used in Section 2(22)(e) to be physical/actual payment. It further held as below:-

"5. That apart, the provisions of law namely s. 2(22)(e) which we have already extracted above, says that by a fiction dividend is made to include any payment by a company etc. Therefore, it is difficult for us to introduce another fiction in respect of the words "payment. In other words, when s. 2(22)(e) itself introduces a fiction, it is improper for us to introduce another fiction and construe a payment as equivalent to a constructive payment. In this view of the matter, we are not inclined to accept the arguments advanced on behalf of the Revenue and following the decision in G.R. Govindarajulu Naidu vs. CIT (supra), we answer the reference in the affirmative and against the revenue."

Also, the Bombay High Court in the case of Commissioner of Income Tax-22 Vs. Pravin Bhimshi Chheda reported in (2014) 48 Taxmann.com 151 (Bombay), has held as below:-

"The Tribunal, then, analyses this transaction and holds that there is no flow of fund or any benefit from M/s Swati Energy and Projects Pvt. Ltd. to M/s Sujyoti Enterprises or to its partner Mr. Pravin B. Chheda. Mr. Pravin Bhimshi Chheda is the respondent-assessee before us. It is in these circumstances, that the Tribunal concluded that this is not a loan or advance so as to attract section 2(22)(e). We are not required to go into any further controversy or larger question."

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. The questions raised in this appeal are answered in the negative i.e. against the revenue and in favour of the assessee.

The appeal lacks merit and is dismissed. No order as costs.