2017 (12) TMI 369 - HC - Income Tax

Tax Tribunal: No Deemed Dividend where Cheque Not Encashed

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

The court examined the applicability of Section 2(22)(e) of the Income Tax Act in a case involving a disputed amount treated as deemed dividend. The ... 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. Issues:1. Applicability of Section 2(22)(e) of the Income Tax Act.2. Treatment of a specific amount as deemed dividend under Section 2(22)(e).3. Justification of the Tribunal in deleting the addition made by the Assessing Officer as deemed dividend.Issue 1: Applicability of Section 2(22)(e) of the Income Tax Act:The case involved a dispute regarding the applicability of Section 2(22)(e) of the Income Tax Act, 1961. The Revenue contended that a certain amount should be treated as deemed dividend under this section. The Tribunal analyzed whether the statutory conditions were met for the provision to apply. The section specifies that certain payments by a company to a shareholder or a concern in which the shareholder has a substantial interest can be treated as deemed dividend. The court emphasized that the provision operates on a notional basis, taxing specified payments as deemed dividends. The key consideration was whether there was an actual payment of money.Issue 2: Treatment of a specific amount as deemed dividend under Section 2(22)(e):The dispute centered on an amount disclosed by the assessee as a credit balance of a sister concern. The Assessing Officer proposed to tax this amount as deemed dividend under Section 2(22)(e). However, the Tribunal found that a cheque issued for this amount was never encashed and was subsequently cancelled. As per the court's analysis, the mere issuance of a cheque without actual payment did not constitute payment of any sum. The court highlighted that for a payment to qualify as deemed dividend, there must be an actual transfer of money, which was lacking in this case. Therefore, the court held that the provision of Section 2(22)(e) was not attracted due to the absence of actual receipt of money by the assessee.Issue 3: Justification of the Tribunal in deleting the addition made by the Assessing Officer as deemed dividend:The Tribunal had deleted the addition made by the Assessing Officer as deemed dividend, emphasizing that no actual outflow of money occurred as the cheque was never presented for payment. The court concurred with this reasoning, stating that the provision of Section 2(22)(e) could not be applied based on a notional or deemed payment in the absence of an actual transaction. Citing precedents from the Madras High Court and the Bombay High Court, the court reaffirmed that the term 'payment' in Section 2(22)(e) referred to physical or actual payment, not a constructive payment. Consequently, the court ruled against the revenue and in favor of the assessee, dismissing the appeal.In conclusion, the judgment delved into the interpretation of Section 2(22)(e) of the Income Tax Act, emphasizing the requirement for actual payment to trigger the provision's application. The court's analysis focused on the absence of real money transfer in the case, leading to the dismissal of the appeal and ruling in favor of the assessee.