Deemed dividend provisions are not attracted in the absence of actual payment – High Court

Deemed dividend provisions not attracted in absence of actual payment. Payment u/s 2(22)(e) has to be physical-actual and not mere book entry-High Court

ABCAUS Case Law Citation:
ABCAUS 2144 (2017) (12) HC

The Challenge/Grievance:
The instant appeal was filed by the Income Tax Department (the Revenue/Department) This under Section 260A of the Income Tax Act, 1961 (the Act), against the order of the Income Tax Appellate Tribunal (ITAT) on the issue of deletion of addition made on account of deemed dividend u/s 2(22)(e).

Important Case Laws Cited/relied upon by the parties:
Commissioner of Income Tax-22 Vs. Pravin Bhimshi Chheda (2014) 48 Taxmann.com 151 (Bom)
Commissioner of Income Tax Vs. Smt. Savithiri Sam (1998) 114 CTR (Mad) 17

Brief Facts of the Case:
For the relevant Assessment Year (AY), the respondent assessee company had disclosed a credit balance standing in the name of a sister concern. During the assessment proceedings, the Assessing Officer (AO) proposed to tax the said amount in the hands of the assessee treating the same to be deemed dividend within the meaning of Section 2(22)(e) of the Act.

The assessee objected to the said proposal and it submitted that it had shown credit balance on account of a cheque having been issued by the sister concern but that cheque had not been accepted and returned back. 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 as it was only an accounting entry.

However, the Assessing Officer 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 sister concern to the assessee.

Upon further appeal by the revenue, the Tribunal observed that undisputed fact was that there was no actual out flow of money as the cheque was not presented for payment. The ITAT opined that but for the book entry, 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 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, did not being it within the ambit of the provisions of Section 2(22)(e) of the Act.

Contention made on behalf of the Petitioner Revenue:
It was submitted that the cheque having admittedly been issued by the sister concern 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.

Contentions made on behalf of the Respondent Assessee:
It was submitted that the provision of Section 2(22)(e) of the Act being deeming provision, can apply only upon fulfilment of statutory conditions mentioned therein. No amount can be treated as deemed dividend unless there is actual payment.

Observations made by the High Court:
The Hon’ble High Court observed 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 its sister concern. No money passed through from the sister concern to the assessee.

The Hon’ble High Court opined that 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.

The Hon’ble High Court also placed reliance on the judgments of Madras High Court and Bombay High Court wherein also the their Lordships had held that the term ‘payment’ used in Section 2(22)(e) has to be physical/actual payment and in the absence actual flow of fund, it could not be considered a loan or advance so as to attract section 2(22)(e).

Decision/ Conclusion/Held:
The Hon’ble High Court held that 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 were accordingly answered in the negative i.e. against the revenue and in favour of the assessee.

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