Mere Issuance of a Cheque that was Subsequently Cancelled and Returned would not constitute ‘Payment of Sum’ attracting ‘Deemed Dividend’: Allahabad HC [Read Order]

A division bench of the Allahabad High Court recently ruled that the provisions of deemed dividend would not attract in case of mere issuance of a cheque that was subsequently cancelled and returned. While quashing a departmental appeal against the order of ITAT, the bench clarified that payment of any sum is necessary to constitute ‘deemed dividend’ for the purpose of Section 2(22)(e) of the Income Tax Act, 1961.

During the assessment proceedings, the AO found that 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. According to him, the same would constitute ‘deemed dividend’ under section 2(22)(e) of the Income Tax Act, 1961.

Assessee claimed that It was only an accounting entry. 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. However, the 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.

The bench noted that the legislative intent behind Section 2(22)(e) was to tax certain payments made by specified persons as deemed dividend by treating such payments to be dividend payment on notional basis. It noted that 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,” the bench said.

Quashing the order, the bench said 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.”