( Expert )
11 December 2008
It depends , read the following article.
Complication in share application
THE market is witnessing a spate of public issues of listed companies. A recent requirement is that applicants should hold shares in dematerialised form. Is there a bar on applying for shares in cash? Normally, applications are made through payment of cheques or drafts. Cash applications can result in disputes over leviability of penalty on the company accepting such applications.
Section 269 SS of the Income-Tax Act, 1961 has been on the statute book for well over 20 years. It prohibits acceptance of any loans or deposits otherwise than by an account-payee cheque or bank draft if the amount is Rs 20,000 or more. Section 271D renders a person accepting cash deposits/loan liable to penalty equal to the amount of the loan or deposit taken or accepted.
There is this case (Bhalotlia Engineering Works Pvt. Ltd vs CIT (275 ITR 399)) where a private limited company accepted Rs 20,000 or more in cash from ten persons towards share application money. Subsequently, shares were allotted to these persons. The I-T department took the view that the company had violated Section 269SS, and penalty was imposed under Section 271D.
It was argued that the amounts partook of the character of deposits and the mandate of Section 269SS was violated. The company pleaded that the amounts were received as share application money. The amounts had to either be returned to the applicants or shares issued thereof. What is the nature of the payment made by the applicants? Is it a loan or a deposit?
Section 269T defines a deposit as money which is repayable after notice. Share application monies are liable to be refunded to the applicants if shares are not allotted. In a sense, it is a bailment, though not necessarily to be returned in specie.
The transactions certainly will not be of the nature of a loan. The Jharkhand High Court considered this issue. The court had no difficulty in holding that the amount paid in support of an application for shares must be considered to be a deposit till the allotment of shares or refund of the money on rejection of the application. What will happen if shares are ultimately allotted to the applicant? What is the nature of the amount in the hands of the company until the shares are allotted?
The amount cannot be a loan. But at the same time, there is an obligation on the company to return the money to the applicant or for allotting the shares applied for. Until either of these happens, the amount cannot be considered to be a loan in the hands of the company.
According to the High Court, money paid to a company in support of an application for shares is a deposit of money in the company which is repayable by it after the period for allotment of shares comes to an end, or a decision is taken regarding the allotment of shares. Thereafter, the amount is repayable to the person who paid the money, even without a demand in that behalf.
In the case of refusal of shares, the amount has to be returned in specie. As the objective of Section 269SS is to prevent black money transactions, the High Court held that the payment of Rs 20,000 or more to the company as share application money came under the umbrella of Section 269SS. The court, therefore, said that the acceptance of share application money violated Section 269SS and warranted the levy of penalty.
There have been several High Court and Supreme Court rulings on issues arising out of share application monies. The income-tax officer (ITO) is empowered to go into the genuineness of share application money and bring it to tax under Section 69.
Interest earned on the deposit of share application money can be taxed as `income under other sources' or it can go to reduce the cost of construction in the period before commencement of production, depending on the facts and circumstances of the case.
This is the first time that a High Court has held that application for shares in cash will attract Section 269SS.
The ruling has rightly thrown open a debate.