Purchase of shares of pvt co in cash
This query is : Resolved
19 May 2014
Sir/Madam,
I have to know whether a Pvt Ltd co can issue the shares in cash or not? As per Companies act 2013 sec 42 it cannot receive any money in cash for Share allotment.
But I wanted to know what was the Law in old Companies Act 1956.
And consequences for Issue of Shares in cash as per Income Tax Act on company and also on person applying for such shares.
Please help me as soon as possible
I have to know whether a Pvt Ltd co can issue the shares in cash or not? As per Companies act 2013 sec 42 it cannot receive any money in cash for Share allotment.
But I wanted to know what was the Law in old Companies Act 1956.
And consequences for Issue of Shares in cash as per Income Tax Act on company and also on person applying for such shares.
Please help me as soon as possible
19 May 2014
The law for issue of share was same previous also.
20 May 2014
And may I know what are the consequences under Income Tax Act for issue of Shares in Cash (Upon Co.) and for Making application for shares in Cash (Upon Holders)
10 August 2024
The issuance of shares and the mode of payment for shares have been governed by various regulations under the Companies Act, 1956 and the Companies Act, 2013. Here’s a comprehensive overview of the rules and consequences related to the issuance of shares in cash:
### **Under the Companies Act, 1956**
**1. Issuance of Shares in Cash:**
- **Regulation:** Under the Companies Act, 1956, there were no specific provisions prohibiting the receipt of payment for shares in cash. Companies could accept payment in cash or through other means, provided that it complied with the relevant provisions of the Act and did not contravene any rules regarding share capital.
**2. Provisions:**
- **Section 69:** Section 69 of the Companies Act, 1956, which dealt with the issue and allotment of shares, did not specifically address the prohibition of cash payments for shares.
### **Under the Companies Act, 2013**
**1. Issuance of Shares in Cash:**
- **Section 42 (Private Placement):** Under the Companies Act, 2013, Section 42 governs private placement of shares and states that a company cannot receive money in cash for shares issued under this provision. Payments must be made through banking channels.
- **Section 62 (Right Issue):** In the case of a rights issue or other forms of share issuance, payments must also be made through banking channels, in accordance with the provisions related to share capital and payment modes.
### **Consequences Under the Income Tax Act**
**1. For the Company:**
- **Section 68 (Unexplained Credit):** If a company receives payment for shares in cash and the payment cannot be properly accounted for or explained, it may be treated as unexplained credit under Section 68 of the Income Tax Act. The amount received in cash could be deemed as income and subjected to tax.
- **Penalties:** If the company is found to be in violation of the Companies Act, 2013 or the Income Tax Act, it may face penalties, and the amount received in cash could be treated as income.
**2. For the Shareholder:**
- **Section 56 (Income from Other Sources):** If shares are purchased in cash and the source of cash is not properly disclosed or is found to be unaccounted, it may lead to additional scrutiny. The shareholder may face tax implications if the income from such transactions is considered unexplained or not properly accounted for.
- **Disclosure:** Shareholders should ensure that payments are made through proper banking channels to avoid any potential tax issues.
### **Summary**
- **Companies Act, 1956:** No specific prohibition on cash payments for shares.
- **Companies Act, 2013:** Cash payments for shares are prohibited. Payments must be made through banking channels.
- **Income Tax Act Consequences:**
- **For the Company:** Cash payments may be treated as unexplained credits and taxed accordingly.
- **For the Shareholder:** Unaccounted cash transactions could lead to tax issues if not properly disclosed.
### **Recommendations**
1. **Compliance with Law:** Ensure that all transactions comply with the Companies Act, 2013, and make payments through proper banking channels.
2. **Documentation:** Maintain proper documentation for all share transactions to provide a clear trail of payments and sources of funds.
3. **Consult Professionals:** Seek advice from legal and tax professionals to ensure compliance with all relevant laws and to address any potential issues.
By adhering to these guidelines, you can ensure compliance with regulatory requirements and avoid potential legal and tax-related complications.
### **Under the Companies Act, 1956**
**1. Issuance of Shares in Cash:**
- **Regulation:** Under the Companies Act, 1956, there were no specific provisions prohibiting the receipt of payment for shares in cash. Companies could accept payment in cash or through other means, provided that it complied with the relevant provisions of the Act and did not contravene any rules regarding share capital.
**2. Provisions:**
- **Section 69:** Section 69 of the Companies Act, 1956, which dealt with the issue and allotment of shares, did not specifically address the prohibition of cash payments for shares.
### **Under the Companies Act, 2013**
**1. Issuance of Shares in Cash:**
- **Section 42 (Private Placement):** Under the Companies Act, 2013, Section 42 governs private placement of shares and states that a company cannot receive money in cash for shares issued under this provision. Payments must be made through banking channels.
- **Section 62 (Right Issue):** In the case of a rights issue or other forms of share issuance, payments must also be made through banking channels, in accordance with the provisions related to share capital and payment modes.
### **Consequences Under the Income Tax Act**
**1. For the Company:**
- **Section 68 (Unexplained Credit):** If a company receives payment for shares in cash and the payment cannot be properly accounted for or explained, it may be treated as unexplained credit under Section 68 of the Income Tax Act. The amount received in cash could be deemed as income and subjected to tax.
- **Penalties:** If the company is found to be in violation of the Companies Act, 2013 or the Income Tax Act, it may face penalties, and the amount received in cash could be treated as income.
**2. For the Shareholder:**
- **Section 56 (Income from Other Sources):** If shares are purchased in cash and the source of cash is not properly disclosed or is found to be unaccounted, it may lead to additional scrutiny. The shareholder may face tax implications if the income from such transactions is considered unexplained or not properly accounted for.
- **Disclosure:** Shareholders should ensure that payments are made through proper banking channels to avoid any potential tax issues.
### **Summary**
- **Companies Act, 1956:** No specific prohibition on cash payments for shares.
- **Companies Act, 2013:** Cash payments for shares are prohibited. Payments must be made through banking channels.
- **Income Tax Act Consequences:**
- **For the Company:** Cash payments may be treated as unexplained credits and taxed accordingly.
- **For the Shareholder:** Unaccounted cash transactions could lead to tax issues if not properly disclosed.
### **Recommendations**
1. **Compliance with Law:** Ensure that all transactions comply with the Companies Act, 2013, and make payments through proper banking channels.
2. **Documentation:** Maintain proper documentation for all share transactions to provide a clear trail of payments and sources of funds.
3. **Consult Professionals:** Seek advice from legal and tax professionals to ensure compliance with all relevant laws and to address any potential issues.
By adhering to these guidelines, you can ensure compliance with regulatory requirements and avoid potential legal and tax-related complications.
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