Share capital
This query is : Resolved
11 August 2011
1) Can a private limited company accepts share application from relatives in cash and to what extent?
2) Can it issue shares against amount received in cash?
2) Can it issue shares against amount received in cash?
12 August 2011
Courts have given divergent views while it exceeded Rs.20,000/- per person leading to a controversy regarding application of section 269SS of the Income tax Act,1961.
12 August 2011
Check out the decision of Jharkhand HC (2005) 275 ITR 399 (Jharkhand), held that Share application money partakes the character of deposit within the meaning of 269SS.
1. Receipt of Share Application money in cash exceeding Rs.20,000 should be avoided.
2. There is no issue with regard to allotment of shares against share application money received in cash.
1. Receipt of Share Application money in cash exceeding Rs.20,000 should be avoided.
2. There is no issue with regard to allotment of shares against share application money received in cash.
12 August 2011
Citation is Bhalotia Engineering Works Pvt. Ltd. v. CIT [2005] 275 ITR 399 (Jharkhand).
12 August 2011
In the case of Jagvijay Auto finance(p) ltd., v CIT (1995) 52 ITD 504(Jp-Trib) it has been held that share application money does not constitute deposit covered u/s 269SS. That is why I said about controversy.
17 August 2011
Sir I have taken Rs. 10 Lakhs in Cash in Share Application and cannot allot the shares bcos Paidup is already exhausted.
What are the consequences?
What are the consequences?
25 July 2025
Here’s a summary and explanation based on your queries and the cases cited:
---
### 1) **Can a Private Limited Company accept share application money in cash from relatives and to what extent?**
* **Legally,** a company *can* accept share application money in cash. However, **Section 269SS of the Income Tax Act, 1961** prohibits accepting loans or deposits by a company in cash exceeding **Rs. 20,000** per transaction.
* Whether share application money amounts to a “loan or deposit” under Section 269SS is debatable. Different courts have given different views:
* **Jharkhand High Court (Bhalotia Engineering Works Pvt. Ltd. v. CIT, 2005)** held that share application money *does* partake the character of deposit under Section 269SS. So accepting more than Rs. 20,000 in cash as share application money *could* be a violation.
* **ITAT Jaipur (Jagvijay Auto Finance (P) Ltd. v. CIT, 1995)** held share application money *does not* constitute a deposit under Section 269SS.
* **In practice, to avoid controversy and litigation risk, it is advisable to avoid accepting share application money in cash exceeding Rs. 20,000 per person.**
---
### 2) **Can the company issue shares against amount received in cash?**
* **Yes**, shares *can* be issued against cash received as share application money.
* The restriction applies only on the mode of receipt of cash exceeding Rs. 20,000 in a single transaction (Section 269SS).
* If shares are issued against cash received beyond this limit, it might attract penalty or disallowance from the Income Tax department for breach of Section 269SS.
---
### 3) **If Rs. 10 Lakhs is received in cash as share application money but shares cannot be allotted because paid-up capital is exhausted, what are the consequences?**
* The amount received without allotment of shares should be treated as **share application money pending allotment**.
* The company is **not allowed to retain share application money without allotment indefinitely**.
* No specific time limit under the Companies Act (pre-2013) for allotment, but under Companies Act 2013, shares must be allotted within **60 days**, else the money must be refunded within 15 days with interest.
* Utilization of such money without allotment may be considered irregular and may attract scrutiny.
* Additionally, retaining such money may attract the application of deposit rules (Company Law or RBI/FEMA regulations if foreign currency involved).
* The company should either **allot shares by increasing authorized capital** or **refund the money immediately**.
* Holding excess cash without allotment may also cause **penalty, disallowances, and reputational risk**.
---
### Summary / Best Practice:
| Issue | Suggested Action |
| ----------------------------------------- | ------------------------------------------------------------------------ |
| Accepting share application money in cash | Avoid cash > Rs. 20,000 per person to avoid Section 269SS violation |
| Issuing shares against cash | Allowed, but cash receipt limit must be respected |
| Receiving cash but shares not allotted | Allot shares within 60 days or refund with interest |
| Paid-up capital exhausted | Increase authorized capital before allotment or refund application money |
---
If you want, I can help you draft a letter or resolution related to refund or allotment or provide further clarity on the Companies Act and Income Tax provisions related to this. Would you like that?
---
### 1) **Can a Private Limited Company accept share application money in cash from relatives and to what extent?**
* **Legally,** a company *can* accept share application money in cash. However, **Section 269SS of the Income Tax Act, 1961** prohibits accepting loans or deposits by a company in cash exceeding **Rs. 20,000** per transaction.
* Whether share application money amounts to a “loan or deposit” under Section 269SS is debatable. Different courts have given different views:
* **Jharkhand High Court (Bhalotia Engineering Works Pvt. Ltd. v. CIT, 2005)** held that share application money *does* partake the character of deposit under Section 269SS. So accepting more than Rs. 20,000 in cash as share application money *could* be a violation.
* **ITAT Jaipur (Jagvijay Auto Finance (P) Ltd. v. CIT, 1995)** held share application money *does not* constitute a deposit under Section 269SS.
* **In practice, to avoid controversy and litigation risk, it is advisable to avoid accepting share application money in cash exceeding Rs. 20,000 per person.**
---
### 2) **Can the company issue shares against amount received in cash?**
* **Yes**, shares *can* be issued against cash received as share application money.
* The restriction applies only on the mode of receipt of cash exceeding Rs. 20,000 in a single transaction (Section 269SS).
* If shares are issued against cash received beyond this limit, it might attract penalty or disallowance from the Income Tax department for breach of Section 269SS.
---
### 3) **If Rs. 10 Lakhs is received in cash as share application money but shares cannot be allotted because paid-up capital is exhausted, what are the consequences?**
* The amount received without allotment of shares should be treated as **share application money pending allotment**.
* The company is **not allowed to retain share application money without allotment indefinitely**.
* No specific time limit under the Companies Act (pre-2013) for allotment, but under Companies Act 2013, shares must be allotted within **60 days**, else the money must be refunded within 15 days with interest.
* Utilization of such money without allotment may be considered irregular and may attract scrutiny.
* Additionally, retaining such money may attract the application of deposit rules (Company Law or RBI/FEMA regulations if foreign currency involved).
* The company should either **allot shares by increasing authorized capital** or **refund the money immediately**.
* Holding excess cash without allotment may also cause **penalty, disallowances, and reputational risk**.
---
### Summary / Best Practice:
| Issue | Suggested Action |
| ----------------------------------------- | ------------------------------------------------------------------------ |
| Accepting share application money in cash | Avoid cash > Rs. 20,000 per person to avoid Section 269SS violation |
| Issuing shares against cash | Allowed, but cash receipt limit must be respected |
| Receiving cash but shares not allotted | Allot shares within 60 days or refund with interest |
| Paid-up capital exhausted | Increase authorized capital before allotment or refund application money |
---
If you want, I can help you draft a letter or resolution related to refund or allotment or provide further clarity on the Companies Act and Income Tax provisions related to this. Would you like that?
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