Subscription to Shares by promoter - directors

Pvt ltd 2771 views 4 replies

Sanjay

Practising C.A.

29 Points Joined January 2008

Dear Friends,

A pvt. ltd. co. was incorporated in 2008. However till date the share money has not been brought in by the promoter - directors. The co has received cash from the two directors. However the same cannot be used for showing that cash was brought in as payment for shares issued to avoid Sec 269 SS of Income Tax.

What is the solution for this problem? As of 31/03/2009 what precautions and observations along with qualificatory remarks, if any, needs to be observed from Audit and reporting point of view?

Can the directors issue a cheque dated b4 31/03/2009, which gets cleared in June 2009. This way the amount will be recd. but not realised, and will come in bank reco. Can this be worked out legally?

Your expert views are solicited on this issue.

Also if someone can provide me with draft articles of association, it would be very helpful.

Thanks in advance,

CA Sanjay Salgia.

Replies (4)

P C Agrawal

Registered independent director Past Ch

8229 Points Joined March 2007

The amendments made in definitions of private company and public company by Companies (Amendment) Act 2000 are without proper application of mind and impossible to comply with. After incorporation of company, it will take around one month for opening bank account (since first PAN application has to be made and then Board meeting to be held for passing resolution for opening bank account). It is only after opening bank account of company cheque can be deposited by the company. High Courts have held that share application money is also attracted by Sec.269SS and hence cash cannot be given. Then how on the date of incorporation itself co. can have minimum paid-up capital? The consequences of non-compliance are serious since it has been included in the definition of company itself. It means without minimum paid-up capital, the company is neither private company nor public company!!! We of our own are presuming that amount can be brought in within reasonable time. We cannot predict what will be the view of courts on this. The Govt. should have time limit of say 6 months within which money could be brought in and a return could be filed for compliance. Probably the govt has realised the mistake and removed this provision in Companies Bill 2008.

Anyway, coming to our problem, we know that MCA system will not accept the balance sheet unless the co. has paid-up capital of minimum Rs.1 lac. Hence in the given situation there is no alternative but to have minimum capital at least as on 31.3.2009 by any means. Co. will have to fight on this issue in case any objection is raised by ROC in future.

Pavan Jain S

Chartered Accountant

1575 Points Joined December 2008

Can you clarify as to why the provisions of section 269SS are applicable to the subscripttion money recieved from promoters. Such subscripttion money do not come within the definition of 'LOAN OR DEPOSIT' as defined in the said section. kindly explain!

P C Agrawal

Registered independent director Past Ch

8229 Points Joined March 2007

I am attaching a note on on Sec.269SS for your ready reference. Pl. refer Q.17 on this issue.

Pavan Jain S

Chartered Accountant

1575 Points Joined December 2008

Q 17 of attached file says that share application money is treated as loan or deposit. As per Companies Act, the subscribers to memorandum are deemed to be members of the Company. In my opinion, their contribution at the time of incorporation is taken as share capital and not share application money.

The judgement cited in Q 17 is a HC judgement and may be based on particular facts peculiar to that case. The rationale of the judgement need not be applied in every case.

kindly clarify