Share application money attracts tax

Updated: Oct 30 2005, 05:49am hrs
Section 269SS of the IT Act, 1961 (Act) prohibits taking of any loan or deposit from any person other than by an account payee cheque or account payee bank draft where the amount of such loan or deposit or the aggregate of these are Rs 20,000 or more. There is no definition of 'loan or deposit' in section 269SS. However, in section 269T, the term 'deposit" has been defined to mean 'deposit of money, which is repayable under notice or payable after a period and in the case of a person other than a company, includes deposit of any nature. Taking or accepting any loan or deposit in contravention of section 269SS is punishable u/s 271D of the Act, which could be a sum equal to the amount of loan or deposit so taken or accepted.

Share application money receipts

Joint stock companies, by and large, raise their capital through issue of shares. The process starts with the invitation through application with a part of money towards the value of shares being paid along with applications for shares in the company. The process of allotment and return of money to those, whom shares are not allotted, takes some time. In the meanwhile, the money received with applications remains with the company. The issue for consideration is whether during the period money remains with the company, which is to be appropriated to the company's account on allotment or is to be refunded for non-allotment can be considered 'deposit' and would attract section 269SS.

Jharkhand High Court's view

In its decision in the case of Bhalotia Engg. (P) Ltd. v. CIT, 196 CTR (Jharkhand) 619, a division bench of the high court has answered this query in the affirmative. The question referred to the HC was 'whether the acceptance of share application money in cash amounting to Rs 20,000 or more violates the provisions of section 269SS' According to the court, the money paid to a company in support of an application for shares is a deposit of money in the company, which is repayable after the period of allotment comes to an end, or a decision is taken not to allot the shares. In this background, according to the court, there cannot be any difficulty in holding that the amount paid in support of the applications for shares must be considered to be a deposit till the allotment of shares or refund of the money. Obviously, the amounts paid cannot be considered as 'loans'. But these will certainly partake the character of deposit, attracting the prohibition contained in section 269SS. In view of this reasoning, the HC answered the reference in the affirmative.

Critique of the decision

From the foregoing discussion, it is clear that though there is no definition of 'deposit' in section 269SS, some indication about the same can be had from section 269T, where it has been said that deposit is money, which is repayable after notice or after a period. Thus, to be a deposit (i) it has to be for a period (agreed upon between the depositor and the depositee) and if no period is fixed, it should be payable after a notice. Hence, the consent of the person providing the money and acceptance by the depositee has to be there on either of these counts before money advanced can be treated as 'deposit'. Both the sections namely sections 269SS & 269T do not envisage the situations of 'deemed deposits' as has been presumed by the HC. If the HC's hypothesis in the judgement is taken to its logical conclusion, there would be umpteen situations, where penalties u/s 271D could be imposed. For example, advances given in cash for purchase of properties, land, machinery, etc., will partake the character of deposit till the transactions are concluded either way. Section 269SS does not stipulate that advances given in such situations should be treated as deposits.

Further, in the case of share application money, the companies cannot deal with it in the manner they like. Section 69(4) of the Companies Act, 1956 provides that the application money received is to be deposited and kept deposited in a scheduled bank until the time specified in sub-section (4) of section 69. For contravention of this requirement, punishment is provided with a fine, which may extend to Rs.500. Similar requirement is prescribed by section 73(3) of the Companies Act. In view of these requirements, the share application money received cannot be dealt with freely as in the case of deposits. These provisions, it appears, were not brought to the notice of the HC when the issue was argued.

Concluding comments

The issue decided raises an arguable matter and to cut short the litigation, the CBDT should issue a clarificatory circular.

The author is former chairman, Central Board of Direct Taxes