2004 (8) TMI 66 - HC - Income Tax

Whether the acceptance of share application money in cash amounting to Rs. 20, 000 or more violates the provisions of section 269SS? Section 269SS was inserted with a view to prevent transactions in black money and to ensure that payments of Rs. 20, 000 and above are traceable to transactions through a bank. - Therefore even if share application money cannot be considered as a loan within the meaning of section 269SS of the Act we are of the view that it partakes of the character of a deposit since it is repayable in specie on refusal to allot shares and is repayable if recalled by the applicant before allotment of shares and the conclusion of the contract. - In this situation we answer the question referred to us in the affirmative in favour of the Revenue

Summary

Issues:
Whether acceptance of share application money in cash exceeding Rs. 20,000 violates section 269SS of the Income-tax Act, 1961.

Detailed Analysis:

1. Assessment Proceedings and Penalty Initiated:
During the assessment year 1990-91, a private limited company accepted cash amounts exceeding Rs. 20,000 from ten persons as share application money. The Assessing Officer found this to be a violation of section 269SS and initiated penalty proceedings under section 271D.

2. Legal Provisions Involved:
Section 269SS prohibits accepting loans or deposits of Rs. 20,000 or more in cash. The definition of 'loan or deposit' and 'deposit' under the Income-tax Act is crucial in determining the nature of the transactions.

3. Commissioner's Decision and Tribunal's Ruling:
The Commissioner held that the share application money did not violate section 269SS. However, the Income-tax Appellate Tribunal reversed this decision, considering the cash amounts as deposits and upholding the penalty imposed by the Commissioner.

4. Nature of Share Application Money:
The crucial question was whether the share application money constituted a loan or deposit. The company argued that it was not a loan but funds for share allotment. The court analyzed precedents to determine the character of such transactions.

5. Characterization of Share Application Money:
The court considered the purpose of section 269SS, aimed at preventing black money transactions. It concluded that share application money, though not a loan, resembled a deposit as it was repayable in case of share rejection or recall by the applicant.

6. Judgment and Conclusion:
The court held that share application money, exceeding Rs. 20,000 accepted in cash, was akin to a deposit under section 269SS. Therefore, the court ruled in favor of the Revenue, upholding the penalty imposed on the company for violating the provisions of the Act.

In summary, the judgment clarified the treatment of share application money exceeding Rs. 20,000 accepted in cash, emphasizing its resemblance to a deposit under section 269SS of the Income-tax Act. The court's decision favored the Revenue, affirming the penalty imposed on the company for contravening the statutory provisions.