SHARE APPLICATION MONEY IS NOT LOAN OR DEPOSIT- however preferable mode is through A/c payee cheques or other permitted banking instruments for receiving and refunding share application money.

[C.A. DEV KUMAR KOTHARI]

Relevant provisions and links:

Sections 68, 269SS, 269T, 271D, 271E which can be attracted in case of share application money

Judgments found in section wise judgments on this website for sections 68, 269SS, 269T, 271D and 271E about share application money.

Share application money:

Share application money is received by company from the applicant with a request to allot shares. The company may allot shares, within the permissible limits for authorized and subscribed capital and also keeping in mind the amount required to be raised by way of share capital.

The money received is therefore not in nature of loan taken by company or loan given by applicant to company.

The money received is therefore not also in nature of deposit taken by company or deposit made by the applicant.

A separate account is required to be maintained for share application money. As per accounting practices and considering volume, share application account can be maintained in a consolidated manner or can be sub-divided for different share holders. However, in the Balance Sheet prepared for the Companies Act, the consolidated amount will appear.

Subsequent transactions:

After receipt of share application money, company can allot shares. In case applications are received for excessive number of shares, then shares can be allotted in a reasonable method of allocation under which some applicant may be allotted fully, some partially, and in case of some applicant entire money might have to be refunded. This will be as per basis of allotment. In case of public issue of shares the basis of allotment is decided by the company, its RTA and the Stock Exchange where shares are to be listed. Some times SEBI may also intervene in such matters when there is heavy over subscription.

In case full allotment is not made excess amount received is refunded.

In case partial allotment is made, and full amount is not received through application, excess of application money payable on shares allotted can be retained towards share allotment money.

In some situations, excess amount received can also be retained towards call money payable, in case the terms of issue prescribes for call money.

Terms of issue and management:

Whether there is a public issue or private issue the company should have proper system for management of issue. There should be proper application, record of application, allotment, refund etc.  in proper and systematic manner. The issue of shares should also be made in a reasonable manner and within reasonable time. These precautions are required to substantiate that the money received was in fact share application money. In case application money is received in very casual and frequent manner and similarly some refunds are also made, then book entries may be disregarded and inference can be drawn that the money received is in fact loan or deposit.       

Transactions by A/c payee cheques or other permitted banking channels should be preferred:

For proper internal check, control, and timely actions it is always better to put transactions through banking channels by permitted instruments. This is also required to avoid applicability of various provisions which entail disallowance of expenses, addition to income or attract provisions of penalty etc.

Besides transactions in cash also causes doubts and suspicion in mind of revenue authorities. Therefore, it is always better to have maximum transactions of making payment and receiving payment of whatever nature by or through permitted instruments of banking channel.

Share application money is not loan or deposit for the purposes of section 269SS and 269T:

We find several reported cases in which the Assessing Officers issued show cause notice to treat share application money received or repaid otherwise than by A/c payee cheques treating violation of section 269SS or 269T as the case may be. Even after the assessee made out a case of reasonable cause and non-applicability of provision in case of share application money, the AO levied penalty. In due course of litigation the matters have gone till High Courts. In many cases High Courts have held that these provisions were not applicable to share application money and penalty was not leviable. Some Tribunals and High Courts have taken view that penalty is leviable. Verdict of the Supreme Court is not yet available on these issues. Therefore, there is still contingency.

Section 68 and share application money:

In case of share application money, the company receiving share application money is also required to establish nature and source of money received. Though after allotment, the return of allotment and register of members are public documents on which share holder is recorded and a lenient view is taken that once shares are allotted and share holder is identified the company need not to establish sources of funds etc. However, in spited o judgments of the Supreme Court, controversy is still alive and on different facts, different views can be taken. We cannot blindly rely simply on judgment of the Supreme Court because the facts in the case before the Supreme Court can be distinguished.

Therefore, the facts should be clear and established with documents, third parties like bank, share brokers, or issue managers, use of permitted banking instruments for making or receiving payment.  

COMMISSIONER OF INCOME TAX-III Versus M/S. SHRI SIDHDATA ISPAT (P) LTD.  2012 (9) TMI 846 - DELHI HIGH. In case before Delhi High Court, matter of penalty was u/s 271D for receipt of share application money in cash treated as loan or deposit in violation of S 269SS.The Court held that share application money was not loan or deposit so penalty was not leviable.

In the case of CIT v. Rugmini Ram Raghav Spinners Pvt. Ltd. 2007 (7) TMI 237 - MADRAS HIGH COURT matter was about repayment of share application money in cash in violation of S. 269 T.

In these cases it has been held that the share application money was not deposit or loan under the provisions of Section 269T and therefore, the penalty u/s 271E was liable to be deleted.