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TMI Blog2004 (3) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the company initially was in Venus Eye Vision Ltd. a flagship company of the group. A search under section 182 of the Act was carried out on 11-1-1996 to 13-1-1996 at the business premises of Venus Eye Vision and Dr. Sharad Patil group. The assessee company was also covered in the search. In this case, block assessment under section 158BC was framed on 21-1-1997. During the course of block assessment proceeding, the Assessing Officer noticed that on 11-1-1996 the assessee had issued share capital of Rs, 1,00,000 and had received share application money pending allotment of Rs. 16,81,500, loans of Rs. 3,62,000 from Directors and Rs. 22,01,000 from friends and relatives. The Assessing Officer also noticed 11 instances of cash receipts above Rs. 20,000 towards share application money in financial year 1994-95 and two instances in financial year 1995-96. Thus the total came at Rs. 13,32,500; out of which, Rs. 3,90,000 was repaid in cash in excess of Rs. 20,000. According to the Assessing Officer, this was in violation of section 269SS and section 269T. The Assessing Officer referred the matter to the Dy. CIT, Range-1, Nashik, who issued show-cause notices on 10-4-1997 to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital would automatically cease to be share application money and would assume the character of deposit. He had also noted that the amount was shown to have been received from close relatives of the directors or from companies in which the directors of the company or relatives of such directors were substantially interested. He also took the view that in such circumstances, it cannot be said that the persons allegedly remitting the money towards the share application money was not aware of the fact that the alleged authorized share capital was to the extent of Rs. 1 lakh only. The parties from whom share application money was alleged to have been received were as under: (a) Shri Babulal R. Deshmukh Rs. 30,000 (b) Dr. Sharad Patil Rs. 4,22,500 (c) Shri Suresh R. Patil Rs. 30,000 (d) Shri Raghunath S. Patil Rs. 30,000 (e) Shri Suhas B. Barot Rs. 25,000 (f) Shri Vikas Damu Mahajan Rs. 30,000 (g) Shri Dilip Vitthal Mahajan Rs. 1,50,000 (h) Shri Ramesh Baliram Patil Rs. 95,000 (i) Shri Sunil Baliram Patil Rs. 90,000 (j) Shri Kisan B Mhas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare capital would automatically cease to be share application money and would assume the character of deposit, it was submitted that the said contention was based on assumption that as the authorized share capital is not increased by the company, then the excess amount received would automatically cease to be share application money and would assume character of deposit. According to the assessee, this observation itself leads to only a technical breach. It was contended that the assessee had accepted the money innocently and under bona fide belief that provisions of sections 269SS and 269T were not applicable. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26. It was also submitted by the assessee that the share application money was not accepted in cash deliberately. The assessee was under bona fide belief that provisions of sections 269SS and 269T were not applicable in case of the transactions of share application money. Reliance was also placed on the decision of the ITAT Bench in the case of Bombay Conductors Electricals Ltd. v. Dy. CIT [1996] 56 TTJ 580. Without prejudice to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Dy. CIT to establish that there was a reasonable cause for not complying with the provisions of sections 269SS and 269T of the Act. As regards the initiation of penalty proceedings, the CIT observed that the second limb of section 275(1)(c) of the Act, viz. "six months from the end of the month in which action for imposition of penalty is initiated" shall apply in the instant case. According to the CIT, penalty proceedings were initiated by the Dy. CIT by notices dated 10-4-1997 and orders dropping the penalties were passed on 28-4-1997, which was within six months of initiation of action for imposition of penalty. The CIT has also observed that in view of the provisions contained in sub-section (ii) of clause (a) of Explanation to subsection (1) of section 263, the orders passed by the Dy. CIT (now Jt. CIT) in exercise of powers vested in him under the statute, such as powers under sections 271D, 271E, 271BB etc. are also covered by the revisionary provisions of section 263. He, therefore, rejected this contention of the assessee that the CIT has no power to revise the orders passed by the Dy. CIT (now Jt. CIT) under sections 271D and 271E of the Act. The CIT has further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en returned at the earliest opportunity. There was no authorized capital remaining to be subscribed as the whole of the authorized capital was fully paid up and hence, the company could not have collected any further share application money, as stated by the assessee as there was no share capital which remained to be issued. He also observed that there was also no increase as far as authorized share capital was concerned. No permission was obtained from the Registrar of Companies/Company Law Board which could have enabled the assessee to call for applications for issue of further-shares. He therefore took the view that the money received from the alleged subscribers can be considered as deposits and as such provisions of sections 269SS and 269T were applicable. No further enquiry in this regard was done by the Officer before dropping penalty proceedings. The CIT concluded that the amount received by the assessee in cash was designated as share application money; however, the amount in reality was deposit. As regards the amount of Rs. 3,90,000, the CIT directed the officer to verify the claim after proper enquiries whether the same was refund of advance made to Venus Corneal Resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enquiries regarding the genuineness of the amounts received by the company. Statements of the concerned parties were also recorded and they have confirmed having given money for share application. While relying upon the decision of the ITAT Bench, Jaipur in the case of Jagvijay Auto Finance (P.) Ltd., it was submitted that the provisions contained in section 269SS were not violated, when the assessee company accepted share application money. It was submitted that the aforesaid contention of the assessee was accepted by the Dy. CIT while dropping penalty proceedings. Therefore, it cannot be said that the order of the Dy. CIT dropping the penalty proceedings was erroneous and prejudicial to the interests of the revenue. He also relied on the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 wherein it has been held that "Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's explanation dropped the penalty proceedings. In view of the above, it was submitted that the orders dropping the penalty proceedings were not Erroneous and prejudicial to the interests of the revenue. Therefore, the order of the CIT is not sustainable in law. 6. Shri Satyakam Mishra, the ld. DR strongly supported the order of the CIT. He further submitted that the order of the CIT clearly brings out the fact that apart from accepting the interpretation of the Assessing Officer with reference to the transactions involved, the Dy. CIT made no enquiry or effort to ascertain the true facts relating to these transactions. According to him, these transactions were examined only from the angle of cash credits at the level of the Assessing Officer and that no examination was done as far as the provisions of sections 271D and 271E are concerned. He also submitted that as per the balance sheet as on 31-3-1993, the subscribed capital was Rs. 18,500 while share application money was Rs. 2,14,000. He further pointed out that the said balance sheet also shows that investment of Rs. 2,14,000 was made in Venus Eye Vision Ltd. It was also brought tour notice that as per balance sheet as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that in the case of share application money if the amounts were received in cash, there is no contravention of sections 269SS and 269T. In the instant case, the main issue is as to whether the amounts received by the assessee were share application or not, submitted the ld. DR. He further submitted that the Dy. CIT before dropping the penalties had not made any enquiry to ascertain the exact nature of the transactions. He further submitted that merely the book entries are not sufficient to prove the nature of receipt or expenditure and that the same needs to be substantiated. As regards the office note written by the Dy. CIT dropping the penalty proceedings, the ld. DR Submitted that there is nothing to show that the Dy. CIT has gone into details of the case, studied the relevant records, examined the exact nature of the transactions or raised any query as to why the amounts were received in cash. It was submitted that the Dy. CIT has dropped the penalty proceedings merely on the basis of submissions given by the assessee and certain observations made by the Assessing Officer during the course of assessment proceedings. In view of the above, it was submitted that the orders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of Rs. 16,81,500, loans of Rs. 3,62,000 from directors and of Rs. 22,01,000 from friends and relatives. The Assessing Officer also noticed that the assessee had received cash above Rs. 20,000 towards share application money in financial year 1994-95 and two instances in financial year 1995-96. It was also noticed that Rs. 3,90,000 was repaid in cash in excess of Rs. 20,000. The Assessing Officer took the view that the assessee had contravened the provisions of sections 269SS and 269T of the Act. The matter was referred to the Dy. CIT for imposing penalty under sections 271D and 271E of the Act. The Dy. CIT initiated the penalty proceedings under section 271D read with section 269SS for the assessment years 1995-96 and 1996-97 and under section 271E read with section 269T for the assessment year 1996-97. In response to the show-cause notice issued by the Dy. CIT, it was submitted that "The Company had to raise the share capital and in the processes collected the share application moneys. The amount so collected has been duly accounted in the books under the account head namely 'share application money'. The assessee had also filed details of share applicants and the amounts pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payable on demand, the deposit would become payable when a demand is made. In the case of a loan, however, the obligation to repay the amount arises immediately on receipt of the loan. It is possible that in case of deposits which are for a fixed period or loans which are for a fixed period, the point of repayment may arise in a different manner. But by and large, the transaction of a loan and the transaction of making a deposit are not always considered identical." As explained by the Supreme Court in the case of CIT v. Bazpur Co-op. Sugar Factory Ltd. [1988] 172 ITR 321 the essence of a 'deposit' is that there must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligation or liability on it to return the same to Sri Sunil Kumar as the same was intended to go to enhance the capital of the assessee company. Till the date of allotment of the shares there was no liability on the assessee company to return the amount of Rs. 34,000 to Sri Sunil Kumar. Such liability arose only when the allotment of shares could not be made to him. The amount of Rs. 34,000 thus had no character of a 'loan' or 'deposit' on 20-2-1990 when it was received in cash. It is the well settled proposition of law that where the breach of a provision in a Statute is to cast a penal liability on the subject such provision should be construed strictly. Keeping that principle in mind it cannot be said in this case that provisions contained in section 269SS were violated when the assessee company took or accepted an amount of Rs. 34,000 on 20-2-1990 from Sri Sunil Kumar by way of application money for purchase of shares of the assessee-company. That being so, the assessee company committed no default under section 269SS so as to be liable for penalty under section 271D. The penalty imposed upon the assessee has thus to be cancelled." From the above decision, it would be clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s voluntarily filed by the assessee before detection of concealment. The CIT took the view that the order of the Assessing Officer dropping the penalty proceedings under section 271(1)(c) was erroneous and prejudicial to the interests of revenue. On appeal, by majority view it was held that the CIT had no jurisdiction to revise the order of the Assessing Officer. The Tribunal found that the view taken by the Assessing Officer was a possible view and the CIT merely because he did not agree with the view could not use his powers under section 263. The Tribunal has also considered the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. In the instant case also, the view taken by the Dy. CIT was duly supported by the decision of the Jaipur Bench of the Tribunal in the case of Jagviyay Auto Finance (P.) Ltd. referred to above. In the facts and circumstances of the present case, it cannot be said that the Dy. CIT has not applied his mind or no enquiries were made before passing the orders. The orders of the Dy. CIT cannot be held erroneous and prejudicial to the interests of the revenue, merely on suspicion and vague terms that no enquiries were made by the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 34,000 on 20-2-1990 by the assessee company, there was no obligation or liability on it to return the same to Shri Sunil Kumar as the same was intended to go to enhance the capital of the assessee company. Thus, the Tribunal held that the amount of Rs. 34,000 cannot be considered as a loan or deposit on 20-2-1990 when it was received in cash. In the show-cause notice, the CIT stated that "the amount shown to be received in excess of authorized share capital would automatically cease to be share application money." From the said observation, it can be safely inferred that the CIT himself accepted that the money originally received was share application money, but as the authorized share Capital was less than the share application money so received, the same would cease to be share application money. In our view, if the initial character of the money received is accepted as towards share capital, then certainly the transaction would not come within the scope of section 269SS of the Act. In such cases, we have to see the purpose of receipt of money which will show the character of transaction. In the instant case, the parties have confirmed having given the money toward share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain instances of cash repaid in excess of Rs. 20,000. He, therefore, vide his letter dated 4-4-1997 made a reference to the undersigned and stated that there was a prima facie case of contravention of section 269T and levy of penalty under section 271E. Accordingly, show-cause notice dated 10-4-1997 was issued to the assessee directing the assessee company to show cause why a penalty under section 271E should not be imposed. In response to the show-cause notice the assessee was represented by Shri Shailesh Shah, ITP and he has filed written submission vide letter dated 16-4-1997, which were discussed and kept on record. He was heard. It was submitted by the assessee's representative that the assessee is a private limited company and for the purpose of raising share capital, money was collected from various persons towards share application. This fact has been brought to the notice of the Assessing Officer during the proceedings for block assessments and the Assessing Officer has not disputed the fact that the money repaid in cash over Rs. 20,000 was out of money received towards share application. The assessee's representative submitted that repayment of money by way of cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c issue before the Dy. CIT was that as to whether the provisions of sections 269SS and 269T were applicable to the facts of the present case. The Dy. CIT found that provisions of these sections were not applicable and, therefore, no penalty was leviable under sections 271D and 271E of the Act. Consequently, he dropped the penalty proceedings. The Dy. CIT was not required to consider whether there was a reasonable cause within the meaning of section 273B of the Act. Therefore, the CIT was not justified in holding that the orders passed by the Dy. CIT were erroneous and prejudicial to the interests of the revenue. The decisions relied upon by the ld. DR are not applicable to the facts and circumstances of the present case. In the case of Maddi Venkataraman Co. (P.) Ltd., the Hon'ble Supreme Court held that expenses incurred in transactions carried out in violation of the provisions of FERA are not deductible. In our view, this decision is of no help to the department. The ld. DR has also cited the decision of the Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd. In our view, the said decision is also not applicable to the facts of the present case. In the said case, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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