SHARE APPLICATION MONEY CANNOT BE TREATED AS LOANS AND ADVANCES

[Mr. M. GOVINDARAJAN]

In ‘Income Tax Officer V.P. Limited’ – (2012) 18 ITR 562 (Mum) the assessee company is engaged in the business of website hosting, domain name registration and allied services.   The assessee filed return declaring income as NIL after claiming deduction under Section 10A for Rs.64,87,472/-  The Assessing Officer found in the Balance sheet under Schedule 10 that the assessee has shown share application money received from Transecute India Private Limited (TIPL) of Rs.1.3 crores.  Since the directors in the Assessee Company and Transecute India Private Limited as one and the same the Assessing Officer came to the conclusion that the assessee showed under the head ‘current liabilities’ as share application received may be covered by the provisions of Sec. 2(22)(e) of the Income Tax Act, 1961. The submission of the assessee is that the sum received by the assessee is towards the share application and it should not be deemed to be dividend in the hands of the assessee company.  However the Assessing Officer confirmed the demand as deemed dividend under Section 2(22) (e) of the Act.

The Commissioner of Income Tax (Appeals) on the appeal of the assessee held the following:

It is agreed by the Assessing Officer that the sums received are towards share application money;

When the nature of receipt par takes the character of share application money, it cannot be treated as loan/advance;

At the time of receipt of money the intention was to invest shares of the appellant company and hence the nature of the receipt was not that of loan or advance;

Only loans and advances can be considered as deemed dividend for the purpose of Section 2(22)(e);

When what has been received as share application money on which there is no dispute, the provisions of Section 2(22)(e) are not attracted.

Hence the Commissioner (Appeals) deleted the addition made by the Assessing Officer.

Aggrieved against the order of Commissioner (Appeal) the Department filed appeal before the Tribunal challenging the deletion of addition made by the Assessing Officer under Section 2(22)(e) of the Act.  The Department, in support of their appeal, submitted that since the assessee has refunded the alleged amount it is not a share application money but the loan/advance to the assessee company which is liable to tax under Section 2(22)(e) of the Act.  The assessee submitted that according to the Companies Act when the shares are not allotted, the share application money received by the company has to be shown in the balance sheet as ‘current liabilities’ as per Schedule VI (Part-I) of the Companies Act. As such the assessee has rightly treated the share application money as not loan or advance. taxmanagementindia.com

The Tribunal held that there is no dispute that the assessee has shown share application money received from TIPL of Rs.1.3 crores under the head current liabilities in its balance sheet.  The Assessing Officer considered the said amount in the nature of loans and advances since directors are common and the provisions of Section 2(22)(e) are applicable.  According to the assessee it is share application money pending for allotment it is not in the nature of loan and advances.   The Tribunal held that it is a settled law the making of entry or absence of an entry cannot determine right and liability of party.  In the absence of any material placed on record by the Revenue to show that TIPL has not applied for shares or the entries recorded in the books of account in this regard are false, untrue and without any basis, the Tribunal was of the view that the amount received by the assessee does not come under the scheme of loan or advances, therefore the Commissioner (Appeals) was fully justified in deleting the addition made by the Assessing Officer and dismissed the appeal filed by the Department.