SHARE APPLICATION MONEY DOES NOT AMOUNT TO ‘LOAN’ OR ‘DEPOSIT’

[Mr. M. GOVINDARAJAN]

Section 269SS of the Income Tax Act, 1961 (‘Act’ for short) provides that no person shall take or accept from any other person, any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, if,-

1. the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or
2. on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or
3. the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b),

is Rs.20000/- or more.

Punishment for penalty is provided under section 271D for the contravention of the provisions of Section 269SS of the Act.  Section 271D of the Act provides that if a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted.  Any penalty imposable  shall be imposed by the Joint Commissioner.

Section 269T of the Act provides that no branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it or any specified advance received by it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit or paid the specified advance,] ³[or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed if-

1. the amount of the loan or deposit or specified advance together with the interest, if any, payable thereon, or
2. the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, or
3. the aggregate amount of the specified advances received by such person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such specified advances,

is Rs.20000/- or more.

Punishment for penalty is provided under section 271E for the contravention of the provisions of Section 269T of the Act.  Section 271E of the Act provides that if a person repays any loan or deposit specified advance referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid.   Any penalty imposable  shall be imposed by the Joint] Commissioner.

In COMMISSIONER OF INCOME TAX, CENTRAL-III, KOLKATA VERSUS M/S. VAMSHI CHEMICALS LTD. - 2024 (5) TMI 746 - CALCUTTA HIGH COURT, the respondent assessee  in the present appeal received share application money to the tune of Rs.20000/- during the assessment year in question.  The said amount has not been received with through the cheque or demand draft.  The Assessing Officer issued a show cause notice for imposing penalty under Section 271D/271E of the Act alleging that the assessee has violated the provisions of Section 269SS.  The Additional Commissioner imposed penalty on the assessee under section 271D for assessment years 2005-06, 2006-07 and 2007-08 and also imposed penalty under Section 271E of the Act, 1961 for the assessment years 2004-05, 2005-06, 2006- 07 and 2007-08.

Being aggrieved against the order of Additional Commissioner, the respondent filed 8 appeals before the Income Tax Appellate Tribunal.  The Income Tax Appellate Tribunal allowed the 8 appeals filed by the assessee. The Revenue, being aggrieved against the order of Income Tax Appellate Tribunal filed the present appeal before the High Court.  The appeal was admitted by the High Court on 25.06.2012 on the following substantial question of law-

“Whether the Learned Tribunal below committed substantial error of law in holding that the  amount received on account of share application money and repayment of the same did not violate the provisions of Sections 269SS and 269T of the Act respectively attacking penalty under Sections 271D and 271E respectively of the Act?”

The High Court analyzed the provisions of Section 269SS, 269T, 271D and 271E of the Act. The High Court relied on the judgment in ASST. DIRECTOR OF INSPECTION (INVESTIGATION) VERSUS KUMARI AB SHANTHI & CHAMUNDI GRANITES (P) LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER - 2002 (5) TMI 4 - SUPREME COURT.  It was held that the object of introducing Section 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he has given some false entries in his accounts, he shall not escape by giving false explanation for the same.  The Supreme Court observed that during any search if any unaccounted money is seized the taxpayer would usually give the explanation that he had borrowed or received deposits from his relatives or friends.  The lender would also manipulate his records later to defend the plea of tax payer.  For this purpose, Section 269SS was introduced by the Government.

The High Court further observed that Section 269SS prohibits any person to take or accept from any other person any loan or deposit otherwise than by an account payee cheque orby account payee bank draft, if the amount or aggregate amount referred to in clause (a) of section 269SS together with the amount or the aggregate amount referred to in clause (b) of Section 269SS is Rs.20000/- or more.  If a person violates the provisions of Section 269SS he is liable to penalty under Section 271D of the Act.   

The High Court, then, analyzed the provisions of Section 269T which provides that no branch of a banking company or a cooperative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or by account payee bank draft drawn in the name of the person who has made the loan or deposit together with interest, if it exceeds Rs.20000/-.   The explanation (iii) to Section 269T defines the meaning of the term ‘loan’ or ‘deposit’ as any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, include loan or deposit of any nature. 

Then the High Court considered the question as to whether the share application money received by the assessee and its repayment is in excess of Rs.20000/- otherwise by way of an account payee cheque or account payee bank draft would amount to loan or deposit.  The High Court referred the dictionaries to derive the meaning of the said terms.  In the Concise Oxford English Dictionary (South Asia Edition), (12th Edition) the word “loan” has been defined as “a thing that is borrowed, especially a sum of money that is expected to be paid back with interest.”   As per New International Webster’s Comprehensive Dictionary (Delux Encyclopaedic Edition) “loan” means “something lent, especially a sum of money lent at interest”.

The Concise Oxford English Dictionary, (South Asia Edition), defines the term “deposit” as-

• a sum of money placed in a bank or other account;
• a sum payable as a first instalment or as a pledge, a returnable sum paid to cover possible loss or damage.

The Webster’s Comprehensive Dictionary gives the meaning for the word ‘deposit’ as to-

• give in trust or for safekeeping,
• give as part payment or as security.

The High Court also relied on the judgment of Supreme Court in COMMISSIONER OF INCOME-TAX, UP II VERSUS BAZPUR CO-OPERATIVE SUGAR FACTORY LIMITED - 1988 (5) TMI 4 - SUPREME COURT.  In the said case the supreme Court held that the essence of ‘deposit’ is that there must be a liability to return it to the party by whom and on whose behalf it is made on the fulfilment of certain conditions. In KESHAVLAL KHEMCHAND AND SONS PVT. LTD. & OTHERS VERSUS UNION OF INDIA & OTHERS - 2015 (2) TMI 686 - SUPREME COURT the Supreme Court has held that the expression ‘loan’ is the act of advancing money by one person to another under an agreement by which the recipient of money agrees to repay the amount on agreed terms.

The High Court observed that share application money is neither repayable after shorter notice nor repayable after a period.  Share application money is the money is the participation in the capital of the company.  It is neither a loan or a deposit. Therefore, the provisions of Sections 269SS and 269T would not applicable to the share money.  Therefore, the High Court held that no penalty under Section 271D or 271E can be imposed on the assessee.