Share Application Money Or Repayment Doesn't Attract Penalty Section 269SS And 269T: Calcutta High Court

The Calcutta High Court has held that if the share application money is neither a loan nor a deposit, then neither Section 269SS nor 269T of the Income Tax Act, 1961 shall apply. Consequently, no penalty, either under Section 271D or under Section 271E of the Income Tax Act, 1961, could be imposed.

The bench of Justice Surya Prakash Kesarwani and Justice Rajarshi Bharadwaj has observed that in cases of loans, it is ordinarily the duty of the debtor to seek the creditor and to repay the money according to the agreement. In other words, a loan grants temporary use of money or temporary accommodation under certain conditions. Thus, a loan is an act of advancing money by one person to another under an agreement by which the recipient of the money agrees to repay the amount on agreed terms. In the case of a deposit, it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it. The essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf the deposit has been accepted on the fulfilment of certain conditions. Share application money is for participation in the capital of a company, which is neither a loan nor a deposit.

During the assessment years, the respondent/assessee company received share application money for preference shares amounting to Rs. 20,000 or more from persons other than by an account payee check or by account payee bank draft. The assessing officer issued a show cause notice for penalty under Section 271D/271E on the ground that the assessee has violated the provisions of Section 269SS. The Additional Commissioner imposed penalties under Section 271D for the assessment years 2005–06, 2006–07, and 2007–08 and also imposed penalties under Section 271E of the Income Tax Act, 1961, for the assessment years 2004–05, 2005–06, 2006–07, and 2007–08. The assessee filed eight appeals before the Income Tax Appellate Tribunal, which were allowed.

Section 269SS prohibits any person from taking or accepting from any other person any loan or deposit other than by an account payee check or by account payee bank draft, if the amount or aggregate amount referred to in clause (a) together with the amount or aggregate amount referred to in clause (b) is twenty thousand rupees or more. If a person violates Section 269SS, then he is liable to a penalty under Section 271D of the Income Tax Act.

Section 269T provides that no branch of a banking company or a co-operative bank, 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 check 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 rupees twenty thousand. Explanation: (iii) to Section 269T defines the words “loan or deposit” to mean 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, includes a loan or deposit of any nature.

The main controversy involved in the appeal was whether share application money received by the respondent/assessee and its repayment in excess of Rs. 20,000/- otherwise than by way of an account payee check or by account payee bank draft would fall within the phrase “loan or deposit.”.

The court, while upholding the tribunal's order, held that looking into the object and purpose of Sections 269SS and 269T of the Act, 1961, read with the explanation defining the words “loan and deposit," the share application money can neither be said to be a loan nor a deposit, and accordingly, the provisions of Sections 269SS or 269T or the consequential penalty provisions under Sections 271D or 271E shall have no application on the facts and circumstances of the case.

Counsel For Appellant: Om Narayan Rai, Prithu Dudheria

Counsel For Respondent: None

Case Title: Commissioner Of Income Tax, Central-Iii, Kolkata Versus M/S. Vamshi Chemicals Ltd.

Case No.: ITA/68/2012

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