We are advised that we should take care to receive share application money by account payee cheque or account payee draft and that we may have to explain the identity of the subscribers and the source of their funding. We are further advised that such subscription amounts, pending allotment, may be treated as a loan or a deposit so that any receipt by means other than account payee cheque or draft would be in violation of Sec. 269SS of the Act. This puts an unnecessary burden on us when our group goes for public issues. Is the advice correct?
Advice referred to in the query is one tendered as a matter of abundant caution. The Income-tax Department ordinarily treats such amounts received towards application of shares as being no different than any cash credit, which is required to be proved to be genuine with reference to the identity of the creditor and his capacity to advance such amount as is necessary to any borrowing under Sec. 68 of the Income-tax Act.
In respect of moneys received by way of share application, courts have taken different views depending on the facts of each case. The consensus is that the company cannot claim total immunity from identifying the subscribers, when in circumstances, as in the case of a private company, indicate that the company should be aware of the identity of its shareholders. But at the same time, in the case of a public issue, where the cash may be deposited in banks by the applicants for the shares, the company may not be held responsible and that unaccounted income, if any, has to be traced and taxed in the hands of the applicants.
The decisions are really not conflicting but depend upon the facts of each case. Where the applicant for the shares is identified, the further burden to satisfy the assessing officer that he has accounted resources for such investments may not fall as heavily in the case of share capital contributions as for other borrowings.
Share application moneys, pending allotment, was treated as a deposit for purposes of Sec. 269SS in Bhalotia Engineering Works Pvt. Ltd. v CIT (2005) 275 ITR 399 (Jharkhand) so as to require the payments to be by account payee cheques or account payee drafts. Better view is one taken in CIT v Rugmini Ram Ragav Spinners P. Ltd. (2008) 304 ITR 417 (Mad), where it was held that it is neither a loan nor a deposit and that at any rate, bona fide belief that it is not a loan or deposit should avoid penalty for acceptance in cash. Oddly, Sec. 269SS is applicable for genuine transaction since a bogus loan or a repayment could have otherwise been subject matter of tax as unaccounted income.
If the assessee is a dealer in shares, payment for the same in cash, where shares are finally allotted, may attract disallowance of the purchase price in view of Sec. 40A(3) which includes payments for purchase to be by account payee cheque or account payee draft, if the amount exceeds Rs. 20,000. The advice received by the reader is apparently based on the above situation in law. The provision requiring such transactions to be routed through the bank is based on the superstition on the part of the revenue that cash transactions are usually not genuine.
This has led to the acceptance of non-genuine transactions put through account payee cheques as genuine, while genuine cash transactions become vulnerable. Non-genuine transactions can be traced only through investigation for which there is no substitute in law.