Ita/52/2017 Of Kunjika Constuction Pvt. Ltd. Through Vijay Jain v. The Commissioner Of Income Tax (Appeals)

- 1 - I. T. A. No.52/2017 20/07/2017 Mr. Vijayesh Atre, learned counsel for the appellant. Ms. Veena Mandlik, learned counsel for the respondent. The present appeal has been filed against order dated 26/10/2016 passed by Income Tax Appellate Tribunal, Indore Bench Indore in ITA No.440/IND/2013. 02-The facts of the case reveal that the appellant Company is a private limited Company registered under the Companies Act and is engaged into the business of building construction and development activities. The appellant Company on 20/12/2006 filed e-return of the income for the assessment year 2006-07 under acknowledgment number 90306381 and also filed physical copy of return on 03/01/2007 declaring total income as nil. The Assessing Officer vide order dated 29/12/2008 has passed an order assessing the income of the appellant Company under Section 143(3) of the Income Tax Act, 1961 @ Rs.16,97,400/-. 03-The Assessing Officer also concluded that assessee Company has accepted deposits from its Directors in cash and the same has been credited towards share application money and therefore, also recommended for issuance of show cause notice in respect of imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961. In the penalty proceedings the Additional Commissioner of Income Tax, Range-2, Ujjain has passed an order after following the prescribed procedure levying penalty to the tune of Rs.46,21,000/- vide order dated 19/07/2010. 04-The appellant (assessee) Company has challenged the aforesaid order of the Additional Commissioner by filing an appeal before the Commissioner of Income Tax (Appeals) and the learned Commissioner vide order dated 07/03/2013 has upheld the order. The order passed by the appellate authority was again challenged before the Income Tax Appellate Tribunal and the Income Tax Appellate Tribunal has dismissed the appeal confirming the penalty imposed upon the appellant of Rs.46,21,000/-. 05-Shri Vijayesh Atre, learned counsel for the appellant Company has vehemently argued before this Court that the Tribunal has failed to appreciate that the appellant Company did not accept any loan or deposits from its Directors and it was in fact money received as share application money and therefore, the question of imposition of penalty as inflicted, does not arise. 06-He has also argued before this Court that the word 'persons' referred in Section 269 SS of the Income Tax Act, 1961 do not refer to the subscriber members and the Directors of the Company and in the present case the Directors of the Company have given share application money to the appellant Company. He has also argued that the Tribunal has failed to appreciate that the Section 269SS of the Income Tax Act, 1961 do no refer to subscriber and the Directors of the Company since a Company incorporated under the Companies Act, 1956 gets its seed capital only from its Directors and Share Holders. 07-He has also argued that the Tribunal has failed to appreciate that the Company utilized the entire amount of Rs.39,65,000/- for allotment of equity shares to the Promoters of and Directors. He further submits that the Tribunal has failed to appreciate that the share application money so accepted by the appellant Company was not a deposit or loan. In the impugned order, it is undisputed finding that the money given by the promoter directors was share application money and was shown as share application money in the balance sheet of the appellant Company. Paragraph No.9 of the impugned order reads as under:- 07-He has also argued that the Tribunal has failed to appreciate that the Company utilized the entire amount of Rs.39,65,000/- for allotment of equity shares to the Promoters of and Directors. He further submits that the Tribunal has failed to appreciate that the share application money so accepted by the appellant Company was not a deposit or loan. In the impugned order, it is undisputed finding that the money given by the promoter directors was share application money and was shown as share application money in the balance sheet of the appellant Company. Paragraph No.9 of the impugned order reads as under:- “9.The learned counsel for the assessee further submitted that the amounts received were by way of share application money which is also shown in the balance sheet as share application money (refer to page 18 of paper book). The Ld. Addl. CIT has in the remand report accepted this position, (Placed at page 10 of paper book). The shares have been issued to the respective persons which have been duly informed to the amounts received were by way of share application money which is also shown in the balance sheet as share application money (refer to page 18 of paper book). The Ld. Addl. CIT has in the remand report accepted this position, (Placed at page 10 of paper book). The shares have been issued to the respective persons which have been duly informed to the Registrar of Companies (refer page 37 and 45 of paper book). The Board Resolution has also been passed for issue of shares. It was thus contended that shares have been issued is not denied by the department, though, the same were allotted subsequently.” 08-He further submits that the Tribunal has failed to appreciate that there is no time limit prescribed under the Companies Act, 1956 for allotment of equity shares against the share application money therefore, a private limited closely held Company can accept and hold share application money from its promoter directors for an unlimited period for want of any statutory restriction to this effect. It has been further submitted that the appellant Company being a private limited closely held Company, could not have issued or allotted its shares to the persons other than the existing shareholders as under Section 3(1)(iii)(c) of the Companies Act, 1956 a private limited Company is prohibited from issuing its shares to public. Therefore also, the appellant Company was right in accepting shares application money from its promoter directors and continue to hold it till the decision of allotment taken by its Board. 09-He submits that the Tribunal has also failed to appreciate the rationale behind the provisions of Section 269SS is to prevent tax evasion, laundering of concealed income and unearth unaccounted cash in the guise of cash loans or deposits in or outside the accounts and in the present case the entire money so infused by the promoter directors is from their known sources of income duly disclosed in their respective books of accounts, for which they have been duly assessed under the Income Tax Act and the said fact is not even disputed in the impugned order. Last few line under para 8 and 9 of the impugned order reads as under:- “On the next page, the Ld. Addl. CIT observed that the assessee's contention is correct that in the assessment order of Shri Vijay Jain for the A.Y. 2006-07, the ld. A. O. himself treated the above amount as share application money. He further observes that the assessee's contention is correct that in the audited balance sheet as on 31/03/2006 dtd. 30/09/2006, the above amounts have been shown as share application money in schedule.” 10-Respondents have filed a reply and in their reply they have - 4 - “On the next page, the Ld. Addl. CIT observed that the assessee's contention is correct that in the assessment order of Shri Vijay Jain for the A.Y. 2006-07, the ld. A. O. himself treated the above amount as share application money. He further observes that the assessee's contention is correct that in the audited balance sheet as on 31/03/2006 dtd. 30/09/2006, the above amounts have been shown as share application money in schedule.” 10-Respondents have filed a reply and in their reply they have - 4 - stated that the order under Section 143(3) was passed on 29/12/2008. During assessment it was noticed that Company has accepted the loan at Rs.56,34,000/- in contravention to the provisions of Section 269SS. Penalty under Section 271D was imposed on the assessee Company. It has been further stated further submits that the submission of the assessee Company is devoid of merits and deserves to be dismissed. The assessee's claim that difference between the loan, deposit and share application money has not been established, is not correct. 11-His contention is that the factual position in the case is that the assessee Company has taken loan from three Directors as under:- -1. Shri Vijay JainRs.33,15,000/--2. Shri Ajay Singh KushwahRs. 6,50,000/-3. Shri Mukesh Soni-Rs. 6,56,000/- 12-During the assessment proceedings summons under Section 131 of the Income Tax Act was issued to the above mentioned persons. All the three persons have accepted that no share application form was filled by them. Therefore, question of share application money does not arises. It has been further stated that no evidential proof, like receipt of share application form, minutes book or copy of resolution passed relating to allotment of shares or other activities carried out by the Company were brought on record. In the audited account of the assessee, Schedule forming details of share application money was not attached, neither it was produced by the assessee during assessment proceedings. As such assessee severely failed to substantiate his claim that amount received from above mentioned three persons is share application money. 13-It has been further stated that the assessee later on cooked up the story, treating the said loan amount as share application money, as assessee has applied for increase in Authorize Share Capital to ROC Gwalior after imposition of penalty under Section 271D. 14-Reliance has been placed upon a judgment delivered in the case of M/s. Bhalotia Engineering Works (P) Ltd. Vs. CIT reported in (2005) 275 ITR 399 (Jharkhand) and a prayer for dismissal of the appeal has been made by the respondents. 15-Heard learned counsel for the parties and perused the record.16-The Tribunal while deciding the matter has held in the facts and circumstances of the case that the present appellant Company has not received the share application money. Shares were allotted after five years and the application to ROC was made after five years, after the penalty was imposed by the Income Tax Department by initiating proceedings under Section 271D for contravention of the provisions of Section 269SS. Section 269SS of the Income Tax Act, 1961 reads as under:- “269SS. Mode of taking or accepting certain loans, deposits .—No person shall, after the 30[th] day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if,– (a)the amount of such loan or deposit or aggregate amount of such loan and deposit; orloan and deposit; or (b)on the date of taking or accepting such loan or deposit, any loan or deposit 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 or deposit 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 (a)the amount of such loan or deposit or aggregate amount of such loan and deposit; orloan and deposit; or (b)on the date of taking or accepting such loan or deposit, any loan or deposit 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 or deposit 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 (c)the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in together with the amount or the aggregate amount referred to in clause ( b), is [twenty thousand rupees] or more: Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by,— (a)Government, (b)any banking company, post office savings bank or co-operative bank; bank; (c)any corporation established by a Central, State or Provincial Act; (d)any Government company as defined in clause 617 of the Companies Act, 1956 (1 of 1956); (d)any Government company as defined in clause 617 of the Companies Act, 1956 (1 of 1956); (e)such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette: associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette: Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.” 17-It is established from the record that the assessee was found to have received deposits from Directors in cash on various dates. Though a plea was taken by the Company that the money received from the Directors was application money for allotment of shares but the fact remains that allotment of share was done after five years. Application to Registrar of Companies was made after five years that too after the penalty was imposed. 18-Division Bench of Jharkhand High Court in the case of Bhalotia Engineering Works Pvt. Ltd. Vs. Commissioner of Income-Tax reported in Income Tax Reports Vol.275 Pg.399 has dealt with the issue of penalty on the ground of violation of Section 299SS in similar circumstances. Paragraph No.10, 11 and 12 of the aforesaid judgment reads as under:- “10.What will happen if shares are ultimately allotted to the applicant? What is the nature of the amount in the hands of the company until the shares are allotted? The amount cannot be a loan. But at the same time, there is an obligation on the company to return the money to the applicant or for allotting the shares applied for. Until either of these happens, the amount cannot be considered to be a loan in the hands of the company. But it appears to us that it will partake the character of a deposit in the hands of the company attracting the prohibition contained in Section 269SS of the Act. 11.The question has to be considered in the context of purpose sought to be achieved by the insertion of Section 269SS in the Act. Obviously, it was done with a view to prevent transactions in black money and to ensure that payments of Rs. 20.000/- and above, are traceable to transactions through a Bank. If the mischief that is sought to be averted is kept in mind. it will be appropriate to hold that any payment of Rs. 20,000/- or above, made to a company as share application money, should be as provided in Section 269SS of the Act. 11.The question has to be considered in the context of purpose sought to be achieved by the insertion of Section 269SS in the Act. Obviously, it was done with a view to prevent transactions in black money and to ensure that payments of Rs. 20.000/- and above, are traceable to transactions through a Bank. If the mischief that is sought to be averted is kept in mind. it will be appropriate to hold that any payment of Rs. 20,000/- or above, made to a company as share application money, should be as provided in Section 269SS of the Act. 12.Therefore, even if share application money cannot be considered as a loan within the meaning of Section 269SS of the Act, we are of the view that it partakes the character of a deposit, since it is repayable in specie on refusal to allot shares and is repayable if recalled by the applicant, before allotment of shares and the conclusion of the contract.” 19-Learned counsel for the appellant has placed reliance upon a judgment delivered by the Hon'ble Supreme Court in the case of Asstt. Director of Inspection Investigation Vs. A. B. Shanthireported in (2002) 6 SCC 259, however, it once again does not help the appellant. In the aforesaid case, the Hon'ble Supreme Court has up held the constitutional validity of Section 269SS. 20-Reliance has also been placed upon a judgment delivered in the case of Ram Rattan Gupta Vs. Director of Enforcement,Foreign Exchange Regulation & Anr. reported in AIR 1966 SC 495. Learned counsel has made an unsuccessful attempt to take shelter of the aforesaid judgment by explaining the meaning of the expression “lend”. The judgment again does not cover the controversy involved in the present case. 21-In light of the aforesaid, as the amount was received in cash by the Company, there is certainly a clear violation of Section 269SS and the order passed by the Tribunal which is based upon the findings of fact does not warrant any interference as no substantial question of law arises in the present appeal. Accordingly, the appeal stands dismissed. Certified Copy as per rules. Tej (S. C. Sharma) J U D G E (Alok Verma) J U D G E