Issue- The Assessing Authority having noticed that the assessee-company had accepted share application money in cash from its directors in violation of provisions of section 269SS, imposed penalty under section 271D and Commissioner (Appeals) upheld penalty order.
Now the first question arises whether the assessee has contravened the provisions of section 269SS. As observed earlier, no definition has been given clearly for the expression “Loan or Deposit”. In the normal business world, a loan connotes a transaction in which borrower approaches the lender for a certain sum for a fixed period on the terms and conditions which may be agreed between borrower and lender which would include the rate of interest, tenure of the loan and other conditions regarding security etc.
Similarly, the word ‘deposit’ would connote a transaction in which the depositor gives to another person generally a bank or some other person a deposit of his belongings which may be money also on certain terms and conditions e.g. in case of a bank the depositor would deposit the money to be refunded after certain period along with pre-defined interest. Deposits can also be made by person for assuring the other of the performance of a contract e.g. in case of bailment contracts. The Hon’ble Jharkhand High Court in the case of Bhalotia Engineering Works Pvt Ltd (supra) has opined that even Share Application money would amount to deposit. However, the Hon’ble Delhi High Court in the case of CIT Vs I.P. India P. Ltd (supra) differed from this view. The Hon’ble High Court in this case observed at para 8 that in case of Baidya Nath Plastic Industries (P) Ltd v K.L. Anand, ITO 230 ITR 572(Delhi), the Ld. single Judge of this Court pointed out that the distinction between a loan and a deposit is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to replay the money, according to the agreement, while 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 made the demand for it. The High Court further noted that this observation was approved later by Division Bench in the case of Director of Income Tax (Exemption ) vs ACME Education Society 326 ITR 146(Delhi). The Hon’ble High Court further observed that if these tests were applied then Share Application Money for allotment of shares in a company cannot be treated as a receipt of loan or deposit.
This has to be seen in the context that Assessee Company was constructing a hotel and loan has not been sanctioned by the financial institutions and banks. Naturally the assessee company would fall back to the sources of the directors for the construction of hotel. Now the money has been transferred at the end of the every year to Share Application account which only shows that intention was very clear that the money contributed by the various directors and their relatives were to be treated as share capital. Assuming for the argument sake that applicability of section 271D has to be seen at the precise moment of receipt even then the money has gone into current account. Now as per our observation earlier that money coming into current account also cannot be called loan or deposit. Even Hon’ble Madras High Court as discussed earlier in the case of CIT v Idhayam Publications Ltd (supra) has clearly held that if money has come into current account and no interest was being charged for the same, then that would not be covered by the definition of loan and deposit as envisaged in section 269SS. In that decision it has been further emphasized that as per Companies (Acceptance and Deposit) Rule 1974 deposit would not include any amount received from the director or share holder of the company, therefore, this amount cannot be termed as loan or deposit for the purpose of section 269SS read with section 271-D and therefore, penalty could not have been imposed. If such situation is examined from another angle that if the money is accepted as share application money then the same cannot be construed again as loan or deposit as held by Hon’ble Delhi High Court in the case of I.P. India (P) Ltd (supra). The same view has been taken by Hon’ble Madras High Court in the case of CIT Vs Rugmini Ram Ragav Spinners P. Ltd. Definitely, Hon’ble Jharkhand High Court in the case of Bhatonia Engineering Works (supra) has taken a different view. Here though the contention of the Ld. Counsel for the assessee was that a view favorable to the assessee particularly in the case of penalty provisions should be adopted as per the decision of Hon’ble Supreme Court in the case of CIT v Vegetable Products (supra). But in our opinion this does not require further discussion because Hon’ble Punjab & Haryana High Court itself in the case of Speedways Rubber Pvt. Limited (supra) has taken the similar view. In that case the assessee had received Share Application of Money Rs. 20,000/- in cash. The penalty was levied u/s 271D of the Act. The penalty was deleted by CIT(A) which was upheld by the Tribunal. The Hon’ble High Court distinguished the decision of Hon’ble Jharkhand High Court in the case of Bhalotia Engineering Works (supra) and held that transaction was bonafide and default was of technical in nature which did not justify the levy of penalty.
In any case, a reasonable cause was also explained that assessee company was constructing a hotel for which bank loans were not sanctioned and, therefore, directors had to contribute the money towards construction of the hotel. The payment was generally required for labour payments and other cash items, therefore, it is a reasonable cause for accepting the cash from directors and relatives and even on this basis also penalty is not leviable.