Section 269SS and section 269T do not apply to share application money

The Madras High Court has recently held in the case of the Commissioner of Income Tax vs. Ms. Pride Remedies Private Ltd. 2014 (12) TMI 392, that share application money cannot be considered as deposit or loan, as such section 269-SS and section 269-T do not apply to them. It was further held that there cannot be a penalty under section 271D or section 271 of the Income Tax Act in such cases.

Facts of the case:

The appeal was preferred before the Hon’ble High Court to decide whether deletion of penalty under section 271D of the Act by the Tribunal against amount received towards allotment of shares was justified or not.
It was agitated by the appellant that whether the deletion of penalty amounted to violation of provisions of Section 269SS or not.
The Madras High Court held that share application money was neither deposit nor loan and accordingly section 269-SS and section 269-T could not be applied to such money.

Provisions of section 269SS of the Income Tax Act:

Section 269SS of the Act provides that any loan or deposit should be taken or accepted from any person only through an account payee cheque or account payee bank draft if, the amount of such loan or deposit or the total amount of such loan and deposit or is Rs. 20,000/- or more.
In other words, no person can accept any loan or deposit of Rs. 20,000/- or more otherwise than by means of an account payee cheque or an account payee draft.

Consequences of contravention of section 269SS:

Penalty under section 271D of the Act is applied when there is a violation of provisions of section 269SS of the Act . So if someone accepts a loan or a deposit from any other person by any means other than an account payee cheque or account payee draft and where the amount of loan or deposit is more than Rs.20,000/-, penalty can be imposed under section 271D of the Income Tax Act.

Provisions of section 271D of the Income Tax Act:

Section 271D of the Income Tax Act deals with penalty for failure to comply with section 269SS of the Act.
It provides that if someone takes or receives any loan or deposit in contravention of section 269SS, he shall be liable to pay a penalty of a sum equal to the amount of the loan or deposit so received.

No Penalty in case of reasonable cause :

According to Section 273B of Income Tax Act no penalty can be levied under section 271D if the failure to comply with the provisions of section 269SS is for a reasonable cause. The reasonable causes are based upon judicial decisions.

The judgment:

The Madras High Court held that share application money was neither deposit nor loan and accordingly section 269SS and section 269T cannot be applied to such cases. For the said reasons deletion was penalty was justified.