Hi SanJosh, Deepakji and everyone,
Here's my take on this:Section 269SS came to grace the statute book on 30th June 1984. To get under the skin of a provision we must first understand what was the mischief that was sought to be curbed by the introduction of that provision. So let's see how CBDT Circular No 387 dated 6th July 1984 tried to explain the rationale behind the insertion of Section 269SS:[Unaccounted cash found in the course of searches carried out by the Income-tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits and taxpayers are also able to get confirmatory letters from such persons in support of their explanation.With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act has inserted a new section 269SS in the Income-tax Act debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where 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), and the amount or the aggregate amount remaining unpaid is Rs. 10,000 or more. The prohibition will also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken, is Rs. 10,000 or more.]The present-day threshold of loan/deposit, crossing which you may fall foul of Section 269SS, stands at Rs 20000 of course. So that was the mischief: Unscrupulous assessees explaining away excess cash found in their possession as loans/ deposits accepted from relatives/friends. As there was no way to trace the movement of cash, the authorities could only allege some hanky-panky on the part of the assessee; they could never prove it. So it was thought how about making it mandatory to accept loans/deposits of Rs 20k or more by way of account payee cheques/bank drafts only. The bank statement will constitute a reliable evidence of the loans actually having come to appear in the assessee's books by bona fide entries only and not having been arranged posthumously after a situation where an assessee having to explain the cash in his possession had arisen. I don't have any quarrel with Section 269SS as such, although I am vehemently opposed to its reciprocal Section 40A(3), which debars payments exceeding Rs 20k (Mind you Section 40A(3) applies to payments of Rs 20001 and above, but Section 269SS applies to receipts of more than Rs 19999. I know at least one case where an assessee landed in huge trouble for not having made this distinction! ). So section 269SS I think is a perfectly legitimate provision meant to protect the interests of the revenue. I feel to decide how far and wide the meaning of the word "deposit" as envisaged in Section 269SS would cast its net, we should do an honest introspection without being prejudiced in the assessee's favour. Considering the huge scope of tax evasion in the absence of Section 269SS being there on the Act, I would rather be tilted towards the revenue's side on this one. If we contend that share application money isn't covered u/s 269SS on account of it neither being a deposit nor being a loan, couldn't this open the floodgates especially for private companies—which we know are nothing but glorified family enterprises—to just brush away unaccounted cash as the amount received towards application money for allotment of shares and then go on to allot shares (to shareholders and their relatives)? But wait a minute! There's another legislation known as the Companies Act, 1956. If we look at the provisions of that Act, it seems there are ample safeguards to make sure the directors of even private companies can not use the media of share application money as a peg to hang their ill-gotten wealth on. Section 69(4) of the Cos Act requires all application monies received from potential shareholders to be kept deposited in a scheduled bank and to remain there till the time the shares are allotted. There's a requirement under the Cos Act to put a kind of lock on the share application money till the entire amount payable on application of shares is received. So there doesn't seem to be any way an assessee-company found in possession of unaccounted for cash could get off the hook by asserting that the excess cash was on account of share application money it had received towards allotment of shares it was planning. The share application money would be lying stashed away in a scheduled bank and not in the company's cash till. Also, here is an extract from section 69(4) of the Cos Act:[…..and the sum payable on application for the amount so stated has been paid to and received by the company, whether in CASH or by a cheque or other instrument which has been paid.]So as far as the Cos Act is concerned, there certainly is no bar on the company accepting share application money in cash initially.The Jharkhand HC in Bhalotia Engg (P) Ltd's case doesn't at all seem to have given thought to these points. All it bothered about in its entire judgement was whether share application money partook of the character of a Deposit. I too believe share application money to be purely deposit until the shares get allotted, but that isn't the end of the matter. To decide whether section 269SS gets attracted or not in this case, one needs to look much further. If whether or not an amount of Rs 20K or more constitutes deposit was all it took to impose penalty u/s 271D, all those accepting cash advances towards sale of buildings, machineries, etc and later returning those consequent to a transaction not having come through would be held guilty of contravening Section 269SS. So in my view the Jharkhand HC didn't take the totality of the circumstances surrounding a transaction involving share application money into view in delivering this judgement. A penalty u/s 271D wasn't called for, in my arrogant opinion. A Caveat: Receipt of share application money in cash had better be avoided. Accept only crossed cheques and the like. Thanks,CA Sanjeev Bedi--- In
http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "Sanjeev Josh"
wrote:>> > Dear Deepak Ji,> > Thanks a ton for pointing out the disturbing decision in case of> Bhalotia Eng. Works handed out by the Hon'ble JHARKHAND High Court.> > I have no hesitation in admitting that this decision had not been> noticed by me. I would love to go into the depth of the issue now.> > Thank you for pointing it out. That's the beauty of this group! Thanks> Amresh Ji for being there!> > Tax is a ocean. The expert a little individual on a paddle boat! The> distance he travels depends on the strength of his/her leg muscles! The> depth to which he/she could dive depends upon the capacity and the> ability of the lungs to hold air. The correct direction he/she travles> depends on the little compass he/she has with him/her in the form of> books, case-laws etc AND the friends like you who guide him/her as a> NORTH STAR!> > Thanks Deepak for twinkeling like the NORTH STAR! making me a poet !>> > Deepak I have a request: You attached an attachment to your message. I> have not been able to access it. Could you please send it to me at my> email worldsbestca@ ... ?> > I would love to investigate the Hon'ble JHARKHAND High Court.> > I would love to see how how the principle of "Purposive interpretation"> have been applied by the said Hon'ble High Court.> > s far as my knowledge goes "Purposive interpretation" rule is to some> extent an extension of the literal rule and under it the words of a> statute will as far as possible be construed according to their> ordinary, plain, and natural meaning, unless this leads to an absurd> result. It is used by the courts where a statutory provision is capable> of more than one literal meaning and leads the judge to select the one> which avoids absurdity, or where a study of the statute as a whole> reveals that the conclusion reached by applying the literal rule is> contrary to the intention of Parliament.> > Thanks again.> > Sanjeev Josh FCA IRS> >> > Dear Friends> > With due respect to everybody I wd like to point out a disturbing> decision in case of Bhalotia Eng. Works handed out by the JHARKHAND HC.> which is disturbing & has been commented upon as wrong one by many> experts, but still the discussion on the same is worth noting. Pl find> enclosed herewith in a separate file the material I have on the subject.> The same has previously been published in various magazines of TAXMAN.> > Â> > CA DEEPAK GADGIL> > SOLAPUR, MAHARASHTRA> >> > --- On Mon, 22/9/08, Sanjeev Josh worldsbestca@ wrote:> >> >> > Dear Sandeep,> > I would tend to cast my vote with you!> > Your answer is more likely than not the correct one.> > Cross the fingers!> > Sanjeev Josh FCA> >> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "sandeep agrawal"> wrote:> > >> > > Dear Sir,> > >> > > Share Application money is neither Loan nor deposit so in my view> 269ss not> > > applicble in this case.> > >> > >> > > Regrads> > >> > > Sandeep Agrawal> > >> > >> > > On 9/20/08, manish saraogi man_saraogi@ ... wrote:> > > >> > > > Section 269SS covers acceptance of both loans as well as deposits> and> > > > if the aggregate amount is in excess of Rs. 20000/-, then there is> a> > > > voilation.> > > >> > > > Acceptance of Share application in cash will fall within the> purview of> > > > Section 269 SS.
