1. These three appeals by the assessee are directed against orders of the CIT, Nashik dt. 13.12.1999, passed Under Section 263 of the Income-tax Act, 1961, wherein he set aside the orders of the Dy. CIT.Range 1, Nashik, for the assessment year 1995-96 and 1996-97 dropping the penalties Under Section 271D and for assessment year 96-97 dropping penalty Under Section 271E of the Act. In these appeals, the assessee has challenged the three separate orders of the CIT, Nashik dt.
13.12.1999 mainly on the ground that the orders passed by the Dy. CIT, Range 1. Nashik, dropping the penalties were not erroneous and prejudicial to the interests of the revenue.
2. The assessee company was incorporated as a private limited company on 11.3.1993 to carry on the business as finance and Investment Company. Dr Sharad Patil and his wife Dr (Mrs) Anita Patil are the directors and promoters of the company. Substantial part of investment of the company initially was in Venus Eye Vision Ltd. a flagship company of the group. A search Under Section 132 of the Act was carried out on 11.1.96 to 13.1.96 at the business premises of Venus Eye Vision and Dr Sharad Patil group. The assessee company was also covered in the search. In this case, block assessment Under Section 158BC was framed on 21.1.1997. During the course of block assessment proceedings, the AO noticed that on 11.1.96 the assessee had issued share capital of Rs. 1,00,000/- and had received share application money pending allotment of Rs. 16,81,500/-, loans of Rs. 3,62,000/- from Directors and Rs. 22,01,000/- from friends and relatives. The AO also noticed 11 instances of cash receipts above Rs. 20,000/- towards share application money in financial year 1994-95 and two instances in financial year 1995-96. Thus the total came at Rs. 13,32,500/-; out of which, Rs. 3,90,000/- was repaid in cash in excess of Rs. 20,000/-. According to the AO, this was in violation of Section 269SS and Section 269T. The AO referred the matter to the Dy. CIT, Range 1, Nashik, who issued show cause notices on 104.1997 to the assessee requiring it to explain as to why penalty Under Section 271D for assessment year 1995-96/96-97 and Under Section 271E for assessment year 1996-97 should not be imposed.
The assessee submitted its reply on 16.4.1997. The main contention of the assessee was that the amounts in question were received towards share application money. Therefore, the money received was not accepted either as loan or deposit. Reliance was also placed on the decision of the ITAT, Jaipur Bench in the case of Jagvijay Auto Finance (P) Ltd. v.ACIT (1995) 52 ITD 504. The Dy. CIT accepted the contention of the assessee in his note dropping penalty proceedings that the share application money did hot constitute loan or deposit. According to him, once the AO has accepted in the assessment order this fact that what was received was share application money, the issue went out of the provisions of Section 269SS/269T of the Act.
3. The CIT, Nashik called for the records and formed an opinion that the orders passed by he Dy. CIT, Range 1, Nashik dropping the penalty proceedings for the assessment years under consideration were erroneous and prejudicial to the interests of the revenue for the following reasons.
Before dropping penalty proceedings, the Dy. CIT should have taken into account the fact that the authorized share capital was Rs. 1,00,000/- only. The amount claimed to be received towards alleged share application money and alleged to be pending for alleged allotment at the end of each financial year was as under:FY 92-93 FY 93-94 FY 94-95 FY 95-96 (upto 10.1.96)-------- -------- -------- ------------------------ The CIT took the view that the amount was received in excess of the authorised share capital in the very first year of incorporation.
According to him, there was no need to accept further amount towards share application money in the subsequent years. He also pointed out that there was nothing on record to show that the shares were actually allotted even till the order was passed by the Dy. CIT. The CIT also noted that the real character of the amounts shown to have been received appeared to be other than share application money. The CIT pointed out that this aspect of the matter has not been enquired by the Dy. CIT. He further took the view that in any event the amount shown to be received in excess of the authorized share capital would automatically cease to be share application money and would assume the character of deposit. He had also noted that the amount was shown to have been received from close relatives of the directors or from companies in which the directors of the company or relatives of such directors were substantially interested. He also took the view that in such circumstances, it cannot be said that the persons allegedly remitting the money towards the share application money was not aware of the fact that the alleged authorized share capital was to the extent of Rs. 1 lakh only. The parties from whom share application money was alleged to have been received were as under:b) Dr Sharad Patil Rs. 4,22,500/-c) Shri Suresh R Patil Rs. 30,000/-g) Shri Dilip Vitthal Mahajan Rs. 1,50,000/-h) Shri Ramesh Baliram Patil Rs. 95,000/-k) Venus Corneal Rs. 3,90,000/-Amount claimed to be returned back: Thus, the CIT opined that no enquiries/investigation were done by the Dy. CIT before dropping penalty proceedings. According to him, dropping of penalty proceedings passed by the Dy. CIT was erroneous and prejudicial to the interests of revenue.
In above lines, the CIT issued show cause notice to the assessee. The assessee had furnished its written submissions on 30.11.99. In the said reply, the assessee had raised many objections. It was stated that the orders passed Under Section 271D and Under Section 271E cannot be revised Under Section 263 because Sub-section (1) of Section 263 says about the order passed by the Assessing Officer. It was stated that in the instant case, the order was not passed by the AO, but the same was passed by the Dy. CIT (now the Jt. CIT). It was also stated that the Dy. CIT/Jt. CIT was the only and competent authority to levy the penalty Under Section 271D and 271E of the Act and, therefore, in the instant case, the Dy. CIT has rightly dropped the penalty proceedings after considering the facts of the case. It was also submitted that the proceedings initiated Under Section 271D and 271E after the date of completion of assessment were invalid as per Section 275 of the Act. It was also claimed that in the instant case provisions of Section 275(1)(c) were applicable for the purposes of limitation regarding imposition of penalty. The assessee also relied on Board's circular No.387 dt. 6.7.1984 and Circular No. 345 dt. 28.6.1982. It was also submitted that provisions of Section 269SS of the Act are not applicable to the genuine and bona fide transactions. It was also submitted that the tax consultant of the assessee gave opinion that the transactions of acceptance of share application money in cash is outside the provisions of Section 269SS of the Act. Alternatively, it was contended that even if it is assumed that the transactions of share application money are covered by the provisions of Section 269SS of the Act, penalty Under Section 271D and 271E was not leviable, since the assessee has acted under bona fide belief on the basis of opinion of experts. As regards the contention of the CIT that the amount received in excess of authorized share capital would automatically cease to be share application money and would assume the character of deposit, it was submitted that the said contention was based on assumption that as the authorized share capital is not increased by the company, then the excess amount received would automatically cease to be share application money and would assume character of deposit. According to the assesses, this observation itself leads to only a technical breach.
It was contended that the assesses had accepted the money innocently and under bona fide belief that provisions of Section 269SS and 269T were not applicable. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa the share application money was not accepted in cash deliberately. The assessee was under bona fide belief that provisions of Section 269SS and 269T were not applicable in case of the transactions of share application money. Reliance was also placed on the decision of the ITAT Bench in the case of Bombay Conductors & Electricals Ltd. v. DCIT (56 TTJ 580).
Without prejudice to the above submissions, it was also submitted that the assessee company had not allotted its shares and the money was kept as share application money pending allotment. It was stated that the assessee being a private limited company, there was no time limit for allotment. In the assessment order, the AO has admitted that the amount so received by the assessee was share application money. In the audited account the said amount has been shown as share application money pending allotment. Confirmations from the parties were also filed before the AO to show that they have given the money towards share capital and no interest was demanded. It was also explained that the amount so received by the assessee was nothing but the contribution towards the share capital of the company. Therefore, it cannot be said that the said amount was loan or deposit, because the basic characteristics of loan or deposit is that the same is returnable depending upon the nature, i.e. loan or deposit and terms of the contract. Normally, interest is payable on such loan or deposit. If money is not payable, in such circumstances, it cannot be said that receipt of money is loan or deposit, because the basic feature of repayment of the same is missing. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Bazpur Co-op. Sugar Factory Ltd. (1998) 172 ITR 321.
Alternatively, it was also contended by the assessee before the CIT that in the instant case there was a reasonable cause Under Section 273 of the Act and the matter should be seen from the angle of Section 273B of the Act.
As regards the receipt of money from M/s Venus Corneal Research Centre Ltd. of Rs. 3,90,000/- shown as share application money, it was submitted that the said amount was not share application money, but the same was refund of advance made to them. This refund was made by them.
Accordingly, it was submitted that the amount cannot be held as repayment of deposit.
In view of the above, it was submitted that proceedings initiated Under Section 263 of the Act may be dropped.
4. After considering the above submissions of the assessee, the CIT, vide para 7.1 of the order, held that he had power to revise orders passed by the Dy. CIT. He further held that in the instant case, the Dy. CIT had not made any enquiry. The assessee had also not produced any evidence before the Dy. CIT to establish that there was a reasonable cause for not complying with the provisions of Section 269SS and 269T of the Act. As regards the initiation of penalty proceedings, the CIT observed that the second limb of Section 275(1)(c) of the Act, viz. "six months from the end of the month in which action for imposition of penalty is initiated" shall apply in the instant case.
According to the CIT, penalty proceedings were initiated by the Dy. CIT by notices dt. 10.4.1997 and orders dropping the penalties were passed on 28.4.1997, which was within six months of initiation of action for imposition of penalty. The CIT has also observed that in view of the provisions contained in Sub-section (ii) of Clause (a) of Explanation to Sub-section (1) of Section 263, the orders passed by the Dy. CIT (now Jt. CIT) in exercise of powers vested in him under the statute, such as powers Under Section 271D, 271E, 271BB etc. are also covered by the revisionary provisions of Section 263. He, therefore, rejected this contention of the assessee that the CIT has no power to revise the orders passed by the Dy. CIT (now Jt. CIT) under Sections 271D and 271E of the Act. The CIT has further observed that in the instant case the Dy. CIT has merely gone by what was stated by the assessee without subjecting such arguments to further scrutiny/enquiries. According to him, no evidence was produced by the assessee before the Dy. CIT to show that there was a reasonable cause within the meaning of Section 273B of the Act. It was also pointed out by the CIT that even if it is assumed that the transactions were genuine; still the provisions of Sections 269SS and 269T can be invoked. It was also observed by him that lack of enquiry to find out the real nature of transaction at the assessment stage does not bar the DY CIT from making further enquiries into its real nature even at the stage of considering the matter for the purpose of penalty. The Dy. CIT being a superior officer is not bound by the observations of the AO while arriving at his judgment.
According to him, the Dy. CIT should have conducted independent enquiries for arriving at the correct conclusion in the matter it was also held by the CIT that in the instant case the Dy. CIT has committed glaring error of law, particularly when he has failed to ask the assessee to produce proof about reasonable cause for non-compliance of the provisions of Sections 269SS and 269T of the Act. It was observed by the CIT that such a grievous error on the part of the Dy. CIT was likely to set a bad trend or pattern for similar such errors in future.
He, therefore, held that such action of the AO can be considered to be prejudicial to the interests of Revenue administration. It was one of the contentions of the assessee that as per the opinion given by the tax consultant, namely, Shri Mahesh Shah, C.A. the provisions of Section 269SS are not applicable to the share application money. The CIT took a view that the said opinion was in the nature of self-serving evidence. While rejecting this contention of the assessee that the amount was received towards share application money, the CIT observed that in fact, no shares were allotted against the receipt of alleged share application money, part of which was returned after lapse of more than a year. According to him, there was no need to accept money more than the authorized capital if the transactions were really genuine.
According to him, if the money was duly received in excess of the authorized share capital, the same should have been returned at the earliest opportunity. There was no authorized capital remaining to be subscribed as the whole of the authorized capital was fully paid up and hence, the company could not have collected any further share application money, as stated by the assessee as there was no share capital which remained to be issued. He also observed that there was also no increase as far as authorized share capital was concerned. No permission was obtained from the Registrar of Companies/Company Law Board which could have enabled the assessee to call for applications for issue of further shares. He therefore took the view that the money received from the alleged subscribers can be considered as deposits and as such provisions of Sections 269SS and 269T were applicable. No further enquiry in this regard was done by the Officer before dropping penalty proceedings.
The CIT concluded that the amount received by the assessee in cash was designated as share application money; however, the amount in reality was deposit. As regards the amount of Rs. 3,90,000/-, the CIT directed the officer to verify the claim after proper enquiries whether the same was refund of advance made to Venus Corneal Research Centre Ltd. The CIT set aside the penalty orders Under Section 271D passed by the Dy.
CIT for assessment years 1995-96 and 1996-97 and order Under Section 271E for the assessment year 1996-97 and the matter was restored to the file of the Dy. CIT (now Jt. CIT) for passing fresh orders after making further enquiries and after following provisions of Section 273B of the Act. 5. Before us, Shri K A Sathe, the ld counsel for the assessee reiterated the submissions made before the authorities below. He further submitted that the entire approach of the CIT is based on suspicion. He was not justified in presuming that whatever money was accepted was deposit, irrespective of the fact that the same was accepted as share application money and accordingly, reflected in the balance sheet of the company. The CIT has not given any cogent reasons while holding that the share application money received by the assessee was in fact loan or deposit. Except the fact that authorized capital was Rs. 1,00,000/-, he has not indicated any other material. Shri K A Sathe, ld Counsel for the assessee vehemently submitted that the assessee is a private limited company. One has to consider the genuine possibility that if it intended to expand its equity or wanted to go public, it should have accepted share application money and on reaching the requisite target, it could have applied for increase in authorized capital by following the prescribed procedure. Accordingly, it was submitted that this genuine possibility was not considered by the CIT and he jumped to the conclusion that there was no share application money and it was loan or deposit only. The id counsel also submitted that the assessee company was also planning to come out with own public issue and this must be one of the reasons for collecting share capital.
It was contended that the authorized share capital of the company was to be increased only upon subscription of required capital mainly because to increase the authorized share capital, substantial fees is required to be paid to the Registrar of Companies. Meanwhile, there was a search Under Section 132 of the Act in the cases of Dr Patil group including the company. For the said reason, the company could not come out with public issue. It was also brought to our notice that during the course of assessment proceedings, the AO had made the necessary enquiries regarding the genuineness of the amounts received by the company. Statements of the concerned parties were also recorded and they have confirmed having given money for share application. While relying upon the decision of the ITAT Bench, Jaipur in the case of Jagvijay Auto Finance (P) Ltd. v. ACIT (1995) 52 ITD 504, it was submitted that the provisions contained in Section 269SS were not violated, when the assessee company accepted share application money.
It was submitted that the aforesaid contention of the assessee was accepted by the Dy. CIT while dropping penalty proceedings. Therefore, it cannot be said that the order of the Dy. CIT dropping the penalty proceedings was erroneous and prejudicial to the interests of the revenue. He also relied on the decision of the Hon'ble Supreme Court In the case of Malabar industrial Co. Ltd. v. CIT (2000) 243 ITR 83 wherein it has been held that "Every loss of revenue as a consequence of an order of the AO, cannot be treated as prejudicial to the interests of the Revenue, for example, when an I.T.O adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law." Shri K A Sathe, the ld counsel for the assessee submitted that in the instant case proper enquiries were made by the Dy. CIT and he had duly noted them. Otherwise also, the view taken by the Dy CIT was based on the decision of the ITAT, Jaipur Bench in the case of Jagvijay Auto Finance (P) Ltd. (supra). It was vehemently argued that there is no authority in law supporting the proposition of the CIT that the amount shown to be received in excess of authorized share capital would automatically cease to be share application money and would assume the character of deposit. It was stated that the expression 'cease' used by the CIT suggests that he has accepted that at the time of receipt, the money was share application money, but 'ceased' to be so and acquired the character of deposit.
According to the ld counsel, what is relevant Under Section 269SS is initial intention. If the money was not accepted as loan or deposit, subsequent change in character is immaterial.
Shri K A Sathe, the ld counsel for the assessee also submitted that the CIT has not considered the decision of the Hon'ble Supreme Court in the case of CIT v. Bazpur Co-op. Sugar Factory Ltd to the effect that the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions. According to him, at the time of acceptance of money, which is material for the purpose of Section 269SS, there was no obligation to return the money.
Reliance was also placed on the decision of this Bench of the Tribunal in the case of Jamnadas T Mehta v. ITO (2002) 81 ITD 103 (Pune) (TM), wherein it has been held that the ambit of interference under Section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury. It was also held that the view taken by the AO was a possible view. Shri K A Sathe, the ld counsel for the assessee, submitted that in the instant case also the view taken by the Dy. CIT was a possible view, which was duly supported by the decision of the Jaipur Bench of the Tribunal referred to above. In fact, the Dy.
CIT made necessary enquiries and after accepting the assessee's explanation dropped the penalty proceedings. In view of the above, it was submitted that the orders dropping the penalty proceedings were not erroneous and prejudicial to the interests of the revenue. Therefore, the order of the CIT is not sustainable in law.
6. Shri Satyakam Mishra, the ld DR strongly supported the order of the CIT. He further submitted that the order of the CIT clearly brings out the fact that apart from accepting the interpretation of the AO with reference to the transactions involved, the Dy. CIT made no enquiry or effort to ascertain the true facts relating to these transactions.
According to him, these transactions were examined only from the angle of cash credits at the level of the AO and that no examination was done as far as the provisions of Section 271D and 271E are concerned. He also submitted that as per the balance sheet as on 31.3.1993, the subscribed capital was Rs. 18,500 while share application money was Rs. 2,14,000/-. He further pointed out that the said balance sheet also shows that investment of Rs. 2,14,000/- was made in Venus Eye Vision Ltd. It was also brought tour notice that as per balance sheet as on 31.3.94, the share application money was at Rs. 2,14,000/- but subscribed capital increased to Rs. 92,500/-. According to the ld DR, this fact alone shows that no shares were allotted from the pending share application money of Rs. 2,14,000/- but that fresh inflow of funds was used for such allotment. This raises fundamental queries and doubts regarding the assessee's assertion that this money was indeed of the nature as it was purported to be. Similarly, the balance sheet as on 31.3.95 shows that the share application money increased to Rs. 19,71,500/- and as on 11.1.96 the share application money was Rs. 15,81,500/-. It was brought to our notice that out of this alleged share application money, substantial amounts were invested with M/s Venus Eye Vision Ltd. There is no evidence on record to show that any steps were taken for increasing the limit of authorized share capital.
The ld DR also pointed out that from perusal of the copies of accounts of the so-called share application money account, it would be clear that there are repeated transactions showing of receipt of share application money on various dates. This is a clear deviation from the normal case where if any person applies for shares there are no repeated payments on account of investments in the shares. The ld DR also submitted that it was one of the contentions of the ld counsel for the assessee that if the company had recorded any transaction in the books of accounts and in the balance sheet as a transaction relating to share application money, the same was sufficient to prove that the amounts received were indeed share application money. If this contention of the id counsel is accepted, then the purpose of inserting Sections 269SS and 269T is defeated as far as company cases are concerned, because the companies can accept the cash from different parties and record this in the books as share application money. It was also submitted that the decision of the ITAT, Japiur Bench in the case of Jagvijay Auto Finance (P) Ltd. relied upon by the ld counsel for the assessee is not applicable to the facts of the present case. In the said case, there was no dispute regarding the nature of receipts. The ITAT Jaipur Bench was mainly concerned with the issue as to whether in a case where share application money was received by a company, the provisions of Section 269SS would apply or not. The Tribunal held that in the case of share application money if the amounts were received in cash, there is no contravention of Sections 269SS and 269T. In the instant case, the main issue is as to whether the amounts received by the assessee were share application or not, submitted the ld DR. He further submitted that the Dy. CIT before dropping the penalties had not made any enquiry to ascertain the exact nature of the transactions.
He further submitted that merely the book entries are not sufficient to prove the nature of receipt or expenditure and that the same needs to be substantiated. As regards the office note written by the Dy. CIT dropping the penalty proceedings, the ld DR submitted that there is nothing to show that the Dy. CIT has gone into details of the case, studied the relevant records, examined the exact nature of the transactions or raised any query as to why the amounts were received in cash. It was submitted that the Dy. CIT has dropped the penalty proceedings merely on the basis of submissions given by the assessee and certain observations made by the AO during the course of assessment proceedings.
In view of the above, it was submitted that the orders of the Dy. CIT dropping the penalties were erroneous and prejudicial to the interests of the Revenue and the CIT had rightly set aside the same.
In the end, it was urged by the ld DR that the order of the CIT may be upheld. Reliance was placed on the following decisions:Maddi Venkataraman & CO (P) Ltd. v. CIT 7. We have carefully considered the rival submissions and have also gone through the orders of the authorities below. We have also perused the material available on record. The decisions relied upon by the parties were also duly considered by us. At the very outset, we may point out that no specific arguments were advanced as to whether penalty proceedings initiated by the Dy. CIT on 10.4.97 and orders dropping the penalties passed on 28.4.97 were within limitation as prescribed Under Section 275(1)(c) of the Act. Similarly, no arguments were advanced on this issue that the CIT has no jurisdiction to revise the orders of the Dy. CIT Under Section 263 of the Act.
Now, we will decide the main issue whether the orders dropping penalty proceedings by the Dy. CIT were erroneous and prejudicial to the interests of the Revenue as held by the CIT. There is no dispute that penalty orders or order dropping penalty proceedings can be subject matter of revision Under Section 263 of the Act. It is trite law that for assuming jurisdiction Under Section 263, the only requirement is that the CIT must consider that the order passed by the AO is erroneous in so far as it is prejudicial to the interests of the Revenue. The assessee company was incorporated with the main object of carrying out business of hire purchase and leasing etc. and to do the business of investment and holding company as envisaged in the Memorandum and Articles of Association of the Company. A search action Under Section 132 of the Act was carried out on 11.1.1996 to 13.1.96 at the business premises of Venus Eye Vision Ltd. and Dr Sharad Patil group. The assessee company was covered in the search. In this case assessment was framed Under Section 158BC vide order dt. 21.1.97. During the course of assessment proceedings, the AO noticed that on 11.1.1996, the company had issued capital of Rs. 1 lakh and had received share application money of pending allotment of Rs. 15,81,500/-, loans of Rs. 3,62,000/- from directors and of Rs. 22,01,000/- from friends and relatives. The AO also noticed that the assesses had received cash above Rs. 20,000/- towards share application money in financial year 1994-95 and two instances in financial year 1995-96. It was also noticed that Rs. 3,90,000/- was repaid in cash in excess of Rs. 20,000/-. The AO took the view that the assessee had contravened the provisions of Sections 269SS and 269T of the Act. The matter was referred to the Dy. CIT for imposing penalty Under Section 271D and 271E of the Act. The Dy. CIT initiated the penalty proceedings Under Section 271D read with Section 269SS for the assessment years 195-96 and 96-97 and Under Section 271E read with Section 269T for the assessment year 96-97. In response to the show cause notice issued by the Dy. CIT, it was submitted that "The Company had to raise the share capital and in the processes collected the share application moneys. The amount so collected has been duly accounted in the books under the account head namely 'share application money'." The assessee had also filed details of share applicants and the amounts paid by them in cash towards share application money. The assessee also submitted before the CIT that the amount received by the assessee was not accepted either as loan or deposit. We find that in support of the above contention, the assessee has also referred to the decision of the Jaipur Bench of the Tribunal in the case of Jagvijay Auto Finance (P) Ltd. (supra). The facts of the said case were that the appellant-assessee was a private limited company and it had received Rs. 34,000/- on 20.2.1990 from one Mr. Sunil Kumar by way of application money for the purchase of shares of the company. The main contention of the assessee was that the said receipt cannot be field as 'loan' or 'deposit' at the time of taking or accepting the same.
Accordingly, it was submitted that penalty Under Section 271D read with Section 269SS cannot be imposed. In the said case also, the AO imposed the penalty Under Section 271D which was confirmed by the CIT (A). In further appeal, the Tribunal held that the assesses committed no default Under Section 269SS and, therefore, penalty Under Section 271D was not leviable. For the sake of convenience, we may refer to the following paragraphs of the said decision, which read as under: "Now the pertinent question which arises for serious consideration in this case is whether the taking or accepting of the amount of Rs. 34000/- by the assessee company from Sri Sunil Kumar, admittedly by way of application money for purchase of the shares of the company, was of the character of 'loan' or 'deposit' contemplated in Section 269SS. At page 5735 of Chaturvedi and Pithisaria's Income-tax Law, Fourth Edition, Vol. V, the meanings of the terms 'deposit' and 'loan' have been explained in the following manner: "Deposit" and "Loan" - these two are not identical in meaning. It is true that both in the case of a loan and in the case of a deposit there is a relationship of a debtor and a creditor between the party giving money and the party receiving money. But in the case of a deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money - the benefit normally being earning of interest from a party who customarily accepts deposits. Deposits could also be for safe keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payable on demand, the deposit would become payable when a demand is made. In the case of a loan, however, the obligation to repay the amount arises immediately on receipt of the loan. It is possible that in case of deposits which are for a fixed period or loans which are for a fixed period, the point of repayment may arise in a different manner. But by and large, the transaction of a loan and the transaction of making a deposit are not always considered identical." As explained by the Supreme Court in the case of CIT v. Bazpur Co-op.
Sugar Factory Ltd the essence of a 'deposit' is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions. The liability to return' the money taken or accepted by a person from the other may arise in or from transactions of various types and characters. But such transactions only which have the character of 'loan' or 'deposit' would attract the provisions of Section 269SS. In a case of 'advance' received towards the price of some goods as defined in Section 2(1) of the Sales of Goods Act, 1930 and which definition includes stock and shares also, the 'liability to return' would arise when the sale of goods is not affected. That liability would not be there at the time of taking or accepting the advance by the seller. The basic character of such receipt would not be that of a 'loan' or 'deposit'. The enlargement of the meaning of 'deposit' by the direct Tax Laws (Amendment) Act, 1987 so as to include 'deposit of any nature' would also have no relevance in the instant case for the reason that such enlargement of the meaning of the said term would be effective in the case of a person other than a company It follows, therefore, that if the basic character of a receipt of money in cash in the sum of Rs. 20000 or more does not have the character of 'loan' or 'deposit' at the time of taking or accepting the amount of the receipt by a company the provisions of Section 269SS would not stand attracted. Our views, we think are fortified by the decisions of the Tribunal in the cases of Muthoot M George Bankers v. ACIT (1993) 46 ITD 10 (Cochin), ITO v.Rajendra Trading Co. (1993) 48 ITD 210, Deccan Farms & Distilleries Ltd v. Velabai Laxmidas Bhanji (1979) 49 Comp. Cas.321 (Bom) and Bazpur Co-op. Sugar Factory Ltd. (supra).
In the instant case it is the admitted position that the amount of Rs. 34000 was taken in cash on 20.2.90 by the assessee company from Sri Sunil Kumar by way of application money for the purchase of shares of the assessee company. The said amount was deposited in bank on the same day and duty reflected to share application money account and cash book of the assessee company. Since allotment of the shares could not be possible or made the said amount was transferred to the loan account of Sri Sunil Kumar. It may thus bed noted that at the time of taking or accepting the amount of Rs. 34000 on 20.2.90 by the assessee company there was no obligation or liability on it to return the same to Sri Sunil Kumar as the same was intended to go to enhance the capital of the assessee company.
Till the date of allotment of the shares there was no liability on the assessee company to return the amount of Rs. 34000 to Sri Sunil Kumar. Such liability arose only when the allotment of shares could not be made to him. The amount of Rs. 34000 thus had no character of a loan' or 'deposit' on 20.2.90 when it was received in cash. It is the well settled proposition of law that where the breach of a provision in a Statute is to cast a penal liability on the subject such provision should be construed strictly. Keeping that principle in mind it cannot be said in this case that provisions contained in Section 269SS were violated when the assessee company took or accepted an amount of Rs. 34000 on 20.2.90 from Sri Sunil Kumar by way of application money for purchase of shares of the assessee company. That being so, the assessee company committed no default Under Section 269SS so as to be liable for penalty Under Section 271D. The penalty imposed upon the assessee has thus to be cancelled." From the above decision, it would be clear that provisions of Section 269SS are not applicable for accepting share application money. In the above case also, no shares could be allotted to Sri Sunil Kumar and the amount was subsequently transferred to loan account. In the said case, it has been held that if the basic character of a receipt of money in cash in the sum of Rs. 20,000/- or more is not that of 'loan' or 'deposit' at the time of taking or accepting the amount of the receipt by a company, provisions of Section 269SS would not stand attracted.
The Jaipur Bench or the Tribunal has also referred to the decision of the Hon'ble Supreme Court in the case of CIT v. Bazpur Co-op. Sugar Factory Ltd , wherein it has been held that essence of a 'deposit' is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions. In the instant case, while framing the assessment, the AO has accepted that the money was accepted as share application money and further-more, the parties had confirmed having given the share application money to the assessee company. As such, there was no obligation on the part of the assessee to return that money. In fact, there was obligation to allot shares. In view of the above decision of the Jaipur Bench, there was no obligation or liability on the assessee company to return the money to the parties. Similarly, till the date of allotment of the shares, there was no liability on the assessee company to return the amount in question. In the instant case, the Dy. CIT dropped the penalty proceedings mainly on the ground that there was no acceptance of loan or deposit. The above decision of the Jaipur Bench was referred to by the assessee before the Dy. CIT. After considering the explanation of the assessee, the Dy. CIT reached at the conclusion that in the instant case provisions of Sections 269SS and 269T were not attracted and, accordingly, he dropped the penalty proceedings. In view of the decision of the Jaipur Bench (supra), it can be safely held that in the instant case also provisions of Section 269SS are not applicable.
At this juncture, we may also refer to the decision of this Bench of the Tribunal in the case of Jamnadas T Mehta v. ITO (2002) 81 ITD 103 (Pune) (TM). In that case, the facts were almost similar. The AO dropped the penalty proceedings Under Section 271(1)(c) of the Act, after being satisfied that the return was voluntarily filed by the assessee before detection of concealment. The CIT took the view that the order of the AO dropping the penalty proceedings Under Section 271(1)(c) was erroneous and prejudicial to the interests of revenue. On appeal, by majority view it was held that the CIT had no jurisdiction to revise the order of the AO. The Tribunal found that the view taken by the AO was a possible view and the CIT merely because he did not agree with the view could not use his powers Under Section 263. The Tribunal has also considered the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83. In the instant case also, the view taken by the Dy. CIT was duly supported by the decision of the Jaipur Bench of the Tribunal in the case of Jagviyaj Auto Finance (P) Ltd. referred to above. In the facts and circumstances of the present case, it cannot be said that the Dy. CIT has not applied his mind or no enquiries were made before passing the orders. The orders of the Dy. CIT cannot be held erroneous and prejudicial to the interests of the revenue, merely on suspicion and vague terms that no enquiries were made by the Dy. CIT on his own. In the instant case, the parties have given the monies to the assessee company fully knowing that the amounts were being given towards share application money and, therefore, there was no question of loan or deposit as held by the CIT. It is an admitted fact that the share application money was reflected in the balance sheets of the company relevant to the assessment years under consideration. In our considered view, a balance sheet of the company is a solemn document and the statements made therein are meant for information to outsiders like creditors, finance agencies and Government. The balance sheets are required to be filed with Registrar of Companies and the information contained is accessible to public. The assessee company had also shown the loans or deposits in the balance sheet, which were taken from directors or others. However, share application money received by the company was being shown separately. The CIT observed that the authorized capital of the assessee company was Rs. 1,00,000/- and, therefore, there was no need to accept money more than the authorized capital if the transactions were really genuine. He also observed that if money was truly received in excess of authorized share capital, same could have been returned at the earliest opportunity. According to him, the assessee failed to do so. In our considered view, the CIT has lost sight of this vital fact that the assesses is a private limited company and one has to consider the genuine possibility that if it intended to expand its activity or wanted to go public, it could have accepted share application money and on reaching the requisite target, it could have applied for increase in authorized capital by following prescribed procedure. It seems that the CIT has without any basis held that the assessee company should not have accepted the money more than the authorized capital. Similarly, the CIT has also observed that the money received in excess of authorized share capital should have been returned at the earliest opportunity. These observations of the CIT are without any basis and not tenable. In the case of Jagvijay Auto Finance (P.) Ltd. (supra) also, shares were not allotted to Shri Sunil Kumar and the amount of Rs. 34,000 was transferred to the loan account of Shri Sunil Kumar. The Jaipur Bench of the Tribunal held that at the time of taking or accepting the amount of Rs. 34000/- on 20.2.90 by the assessee company, there was no obligation or liability on it to return the same to Shri Sunil Kumar as the same was intended to go to enhance the capital of the assessee company. Thus, the Tribunal held that the amount of Rs. 34000/- cannot be considered as a loan or deposit on 20.2.90 when it was received in cash. In the show cause notice, the CIT stated that "the amount shown to be received in excess of authorized share capital would automatically cease to be share application money".
From the said observation, it can be safely inferred that the CIT himself accepted that the money originally received was share application money, but as the authorized share capital was less than the share application money so received, the same would cease to be share application money. In our view, if the initial character of the money received is accepted as towards share capital, then certainly the transaction would not come within the scope of Section 269SS of the Act. In such cases, we have to see the purpose of receipt of money which will show the character of transaction. In the instant case, the parties have confirmed having given the money toward share capital and the AO has accepted this position. At the same time, the accounts of the company were audited by the auditors of the company. Even the auditors have not given any adverse remarks regarding the basic character of receipt of the money. In other words, it was accepted that the money was received towards share capital. We may also add here that in the case of a deposit, delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money - the benefit normally being earning of interest from a party who customarily accepts deposits. In the instant case, no interest has been paid to any person who had given the money to the assessee company. In fact, all the parties have confirmed that they have given money to the assessee company towards share capital. There was no element of interest. Further-more, the concerned parties have given money to the assessee company towards the share capital and it cannot be ruled out that they have made necessary enquiries before transaction. It is also notable that the assessee has maintained proper accounts in respect of share application money and the transactions have been accepted as genuine by the AO in his order dt. 21.1.97 passed Under Section 158BC read with Section 143 of the Act.
In view of the above, we are of the view that in the instant case provisions of Section 271D read with Section 269SS are not applicable.
As regards the violation of provisions of Section 269T, it was explained by the assessee that it had refunded a sum of Rs. 3,90,000/- to Dr Sharad R Patil. It was also submitted that the payment constituted refund of share application money paid by him to the company. In fact, the assessee had received (Rs. 2,22,500/- + Rs. 2,00,000/-) Rs. 4,22,500/- from Dr Sharad R Patil towards share application money. The assessee company had refunded Rs. 3,90,000/- out of the above amount. It seems that the Dy. CIT has verified this fact from the records and accepted the contention "of the assessee. It is also noticed that the account extract of the said party was produced before the CIT. We also think it appropriate to reproduce the Office Note of the Dy. CIT, Range 1, Nashik dt. 28.4.1997 (filed by the department) which reads as under: During the block assessment proceedings, the AO noticed certain instances of cash repaid in excess of Rs. 20,000/-. He therefore vide his letter dt. 4.4.97 made a reference to the undersigned and stated that there was a prima facie case of contravention of Section 269T & levy of penalty Under Section 271E. Accordingly, show cause notice dt. 10.4.97 was issued to the assessee directing the assessee company to show cause why a penalty Under Section 271E should not be imposed. In response to the show cause notice the assessee was represented by Shri Shailesh Shah, ITP and he has filed written submission vide letter dt. 16.4.97, which were discussed and kept on record. He was heard.
It was submitted by the assessee's representative that the assessee is a private limited company and for the purpose of raising share capital, money was collected from various persons towards share application. This fact has been brought to the notice of the AO during the proceedings for block assessments & the AO has not disputed the fact that the money repaid in cash over Rs. 20,000/- was out of money received towards share application. The assessee's representative submitted that repayment of money by way of cash over Rs. 20,000/- was out of money received earlier towards share application money. Therefore, it was argued that the amount of cash so repaid by the assessee company was neither a loan nor a deposit.
The various arguments & submissions of the assessee's representative were carefully considered and examined. It is an undisputed tact that the amounts which were repaid were out of the share application money. Even the AO in his above mentioned reference has observed that the said amounts were out of share application money. In my opinion, the moment the AO accepts the fact that the amounts which were repaid were out of share application money, the issue goes beyond the purview of Section 269T. In fact, the amounts which were repaid during the year were received by the company as share application money in the earlier assessment years. The genuineness of the amounts so received have not been disputed by the AO. In the result, I hold that there is no case for penalty Under Section 271E. Therefore, the proceedings are dropped." From the above, it would be clear that penalty proceedings initiated Under Section 271E by show cause notice dt. 10.4.97 were dropped after considering the entire relevant facts of the present case. In that view of the matter, the CIT has committed glaring error of law directing the Dy. CIT (now Jt. CIT) to re-examine the issue. However, the CIT has not assigned any reason as to why this issue is required to be re-examined.
On this score alone, the findings of the CIT are liable to be set aside. Further-more, we have already held hereinabove that the Dy. CIT has already examined the issue and reached at the conclusion that the contention of the assessee was true and was supported by evidence. In that view of the matter also, the above direction of the CIT is not sustainable in law.
Before parting with this case, we may also observe here that the CIT was of the view that the Dy. CIT has failed to ask for proof regarding reasonable cause for not following the provisions of Section 269SS and 269T as contemplated in Section 273B of the Act. He further held that the assessee was required to prove that under what circumstances it had contravened the provisions of Section 269SS of the Act In our view, the above observations of the CIT are also without any basis; particularly when the basic issue before the Dy. CIT was that as to whether the provisions of Section 269SS and 269T were applicable to the facts of the present case. The Dy. CIT found that provisions of these sections were not applicable and, therefore, no penalty was leviable Under Section 271D and 2781E of the Act. Consequently, he dropped the penalty proceedings. The Dy. CIT was not required to consider whether there was a reasonable cause within the meaning of Section 2783B of the Act.
Therefore, the CIT was not justified in holding that the orders passed by the Dy. CIT were erroneous and prejudicial to the interests of the revenue.
The decisions relied upon by the ld DR are not applicable to the facts and circumstances of the present case. In the case of Maddi Venkataraman & Co. (P) Ltd. (supra) the Hon'ble Supreme Court held that expenses incurred in transactions carried out in violation of the provisions of FERA are not deductible. In our view, this decision is of no help to the department. The id. DR has also cited the decision of the Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd. (supra). In our view, the said decision is also not applicable to the facts of the present case. In the said case, it was held by the Hon'ble Bombay High Court that even genuine transactions can be struck down when there is motive to evade tax. This decision is also not relevant as far as case in hand is concerned.
8. The net result of above discussion is that there was no justification in setting aside the orders of the Dy. CIT dropping penalty proceedings Under Section 271D for assessment years 1995-96 and 1996-97 and Under Section 271E for assessment year 1996-97. We accordingly quash the orders of the CIT.