Violation of Sec269SS

[Kshitiz Chhawchharia]

A Pvt ltd co. has taken more than than Rs 20000/- as share application money in Cash. Will this tantamount to violation of Sec269SS and penalty proceeding u/s271D be initiated?

[Mukesh Kumar]

Share application money as such can not be treated as loan or deposit which is subject to the provisions of section 269SS or 269T. The issue is not of law but of factual positions. If the company is able to provide the genuinness of share application money and prove the source of such receipt, AO can not treat the same as subject to the provisions of 269SS and can not initiate penalty proceedings u/s 271D. For more details, you may refer to the decision of Delhi High Court reported in : 2009 - TMI - 32262 - DELHI HIGH COURT on this website.

[DEV KUMAR KOTHARI]

It is advisable to avoid share applications with cash payment when share issue and colection of share applications is not through bankers. However, a share application money received in cash and followed by allotment, return of allotment, issue of share certificate can provide suffecient safeguard in context of different provisions like s.68, and S 269 SS. In case of cash received and then refund of share application money ( even by a/c payee cheque), the matter can be viewed with suspecion and doubt by the A.O. and the theory of share application can be rejected by the A.O. and he can treat the same as loan or deposit. Besides there should be easonable cause of accepting cash to provide another safeguard. Advise cleints to be careful and deal through a/c payee cheques as much as possible.

AI Summary

Share application money in cash risks recharacterisation as loan or deposit unless genuineness and source are proven. Acceptance of share application money in cash is not per se a violation of the prohibition on cash receipts; the legal effect depends on factual proof of genuineness and source. Documentary and transactional safeguards-such as allotment, issuance of share certificates, and demonstrable source-support treatment as share capital rather than loan or deposit. Cash receipt followed by refund, inadequate explanation, or lack of reasonable cause exposes the receipt to recharacterisation and possible penalty. Advisable practice is to collect by account-payee cheques and preserve evidence to avoid adverse treatment.