Section 2(22)(e) – Share application money is not “loan or advance” for the purpose of section 2(22)(e).

Section 2(22)(e) – Share application money is not “loan or advance” for the purpose of section 2(22)(e).

During the assessment proceedings u/s. 153A, the AO noticed that the assessee was a beneficial shareholder in both M/s Kingston Properties Pvt. Ltd (KPPL) and New Dimensions Consultants P. Ltd. (NDCPL). NDCPL had reserves and had contributed share application money into KPPL. KPPL was not the beneficial shareholder of NDCPL but the assessee was there in both the companies. NDCPL did not allot shares but the share application money was returned after the period of three years. The AO held that the assessee being a beneficial shareholder, had chosen this route to enrich his wealth by increasing net worth of KPPL, where he had beneficial interest. He rejected the book entries of both the companies by mentioning that it was a case of lifting of corporate veil. The AO assessed the sum of Rs. 1,40,03,700 as deemed dividend u/s. 2(22)(e) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the appeal in favor of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
Share application money or share application advance is distinct from ‘loan or advance’. Although share application money is one kind of advance given with the intention to obtain the allotment of shares/equity/preference shares etc, such advances are innately different form the normal loan or advances specified both in section 269SS or 2(22)(e) of the Act. Unless the mala fide is demonstrated by the AO with evidence, the book entries or resolution of the Board of the assessee become relevant and credible, which should not be dismissed without bringing any adverse material to demonstrate the contrary. It is also evident that share application money when partly returned without any allotment of shares, such refunds should not be classified as ‘loan or advance’ merely because share application advance is returned without allotment of share. In the instant case, the refund of the amount was done for commercial reasons and also in the best interest of the prospective share applicant. Further, it is self explanatory that the assessee being a ‘beneficial share holder’, derives no benefit whatsoever, when the impugned ‘share application money/advance’ is finally returned without any allotment of shares for commercial reasons. In this kind of situations, the books entries become really relevant as they show the initial intentions of the parties into the transactions. It is undisputed that the books entries suggest clearly the ‘share application’ nature of the advance and not the ‘loan or advance’. As such the revenue has merely suspected the transactions without containing any material to support the suspicion. Therefore, the share application money may be an advance but they are not advances which are referred to in section 2(22)(e) of the Act. Such advances, when returned without any allotment or part allotment of shares to the applicant/subscriber, will not take a nature of the loan merely because the same is repaid or returned or refunded in the same year or later years after keeping the money for some time with the company. So long as the original intention of payment of share application money is towards the allotment of shares of any kind, the same cannot be deemed as ‘loan or advance’ unless the mala fide intentions are exposed by the AO with evidence.

The appeal filed by the Revenue was dismissed.

Cases Relied upon :
1 Ardee Finvest (P) Ltd. vs. DCIT ITA No. 218/Del/2000 (AY 1996-97)(Del)
2 Direct Information P. Ltd. ITA No. 2576/M/2011 order dated 31.1.2012 (Mum)
3 CIT vs. Sunil Chopra ITA no. 106/2011 judgment dated 27-04-2011 (Del)(HC)
4 Subhmangal Credit Capital P Ltd. ITA No.7238/ Mum/2008 dtd 19-01-2010 (Mum)
5 Rugmini Ram Gagav Spinners P. Ltd 304 ITR 417 (Mad)(HC)