ORDER
Vimal Gandhi, President
1. These cross-appeals, one by the assessee for asst. yr. 1998-99 and the other by the Revenue for asst. yr. 1997-98 are directed against order of CIT(A) relating to claim of liability of Rs. 88,69,000. The learned CIT(A) allowed the claim in asst. yr. 1997-98 but disallowed the same in the next year. Both the parties are aggrieved and have brought the issue in appeal before the Tribunal.
2. The aforesaid liability of Rs. 88,69,000 was claimed in the following circumstances:
The assessee received share application money amounting to Rs. 1,08,18,995 from four parties on 22nd Nov., 1994 as per details noted in para 4 of order of CIT (A) for asst. yr. 1998-99. This money was received by way of pay orders and deposited in the company’s account with Bank of America. The amount was credited on 23rd Nov., 1994. The assessee, simultaneously issued three cheques for aggregate amount of Rs. 99,42,258 dt. 16th Nov., 1994 on 22nd Nov., 1994. The aforesaid cheques were debited to the account of the assessee on 24th Nov., 1994. Copy of above statement is available at p. 41 of the paper book. A perusal of aforesaid statement shows that opening balance with the assessee prior to deposit of Rs. 1,08,18,995 was only Rs. 5,000 and odd. So the payment of part of consideration for acquiring immovable property is shown to have been made on receipt of Rs. 1,08,18,996. There is no other credit in the bank account to link the payment of Rs. 99,42,258 made to the vendees of property No. D-3/6, Aurangzeb Road, New Delhi. Having regard to above direct evidence, we are of the view that share application money received by the assessee was utilised for acquiring immovable property in question. There is direct nexus between receipt of amount and the acquisition of property in question. Factual finding recorded by the lower authorities to the contrary are against material on record and cannot be accepted. The assessee has clearly proved nexus between the receipt of share application money and its utilisation in acquiring immovable property referred to above.
3. The second important question is whether above amount received as share application money could be allowed as a liability or a debt owed by the assessee in view of Section 2(m) of the WT Act. It is the claim of the assessee that share application money received was debt owed as on the relevant valuation dates involved in the two assessment years, the assessee had not allotted shares in respect of share application money received by it. In this connection, assessee made reference to Section 69 of the Companies Act under which a public limited company cannot retain share application money beyond 120 days and there are other restrictions placed on the company. However, it is not in dispute that assessee is not a public limited company and, therefore, Section 69 of the Companies Act has no application to the assessee. All the same it is stated that in the case of a private company, share application money, until allotment of share, is a debt and there is relationship of debtor and creditor between the company and the person applying for allotment of shares. So, till the allotment, the amount received by the assessee as share application money was a debt owed by the assessee and was required to be allowed as a liability in computing net wealth of the assessee.
It is further contended by Shri Sandeep Dinodia, chartered accountant learned counsel for the assessee that only an offer is made by an applicant to the company to subscribe to shares and unless that offer is accepted, no valid contract comes into being. Therefore, mere acceptance of money and its utilisation does not bind a company to issue shares, till the board of directors take a decision to allot shares. In this case, said decision by the board of directors was taken only in March, 2001 and till then the money in question was only a debt returnable to the persons who applied for allotment of shares.
The assessee has further submitted that depiction of money in the accounts of the assessee was not relevant or decisive. In this connection, assessee relied upon decision of Hon’ble Supreme Court in the cases of Kedar Nath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC). The assessee also placed reliance on definition of “debt” as per dictionaries to emphasise that receipt of share application money prior to allotment of share was a debt owed.
4. The assessee further argued that principle laid in accounting standard also support the claim of the assessee. Reliance was placed on Mandatory Accounting Standard No. 4 providing for contingencies in the balance sheet. The said accounting standard states as under :
“The term ‘contingencies’ used in this statement is restricted to conditions or situations at the balance sheet date, the financial effect of which is to be determined by future events which may or may not occur.”
The assessee further relied upon net worth of a company defined as per Section 2(29A) of the Companies Act, 1956 as under :
“Net worth means sum total of the paid-up capital and free reserves after deducting the provisions and expenses as may be prescribed,” (Free reserves means reserves created out of profits and share premium account but does not include reserves created out of revaluation of assets and write back of provisions for depreciation and amalgamation).
It was further contended that share application money will not be treated as part of capital of a company before allotment of shares. In this connection, reference was made to Section 2(32) of the Companies Act. The assessee further relied upon commentary of learned author Ramaiya on Section 73 of the Companies Act (p. 851) wherein the learned author has opined that money received towards share application money on private placement, until allotment is made by the company, the relationship is one of debtor and creditor and only on allotment this amount is transferred to share capital.
5. The assessee further relied upon Companies (Acceptance of Deposit) Rules, 1975, whereunder certain exempted categories of deposits were enumerated in Clause 2(b) to contend that amount received by way of subscription to any share pending allotment was deposit of exempt category. In the light of all the above submissions, it was contended that share application money could not be treated as capital of the assessee, it was a returnable debit in the hands of the assessee on the two valuation dates and, therefore, a liability deductible as per Section 2(m) of the WT Act.
6. Shri Salil Gupta, learned Departmental Representative vehemently opposed above submissions. It was argued that under Section 2(m) of the WT Act, the assessee has to prove that the debt was owed by the assessee and incurred in relation to a taxable asset. The onus to establish the claim squarely lies upon the assessee. In the present case, assessee failed to establish nexus and relationship between the debt owed and taxable asset acquired. In the order for asst. yr. 1997-98, the CWT(A) allowed relief by merely relying on the nexus between assets acquired and amount shown as share application money without going into the question whether the disputed amount was “debt owed”.
The expression “debt owed” is not defined in the WT Act and, therefore, one has to understand its meaning by referring to dictionaries and Judge-made law. This expression was also employed in Section 80J and Rule 19A of IT Rules. The learned Departmental Representative relied upon the decision of Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corporation (2003) 261 ITR 113 (Guj) where it is stated as under :
“In Kesomm Industries and Cotton Mills Ltd v. CWT (1966) 59 ITR 767 (SC), while considering the definition of the word ‘debt’ and noticing the judgments which were cited at the bar, held that there was no conflict on the definition of the word ‘debt’, and that all the decisions agreed that the meaning of the expression ‘debt’ may take colour from the provisions of the concerned Act; it may have different shades of meaning. It was held that the definition of the word ‘debt’ to the effect that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation; ‘debitum in praesenti solvendum in future’ was unanimously accepted. The Supreme Court also held that in the expression ‘debt owed’, the verb ‘owe’ means ‘to be under an obligation to pay’, and it does not really add to the meaning of the word debt’.”
7. With reference to the argument of learned counsel for: the assessee that there was relationship of debtor and creditor relating to share application money till the shares are allotted, the learned Departmental Representative referred to the Companies Act and submitted as under :
“Under the provisions of the Companies Act, 1956, issue of shares has the following stages :
(a) Resolution by the board of directors
(b) Resolution of the general body meeting
(c) Offer of shares to prospective shareholders by the company
(d) Acceptance of offer by the applicants by way of filing share application forms along with money
(e) Allotment of shares by the board
(f) Issue of share certificates
(g) Return of allotment with the ROC
In the instant case, stages (a) to (d) have admittedly been completed. Merely because the process has not been finalised, the nature of the transaction shall not change from capital to debt. The intention of the company as well as the prospective allottees right from inception of the process was to issue and allot shares. This would be borne out from the resolutions of the board of directors, annual general meeting and the share application forms, which have not been made available. Mere reliance on the self-serving receipts issued by the assessee would not change the real substance and nature of these transactions”‘
8. The learned Departmental Representative further argued that assessee disclosed amount in question in the balance sheet under the heading “share holders fund” as required by Schedule VI of the Companies Act, 1956. The issue in dispute was further squarely covered by decision of Hon’ble Supreme Court in the case of CIT v. Lucas TVS Ltd. (2001) 249 ITR 302 (SC) where with reference to share application money and “capital employed” under Section 80J of IT Act, their Lordships observed as under :
“Our attention was drawn to the judgment of this Court in Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC). This Court there referred to English judgments and the judgments of this Court to determine what a debt was. It held that a debt was a sum of money which is now payable or will become payable in future by reason of a present obligation. It added that (p. 780) a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happened. But if there is a debt, the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount. In short, a debt owed within the meaning of Section 2(m) of the WT Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money.’
What is relevant for our purpose is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency has happened. In the present case, the liability of the respondent to Lucas (England) is to issue to Lucas (England) equity shares of a value equivalent to the amount advanced by Lucas (England) for the plant and machinery. It is only if, for any reason, the shares cannot be allotted that the question of compensating Lucas (England) in cash might arise. We do not think that, in these circumstances, it can be said that there was a debt owed by the respondent to Lucas (England) to be taken into account for the purposes of computing the capital under Section 80J.”
In the light of above submission, the learned Departmental Representative submitted that amount in question could not be treated as a liability under Section 2(m) of the WT Act.
9. We have given careful thought to the rival submissions of the parties in the light of material available on record. The quantification of the alleged liability was not challenged before us. The only question we were called upon to decide was whether Rs. 88,69,000 could be allowed to the assessee as a liability while computing its net wealth in the light of provision of Section 2(m) of the WT Act. There is no dispute that the assessee has to show and prove that the disputed amount was a debt owed on the two valuation dates in question. There is further no dispute between the parties that amount in question was received by the assessee-company as share application money. It has already been held by us that the said money was utilised for acquiring property at Aurangzeb Road, New Delhi. The assessee has further to prove that it was a debt in praesenti. In other words, the liability represented sum of money which was payable or will become payable in future by reason of present obligation. It was not a contingent liability depending on happening of certain events.
10. We are of the view that dictionary meaning of “debt owed” is of no help as the expression has to be understood in the light of context and purpose of the statute in which it is employed. Under the WT Act, a liability to be a deductible amount should be clear, ascertained and defined, leaving no doubt in the mind that it is a cut in the assets held by the assessee.
11. In the Commentary of Ramaiya on Company Law, the learned author has opined that until allotment is made by a company, there is relationship of a debtor and the creditor between the company and the person applying for allotment of shares. It has been further observed that there is no prohibition against the company utilising share application money. In the event of allotment not being made, the amount will have to be refunded. There is no doubt that, if on proved facts, it is established that company has decided not to allot shares, and this fact is established either through direct evidence or by necessary implication, the share application money would be debt owed and the amount has to be allowed as a liability. But every receipt of share application money would not automatically become debt and a liability the moment it is received by the company. At least such a view cannot be held if principles laid down by their Lordships of the Hon’ble Supreme Court in the case of Lucas TVS Ltd. (supra) are kept in view and are applied. In the said case, as in the present case, their Lordships were considering question whether share application money in the hands of company would be a debt owed by the company or its capital. Their Lordships noted the decision of Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC) which was rendered under Section 2(m) of the WT Act and held that share application money would become a debt only when shares cannot be allotted and assessee is required to return the cash. Unless above contingency happens, the share application money is not a debt owed. It was treated as a part of capital of assessee for purposes of Section 80J of IT Act.
12. The aforesaid decision is squarely applicable to the case in hand. There is material on record that right from the very beginning assessee intended to allot shares to the persons who paid share application money. The assessee never intended to return the amount received to the applicants. This was clear from the manner in which amounts were utilised for acquiring immoveable properties. The situation of non-allotment of shares did not arise and, therefore, it was out of question that the assessee would be required to return the application money.
13. Having regard to the above positive circumstances, and in the absence of any other material, it is difficult for us to hold that share application money represented debt in praesenti or had an obligation in present which made it payable in future. It is not permissible to ignore the treatment given to the disputed amounts by utilising it immediately. It is difficult for the assessee to contend that assessee had an intention to return the money. The contingency requiring the assessee to return the money never arose. Therefore, there is no justification to treat receipt of share application money as a debt in above circumstances. It cannot be debt the moment it is received by the company because the company had asked for capital and applicants paid it towards capital. The said situation never changed. If for any reason there was a delay in the allotment, to which nobody has objected, the situation did not change. The assessee-company right from day one utilised the money in acquiring properties and treated it as part of its capital and not as debt owed by it. Above circumstances were not shown to have changed at any stage till the actual allotment of shares. Thus, in the absence of any evidence to show that the assessee became liable to return share application money, the amount in question could not be treated as a permissible liability. The claim was required to be disallowed as done by the learned CIT(A) in asst. yr. 1998-99. Accordingly, we confirm impugned order of CIT(A) in the above assessment year.
The other order of CIT(A) for asst. yr. 1997-98 is set aside and that of AO is restored.
14. In the result, the Revenue’s appeal is allowed for asst. yr. 1997-98, whereas that of the assessee for asst. yr. 1998-99 is dismissed.