We refunded share application money in cash. Is that a repayment of a deposit under s.269T?
No. The Madras High Court held that money received as advance towards allotment of shares, with no time frame for return and no interest, is neither a deposit nor a loan but share capital advance, and that ss.269SS and 269T apply only to deposits or loans — when it is neither, those sections have no application at all. Penalty under s.271E is not automatic and a bona fide belief that advances against allotment of shares are not loans or deposits is itself a reasonable cause under s.273B.
Decided by the High Court (P.D. Dinakaran J and P.P.S. Janarthana Raja J) on 2007-07-12, reported as Tax Case (Appeal) No.274 of 2004; Assessment Year 1990-91; High Court of Judicature at Madras. It bears on section 269T, section 271E, section 269SS, section 273B, section 260A of the Income Tax Act 1961, in Cash Transaction Limits, Penalty, Evidence & Burden of Proof and How Tax Law Is Read matters.
This is the cleanest statement of the threshold defence that gets overlooked: before arguing reasonable cause, ask whether the receipt or repayment is a loan, deposit or specified sum at all. The same analysis defeats penalties on trade advances, sale consideration, share application money and current-account adjustments. Two limits must be stated. First, date the statute, and date each change separately: at the relevant time s.269T reached only a 'deposit' and s.271E(2) named the Deputy Commissioner. The word 'Deputy' in s.271E(2) was substituted by 'Joint' by the Finance (No. 2) Act 1998 with effect from 1 October 1998, long before the 2015 amendment. The Finance Act 2015 is what added 'specified sum' to s.269SS and 'specified advance' to s.269T and s.271E, from 1 June 2015. Read the current text of all three sections from a current source, not from this judgment. The holding that share application money is neither a loan nor a deposit survives those amendments, but a citation of the section text from this judgment does not. Second, the Court's route was that the concurrent factual finding of the CIT(A) and the Tribunal — that the money was share application money — was based on valid material and was not perverse, so the case is as much about the standard of interference under s.260A as about s.269T. The Revenue's answer, recorded at para 3, was that the assessee had taken loans and repaid them under the guise of refund of share application money; the defence works only if the character of the receipt stands up on the documents.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is a closely held company in which the public are not substantially interested. For assessment year 1990-91 it returned income of Rs 5,59,760 and the assessment under s.143(3) determined income at Rs 24,23,910. During the year the company repaid in cash some of the share application money it had earlier received. The money had been received in cash over a period of time as advance towards allotment of shares from sixteen persons, without stipulating any time frame for return or refund and without interest in case of non-allotment either fully or partly. The Assessing Officer initiated penalty proceedings under s.271E and levied Rs 5,90,416. The CIT(A) deleted the penalty and the Tribunal dismissed the Revenue's appeal, recording that the Departmental Representative could not bring on record any material to show that the assessee in fact wanted only a loan or deposit but tried to show it as share application money, and that partial rejection or partial allotment of the applications did not mean it was not share application money. The Revenue appealed under s.260A on two questions: whether the Tribunal was right in holding that the cash payments pertained to refund of share application money and not repayment of a deposit or loan, and whether it was right in holding that penalty under s.271E was not leviable.
Both questions were answered in favour of the assessee and against the Revenue, and the tax case was dismissed with no costs (para 6). The money retained by the company was neither deposit nor loan but only share capital advance; ss.269SS and 269T have application only in a limited way in respect of deposits or loans, and when the receipt is neither, those sections have no application at all. Penalty under s.271E is not automatic, and a bona fide belief that receipt of advances against allotment of shares would not be termed loans or deposits is sufficient to drop the penalty unless the material on record positively shows the money received was only a deposit or loan (para 5).
The Court began from the rationale of ss.269SS and 269T, which is to prevent tax evasion, that is, the laundering of concealed income by parties in the guise of cash loans or deposits in or outside the accounts, and reasoned that the sections therefore operate only in respect of deposits or loans (para 5). It found nothing to show that the advances or their repayment had flowed from undisclosed income of the assessee or of the applicants, and pointed to the absence of any interest on advances repaid after a considerable time, observing that if the intention had been to receive them as loans or deposits the lenders would not have made the advances gratuitously. It gave weight to the fact that the assessee had never been called on to explain a default under s.269SS when the advances were received in earlier years, which showed the case was not governed by those provisions. It then set out the statutory scheme — s.271E, s.269T and s.273B as they then stood — noting that the specific word used in s.269T is 'deposit' and that the finding here was that there was no deposit. On s.273B it held that the reasonable cause was the assessee's bona fide belief that the money received was only for allotment of shares, and that the Revenue had produced no material or compelling reason to prove otherwise. Finally it applied CIT v. P. Mohanakala [2007] 291 ITR 278 (SC) for the proposition that where there is a concurrent finding by the authorities below no interference is called for by the High Court, and held the Tribunal's order was not perverse and rested on valid materials and evidence.
When it is neither deposit nor loan, the provisions of Sections 269SS and 269T have no application at all.
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Handle my notice → Ask a CA on WhatsAppNo. The Madras High Court held that money received as advance towards allotment of shares, with no time frame for return and no interest, is neither a deposit nor a loan but share capital advance, and that ss.269SS and 269T apply only to deposits or loans — when it is neither, those sections have no application at all. Penalty under s.271E is not automatic and a bona fide belief that advances against allotment of shares are not loans or deposits is itself a reasonable cause under s.273B. This was decided by the High Court (P.D. Dinakaran J and P.P.S. Janarthana Raja J) and bears on section 269T, section 271E, section 269SS, section 273B, section 260A of the Income Tax Act 1961. It is reported as Tax Case (Appeal) No.274 of 2004; Assessment Year 1990-91; High Court of Judicature at Madras. This is the cleanest statement of the threshold defence that gets overlooked: before arguing reasonable cause, ask whether the receipt or repayment is a loan, deposit or specified sum at all. The same analysis defeats penalties on trade advances, sale consideration, share application money and current-account adjustments. Two limits must be stated. First, date the statute, and date each change separately: at the relevant time s.269T reached only a 'deposit' and s.271E(2) named the Deputy Commissioner. The word 'Deputy' in s.271E(2) was substituted by 'Joint' by the Finance (No. 2) Act 1998 with effect from 1 October 1998, long before the 2015 amendment. The Finance Act 2015 is what added 'specified sum' to s.269SS and 'specified advance' to s.269T and s.271E, from 1 June 2015. Read the current text of all three sections from a current source, not from this judgment. The holding that share application money is neither a loan nor a deposit survives those amendments, but a citation of the section text from this judgment does not. Second, the Court's route was that the concurrent factual finding of the CIT(A) and the Tribunal — that the money was share application money — was based on valid material and was not perverse, so the case is as much about the standard of interference under s.260A as about s.269T. The Revenue's answer, recorded at para 3, was that the assessee had taken loans and repaid them under the guise of refund of share application money; the defence works only if the character of the receipt stands up on the documents. If it applies to you, the first step is this: Take the character point first: show the receipt is not a loan, deposit or specified sum, and only then plead reasonable cause in the alternative.
The assessee is a closely held company in which the public are not substantially interested. For assessment year 1990-91 it returned income of Rs 5,59,760 and the assessment under s.143(3) determined income at Rs 24,23,910. During the year the company repaid in cash some of the share application money it had earlier received. The money had been received in cash over a period of time as advance towards allotment of shares from sixteen persons, without stipulating any time frame for return or refund and without interest in case of non-allotment either fully or partly. The Assessing Officer initiated penalty proceedings under s.271E and levied Rs 5,90,416. The CIT(A) deleted the penalty and the Tribunal dismissed the Revenue's appeal, recording that the Departmental Representative could not bring on record any material to show that the assessee in fact wanted only a loan or deposit but tried to show it as share application money, and that partial rejection or partial allotment of the applications did not mean it was not share application money. The Revenue appealed under s.260A on two questions: whether the Tribunal was right in holding that the cash payments pertained to refund of share application money and not repayment of a deposit or loan, and whether it was right in holding that penalty under s.271E was not leviable. The matter was decided on 2007-07-12 by the High Court (P.D. Dinakaran J and P.P.S. Janarthana Raja J). On those facts the High Court held as follows. Both questions were answered in favour of the assessee and against the Revenue, and the tax case was dismissed with no costs (para 6). The money retained by the company was neither deposit nor loan but only share capital advance; ss.269SS and 269T have application only in a limited way in respect of deposits or loans, and when the receipt is neither, those sections have no application at all. Penalty under s.271E is not automatic, and a bona fide belief that receipt of advances against allotment of shares would not be termed loans or deposits is sufficient to drop the penalty unless the material on record positively shows the money received was only a deposit or loan (para 5).
The Court began from the rationale of ss.269SS and 269T, which is to prevent tax evasion, that is, the laundering of concealed income by parties in the guise of cash loans or deposits in or outside the accounts, and reasoned that the sections therefore operate only in respect of deposits or loans (para 5). It found nothing to show that the advances or their repayment had flowed from undisclosed income of the assessee or of the applicants, and pointed to the absence of any interest on advances repaid after a considerable time, observing that if the intention had been to receive them as loans or deposits the lenders would not have made the advances gratuitously. It gave weight to the fact that the assessee had never been called on to explain a default under s.269SS when the advances were received in earlier years, which showed the case was not governed by those provisions. It then set out the statutory scheme — s.271E, s.269T and s.273B as they then stood — noting that the specific word used in s.269T is 'deposit' and that the finding here was that there was no deposit. On s.273B it held that the reasonable cause was the assessee's bona fide belief that the money received was only for allotment of shares, and that the Revenue had produced no material or compelling reason to prove otherwise. Finally it applied CIT v. P. Mohanakala [2007] 291 ITR 278 (SC) for the proposition that where there is a concurrent finding by the authorities below no interference is called for by the High Court, and held the Tribunal's order was not perverse and rested on valid materials and evidence. In the words reproduced by the source cited on this page: "When it is neither deposit nor loan, the provisions of Sections 269SS and 269T have no application at all." The decision followed or applied CIT v. P. Mohanakala [2007] 291 ITR 278 (SC) — applied on non-interference with concurrent findings.
It was decided by the High Court on 2007-07-12 and is reported as Tax Case (Appeal) No.274 of 2004; Assessment Year 1990-91; High Court of Judicature at Madras. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 269T, section 271E, section 269SS, section 273B, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both questions were answered in favour of the assessee and against the Revenue, and the tax case was dismissed with no costs (para 6). The money retained by the company was neither deposit nor loan but only share capital advance; ss.269SS and 269T have application only in a limited way in respect of deposits or loans, and when the receipt is neither, those sections have no application at all. Penalty under s.271E is not automatic, and a bona fide belief that receipt of advances against allotment of shares would not be termed loans or deposits is sufficient to drop the penalty unless the material on record positively shows the money received was only a deposit or loan (para 5). It arises in Cash Transaction Limits, Penalty, Evidence & Burden of Proof and How Tax Law Is Read matters, on section 269T, section 271E, section 269SS, section 273B, section 260A of the Income Tax Act 1961, and was decided by P.D. Dinakaran J and P.P.S. Janarthana Raja J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For share application money, build the file the Court relied on — applications for allotment, no stipulated time frame for return or refund, no interest paid on any refund, board resolutions and the allotment or rejection record. Point to the Department's own conduct: the Court gave weight to the fact that the assessee had never been called on to explain a s.269SS default when the advances were received in earlier years. Where allotment was partly made or partly rejected, meet the inference head on — the Tribunal's finding, extracted in the judgment, was that partial rejection does not convert share application money into a loan. Do not lift the text of s.269T or s.271E from this judgment; it reproduces the pre-2015 provisions.
Still good law. A citedby search returns 30 later citing documents. The Madras High Court itself followed it in CIT v M/s Pride Remedies Private Ltd (3 December 2014): at para 6 the Bench recorded that 'In the decision reported in 304 ITR 417 (CIT V. Rugmini Ram Raghav Spinners Private Limited), this Court had an occasion to consider the similar issue', and at para 7 held 'Hence, following the decision of this Court cited supra, we find no question of law... Accordingly, the order of the Tribunal stands confirmed', dismissing the Revenue's appeals and leaving the s.271D penalty deleted. Tribunal benches at Delhi, Hyderabad and Kolkata apply it to the same effect - that money received towards allotment of shares is neither a loan nor a deposit, so ss.269SS and 269T and the penalties in ss.271D and 271E are not attracted (Dhatri Constructions, Hyderabad, 9 October 2012; Vishwa Bhumi Engineers, Delhi, 10 August 2011; Timeless Infoteck, Delhi, 8 April 2011), and in Eminent Infra Projects (Delhi, 16 November 2011) the penalty was deleted on a bona fide belief founded on it. Nothing overruling, doubting or confining it was found. The point on which the ratio turns, and which a practitioner must be able to establish on the facts, is intention: as the Delhi Tribunal put it in Greenline Developers, the question is whether the money was truly for allotment, because 'if the intention was to receive them as a loan or deposit, the lenders would not have made the advances gratuitously'. Where shares are never allotted and the money is repaid, the Revenue will press the contrary characterisation. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment reproduces s.269T, s.271E and s.273B as they stood for assessment year 1990-91; s.271E(2) as extracted names the Deputy Commissioner, and s.269T is the pre-2015 text confined to deposits. The Finance Act 2015 extended s.269SS to a 'specified sum' and s.269T to a 'specified advance' from 1 June 2015. The substitution of 'Joint' for 'Deputy' in s.271E(2) is a different and much earlier amendment, made by the Finance (No. 2) Act 1998 with effect from 1 October 1998 (department footnote 56 on incometaxindia.gov.in/w/section-271e-4, a Year-2002 archived page used here only to date the amendment). The whole of the Court's discussion is contained in a single very long paragraph 5, which also extracts paragraph 3 of the Tribunal's order; where I attribute a sentence to para 5 it is the High Court's own text unless I have said otherwise. The Supreme Court order of 22 November 2019 shows Civil Appeal No.1937/2009 as the lead matter in a batch of several hundred; I could not determine from that order whether the Revenue's appeal against this judgment was among the matters dismissed as withdrawn for low tax effect under CBDT Circular 17/2019 or among those directed to be listed separately. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both questions were answered in favour of the assessee and against the Revenue, and the tax case was dismissed with no costs (para 6). The money retained by the company was neither deposit nor loan but only share capital advance; ss.269SS and 269T have application only in a limited way in respect of deposits or loans, and when the receipt is neither, those sections have no application at all. Penalty under s.271E is not automatic, and a bona fide belief that receipt of advances against allotment of shares would not be termed loans or deposits is sufficient to drop the penalty unless the material on record positively shows the money received was only a deposit or loan (para 5).
TaxSphere, “CIT v Rugmini Ram Ragav Spinners P Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-rugmini-ram-ragav-spinners-share-application-money-not-a-deposit/ (validity last checked 2026-09-08)
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Our credit society takes and repays members' money in cash across the counter like a bank. The officer has levied penalty under sections 271D and 271E on the whole turnover. Can it stand?
I took and repaid small cash loans from my family's sister concern, all recorded in the books. Must penalty follow automatically under sections 271D and 271E?
My assessment order says penalty under sections 271D and 271E is initiated. The Joint Commissioner issued his notice months later and passed the penalty order after that. Does time run from the assessment order or from his notice?
Our credit society takes deposits and repays loans in cash to members. Can the department levy 271D and 271E on the whole amount?
