Use of Share Application money

Record the receipt of Share Application money in Board Meeting.

On the practical front this money is very much available to the company as nobody can trace this money. Reason being there is no such requirement to open some escrow account for the same application money.
Practically use of this money depends on the terms of subscription agreement between the prospective investor and Issuer Company.
Only if the applicants raises objections, or ask for refunds then the problem starts , otherwise no problem
However as per Schedule VI the Share Application money is to be taken as Current Liablity thus therotically that money is not available to company.

However as per Section 73 Applicable in case of Public Placement through Stock Exchange

Section 73(3)
All moneys received as aforesaid shall be kept in a separate bank account maintained with a Scheduled Bank until the permission has been granted, or where an appeal has been preferred against the refusal to grant such permission, until the disposal of the appeal, and the money standing in such separate account shall, where the permission has not been applied for as aforesaid or has not been granted, be repaid within the time and in the manner specified in subsection (2), and if default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine, which may extend to five thousand rupees.
  
Section 73 (3A)
Moneys standing to the credit of the separate bank account referred to in sub-section (3) shall not be utilised for any purpose other than the following purposes, namely :-

(a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on the stock exchanger or each stock exchange specified in the prospectus; or
 
(b) repayment of moneys received from applicants in pursuance of the prospectus, where shares have not been permitted to be dealt in on the stock exchanger or each stock exchange specified in the prospectus, as the case may be, or, where the company is for any other reason unable to make the allotment of share.

Also to note

Share application is nothing but an offer to subscribe to shares in a company. The offer has to be accepted by allotment for the contract to be complete or the application refused. The usage of money would mean an acceptance by action. The company will then be compelled to issue share certficate to the applicant and it cannot refuse to allot shares in such an event.

A ruling by the Jharkhand High Court assumes importance. The case involved a company which received share application money from 10 persons in cash for issue of shares. The tax officer levied penalty under Section 271 D of the Income-Tax Act, stating that receiving share application money in cash resulted in violation of Section 269 SS of the I-T Act.

Section 269 SS provides that no person shall accept from any other person any loan or deposit in excess of Rs 20,000 otherwise than by an account-payee cheque subject to certain exceptions. Section 271 D provides that if a person accepts any loan or deposit in contravention of Section 269 SS, he shall be liable to pay penalty of an amount equivalent to the loan taken or deposit so accepted.
The term "deposit" is explained in Section 269 SS to mean loan or deposit of money. Whereas, Section 269 T defines "loan or deposit" in a narrower sense, to mean any deposit of money which is repayable after notice or repayable after a period and in the case of a person other than company includes deposit of any nature. This definition should apply in the case of levy of penalty on repayment of loan or deposit. The company contended that the amount received towards share application money is neither loan nor deposit. In an appeal, the Appellate Commissioner struck down the penalty but in the second appeal the Tribunal upheld it, treating share application money as deposit.

The Jharkhand High Court observed that until the applications for issue of share are processed and shares are allotted or the amounts are refunded to the applicants, the amounts are clearly not loans repayable even without a demand by the lenders. The amounts are liable to be refunded to applicants once it is decided that shares were not to be allotted to them.

The court finally held that the share application money received by the company partakes the character of deposit since it is repayable in specie on refusal to allot shares and is repayable if recalled by the applicant before the allotment of shares and the conclusion of the contract. Consequently, receipt of such money in contravention of Section 269 SS attracts penalty under Section 271 D of the ITA.

This ruling should not apply in case amounts are received from the applicants who are subscribers to the MoA of the company as in that case there is no obligation on the company to repay the amount but to issue shares.
It is mandatory for subscribers to acquire shares as committed by them while signing the MoA of the company.
The share application money is not a deposit as the amount is received for a specific purpose of allotment of shares and is not a money-lending transaction.
Further, the prime obligation of the company is to issue shares and not repay the application money. The amount is repaid only in case where shares are not allotted, which is a consequential event in the process of share allotment. 

The tax authorities will rely on this ruling for levying penalty under Section 271 D until a favourable ruling is pronounced. Therefore, private companies need to ensure that share application monies are received by an account-payee cheque only to avoid any penal consequences. 

But in the matter of COMMISSIONER OF INCOME-TAX Versus RUGMINI RAM RAGAV SPINNERS P. LTD. [2008 -TMI - 30707 - MADRAS HIGH COURT] the issue has been decided in favor of assessee.

Provisions of section269SS does not apply to share application money accepted in cash and consequently no penalty under section 271D was leviable. Commissioner of IncomeTax v. I.P. India (P) Ltd. (2012) 43 (I) ITCL 194 (Del-High Court).