By CA Surekha Ahuja
A private company may carry old share application money, an investor loan, an unconverted instrument or an advance for a funding round that never closed. The problem becomes more difficult when both the investor and spouse have died, records are incomplete and no one has claimed the money.
Writing off the balance, allotting shares retrospectively or refunding the money to an available family member may appear convenient. Each step can create fresh company-law, tax or succession problems.
The correct approach is to establish what the company owes, who is legally entitled to receive it, what MCA action is required and how the transaction must be treated under the applicable Income-tax Act.
1. Start with the actual nature of the balance
The balance-sheet description is not conclusive. Examine the original transaction, documents and subsequent events.
| Balance in the books | Company-law action | Income-tax review |
|---|---|---|
| Share application money pending allotment | Verify the offer, allotment deadline and refund obligation | Establish the original source and nature of the receipt |
| Advance against proposed shares | Examine the subscription agreement, approvals and applicable issue requirements | Check evidence supporting the original credit |
| Allotted equity or preference shares | Follow the applicable transmission process | Review the original capital transaction and any later transaction separately |
| Debentures or convertible instruments | Apply conversion, maturity, redemption and repayment terms | Examine interest, redemption and withholding-tax consequences |
| Investor or founder loan | Verify the agreement, principal, interest and repayment terms | Establish the original credit and examine any later remission separately |
| Failed funding round | Determine whether a contractual or statutory refund obligation arose | Preserve evidence of the receipt and repayment basis |
| Unexplained or unsupported credit | Reconstruct the transaction before deciding the corrective action | Assess potential unexplained-credit exposure for the relevant tax year |
Do not reclassify an amount merely to make closure easier. The treatment must follow the transaction's legal substance.
2. MCA compliance: allotment, refund and transmission
Share application money
Where the transaction is a private placement governed by Section 42 of the Companies Act, 2013, Section 42(6) requires allotment within 60 days of receipt of application money. If allotment does not take place within that period, the money must be refunded within the following 15 days. Failure to refund within that further period attracts interest at 12% per annum from the expiry of the 60th day.
These deadlines must not be applied indiscriminately to every advance, loan or funding receipt. Examine whether Section 42 actually governs the transaction and whether the offer complied with the applicable statutory requirements. The relevant provisions of the Companies (Acceptance of Deposits) Rules, 2014, must also be considered.
In Murlidhar Vincom Pvt. Ltd. v. Skoda (India) Pvt. Ltd., NCLAT, 26 November 2024, the Tribunal rejected an insolvency appeal seeking to treat the outstanding share application money as a financial debt under the facts before it. The absence of evidence of a compliant private-placement offer was material to the deposit-rule argument. The Tribunal left recovery before an appropriate forum open. The decision should not be read as eliminating the company's underlying refund obligations where these are otherwise established.
Practical action: Prepare a transaction-wise schedule recording the date and amount received, supporting offer and application documents, allotment status, refund deadline, interest exposure, refunds made, statutory filings and outstanding balance.
Do not backdate applications, board minutes or allotments. Identify any past default and obtain advice on the legally available corrective route. A late filing does not necessarily cure a substantive contravention.
If the investor and spouse have both died
The company must establish the succession chain before paying the claim or transmitting securities.
Obtain and examine:
Death certificates and the relevant dates of death.
Any will, probate, letters of administration or court order.
The applicable succession law and the identity of all persons legally entitled.
A succession certificate or other appropriate evidence where required for the particular asset or claim.
Identification, tax and banking details of the verified recipient.
A succession certificate under Sections 372 and 381 of the Indian Succession Act, 1925, may be relevant to debts and securities. It is not a universal requirement for every case. The appropriate documentation depends on the asset, succession facts and applicable law.
The spouse does not necessarily inherit the entire claim. The order of deaths, any will and the applicable succession law may determine who ultimately becomes entitled.
An indemnity or no-objection declaration may support a properly established settlement, but it cannot cure defective title or extinguish the rights of an omitted heir. Where entitlement is disputed or uncertain, do not release the money until the position is resolved through appropriate legal advice or proceedings.
If shares were already allotted
The issue is ordinarily transmission of existing securities, not refund of the original subscription money. Follow Section 56 of the Companies Act, 2013, and the applicable rules and company procedures.
First verify that the shares were validly allotted and that the statutory records reflect the transaction. Do not allot shares afresh in a deceased person's name merely to clear an old balance.
Check the IEPF position
Section 125(2)(f) of the Companies Act, 2013, covers specified application money due for refund and related interest that remains unclaimed and unpaid for seven years, subject to the statutory requirements.
Confirm whether the particular amount falls within the specified category, when the relevant period began, whether any payment or refund was made and what action is required. Do not assume that every old loan or advance is covered by the same IEPF provision.
3. Income-tax compliance: examine the original receipt and the proposed closure separately
Three questions must be answered independently:
Was the original receipt satisfactorily explained?
Does the company still have a legally enforceable liability?
Would the proposed settlement, remission or write-back have tax consequences?
Unexplained credits
For tax years governed by the Income-tax Act, 1961, Section 68 may apply where a sum is credited in the books and the company fails to satisfactorily explain its nature and source.
For tax years governed by the Income-tax Act, 2025, Section 102 deals with unexplained credits. The applicable Act and transitional provisions must be identified for the relevant tax year.
The company should retrieve the original bank statement, subscription or loan agreement, investor details, board approvals, relevant MCA filings, ledger entries and financial statements. Where available, retain evidence of the investor's identity, creditworthiness and genuineness of the transaction.
In PCIT v. NRA Iron & Steel Pvt. Ltd., decided by the Supreme Court on 5 March 2019, the Court emphasised the importance of evidence regarding investor identity, creditworthiness and transaction genuineness. The fact that a credit has appeared in audited accounts for several years does not, by itself, establish that its original nature and source were adequately explained.
Section 41(1): will a write-back be taxable?
For periods governed by the Income-tax Act, 1961, Section 41(1) generally applies where a deduction or allowance was previously made for a loss, expenditure or trading liability and the company subsequently obtains a benefit through remission or cessation of that liability. The provision's explanation also addresses unilateral write-offs of qualifying liabilities.
In CIT v. Sugauli Sugar Works (P.) Ltd. (1999) 236 ITR 518 (SC), the Supreme Court held that a unilateral accounting entry, by itself, does not establish cessation of liability for Section 41(1).
For an old investor balance, the distinction is critical:
Share application money, share capital and investor loans are not automatically taxable under Section 41(1) merely because they remain outstanding for years.
The nature of the liability and whether a deduction was previously allowed for a qualifying trading liability must be examined.
A problem with the original receipt may raise a separate issue under the applicable unexplained-credit provision even if Section 41(1) does not apply.
The correct provision under the Income-tax Act, 2025, must be identified independently. Section 41 of the 2025 Act concerns written down value of depreciable assets; it is not the equivalent of Section 41(1) of the 1961 Act.
Practical action: Before approving a write-back, prepare a written tax note recording the original transaction, the nature of the liability, the earlier tax treatment, any deduction claimed, the legal basis for extinguishment and the provision applicable to the relevant tax year.
Do not use a journal entry as a substitute for establishing that the liability has legally ceased and determining the tax consequences.
Repayment, interest and withholding tax
A genuine repayment of principal does not become taxable company income merely because the recipient is an heir. The company must, however, establish that the payment discharges a real liability and is made to the person legally entitled to receive it.
Identify principal and interest separately. Review the applicable withholding-tax provisions and the timing of deduction under the law governing the transaction. Conversion, redemption, principal repayment, interest payment and write-back are distinct events and should be analysed and recorded separately.
4. The practical MCA–tax closure protocol
The Board should not approve closure until the following work is completed.
Step 1 — Reconstruct the transaction. Reconcile the bank receipt with the ledger, agreements, board minutes, financial statements and statutory filings. Document missing records and efforts to obtain corroboration.
Step 2 — Establish the legal obligation. Determine whether the balance represents unallotted application money, allotted securities, a loan, a convertible instrument or another liability. Identify whether allotment, refund, conversion, redemption or repayment is due.
Step 3 — Quantify the exposure. Calculate principal and applicable interest. Identify possible MCA defaults, unfiled forms, deposit-rule issues, IEPF obligations and other compliance gaps. Separate established liabilities from disputed amounts.
Step 4 — Verify the person entitled. Establish the succession chain and obtain appropriate evidence. Do not release money to an unverified claimant.
Step 5 — Complete the tax review. Examine the original credit, earlier tax treatment, any deduction claimed, the proposed settlement and any write-back. Identify the applicable Income-tax Act, tax year, reporting and withholding-tax consequences.
Step 6 — Obtain proper approval. Place the facts, legal analysis, quantified exposure and proposed course before the Board. Obtain any other approval required by law. The resolution should record the basis for the action, not merely authorise removal of the balance.
Step 7 — Execute and regularise. Refund money where required, transmit securities where appropriate, or complete repayment, redemption or conversion under the applicable terms. Make required filings and take the legally available steps to address defaults. Do not assume that a late filing automatically cures every contravention.
Step 8 — Preserve the closure file. Retain the supporting documents, succession evidence, Board approvals, tax analysis, payment proof, revised ledger and compliance filings in one indexed file. Reconcile the final accounting treatment with the legal outcome.
If entitlement remains disputed, retain the liability appropriately pending resolution. Do not write it off simply because no one has claimed it for years.
5. Board-level decision matrix
| Finding | Appropriate course |
|---|---|
| Valid allotment completed and recorded | Reconcile records and address any outstanding filing or disclosure issue |
| Allotment not completed and refund is due | Determine principal and interest, verify the recipient and complete the refund and required compliance |
| Securities validly allotted to the deceased | Follow the applicable transmission procedure |
| Loan or convertible instrument remains outstanding | Apply the contractual terms and relevant company-law requirements |
| Original receipt cannot be adequately substantiated | Conduct a legal and tax risk review before deciding corrective action |
| Succession or entitlement is disputed | Retain the liability appropriately and resolve entitlement before payment |
| Write-back is proposed | Establish legal extinguishment and prior tax treatment before recording the entry |
CA S.Ahuja Perspective
An old investor balance is not merely a bookkeeping problem. It may involve company law, succession, contract, taxation and insolvency law.
The Board must be able to answer four questions:
What does the company owe? Who is legally entitled to receive it? What MCA action is required? What is the correct income-tax treatment?
The defensible sequence is to reconstruct, classify, verify, quantify, approve, settle and document. That is how a company can close an inherited investor balance without replacing an old problem with a new one.
This article provides general guidance. The appropriate action depends on the original transaction, instrument, applicable statutory provisions, tax year, succession facts and nature of any default. Obtain transaction-specific legal and tax advice before settlement, transmission or write-back.
