Deceased Investor, Old Share Application Money and Unclaimed Funding: How a Company Can Close the Balance Without Creating New Liabilities

 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:

1. Was the original receipt satisfactorily explained?

2. Does the company still have a legally enforceable liability?

3. 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.

Clause 22(ii) of Form 3CD — A Reporting Obligation Wider Than the Law It Serves

By CA Surekha Ahuja

 When a mandatory reporting clause requires figures that have no bearing on any tax disallowance, it is not rigour — it is an unnecessary burden on businesses and auditors alike. A hard look at the mismatch between Clause 22(ii) and Section 43B(h).

There is a specific kind of compliance burden that is harder to justify than a difficult one — and that is a purposeless one. Clause 22(ii) of Form 3CD, as currently worded, falls squarely into this category. It demands reporting of data that has no connection to the tax disallowance it is meant to facilitate.

This post examines the structural mismatch between Clause 22(ii) and Section 43B(h), explains why the current reporting scope is wider than any legitimate tax purpose, and suggests both interim practical steps for practitioners and the case for reform.

What Clause 22(ii) Requires

Clause 22(ii) of Form 3CD requires the tax auditor to report the total amount required to be paid to a Micro or Small Enterprise (as referred to in Section 15 of the MSMED Act, 2006) during the previous year — not merely the amount outstanding at year-end.

The Core Mismatch: Flow Data vs. Stock-Based Disallowance

Section 43B(h), inserted by the Finance Act 2023 with effect from FY 2023–24, disallows any sum payable to a Micro or Small Enterprise as a business deduction unless it is actually paid within the credit period prescribed under Section 15 of the MSMED Act — 15 days (without written agreement) or 45 days (with written agreement). The amount remaining unpaid beyond these limits as at 31st March is added back. Amounts paid during the year — whether in 10 days or 40 days — are tax-neutral. No disallowance. No consequence.

This is, by design, a stock-based disallowance. It operates on what remains unpaid at year-end. Clause 22(ii), however, demands flow data — the total amount that moved through the ledger over twelve months. These two are structurally incompatible.

Parameter	Clause 22(ii) Requires	Section 43B(h) Operates On
Total invoiced by MSME vendors during the year	Yes — mandatorily Tax Irrelevant	Not needed
Amounts paid within 15/45 days during the year	Yes — part of computation Zero consequence	Fully deductible — no examination required
Amount unpaid at 31st March beyond credit period	Yes — included Relevant	This is the only figure that drives disallowance
Interest on delayed MSME payments (P&L)	Implicit verification expected	Disallowed regardless under Sec 23 of MSMED Act — no audit consequence

"If a business has paid ₹11.4 crore to MSME vendors during the year and ₹60 lakh remains unpaid at 31st March, only ₹60 lakh is relevant to Section 43B(h). Clause 22(ii) requires reporting and verification of the entire ₹12 crore — an exercise with zero incremental tax consequence."

Three Questions That Need Answers

1 What is the administrative purpose of "total during the year"?

The aggregate payment figure has no corresponding entry in any vendor's ITR, making cross-verification impossible. It does not determine the disallowance quantum, which depends solely on the year-end unpaid balance. If the intent is MSME policy data collection, the mechanism for that is the Ministry of MSME — not a tax audit report. The clause's reporting scope is wider than any identifiable tax purpose.

2 Was Clause 22(ii) recalibrated when Section 43B(h) was inserted?

Section 43B(h) was inserted by the Finance Act 2023. Clause 22(ii) predates it and appears to have been carried forward without alignment to the new disallowance provision. The result is a reporting obligation drafted around an older framework being applied to a provision with a fundamentally different operative basis. This is not a policy disagreement — it is a drafting misalignment that has created a recurring compliance burden with no corresponding tax outcome.

3 Should the tax auditor verify MSME interest provisions?

Interest on delayed MSME payments under Section 16 of the MSMED Act is non-deductible under Section 23 of that Act — regardless of how it is treated in the books. Whether the auditor verifies that adequate interest has been provided changes nothing in the tax computation. This is an audit step without an audit consequence, which is a use of professional time that is difficult to justify.

The Practical Burden

For a business with 150 or more vendors, complying with Clause 22(ii) as currently worded requires: identifying all vendors holding valid UDYAM registrations as Micro or Small enterprises (which most ERP systems do not natively track); extracting twelve months of payment history for each such vendor; date-stamping each transaction against invoice dates to verify payment timelines; and presenting all of this to the tax auditor for verification.

For large manufacturing or trading concerns, this is a multi-week exercise each audit season — consuming finance team bandwidth, ERP customisation effort, and significant audit hours. The cost is real and recurring. The tax outcome it generates is nil, to the extent amounts were paid during the year.

The Logical Fix

Restrict Clause 22(ii) reporting to: (a) amounts remaining unpaid to MSME vendors at the close of the previous year, categorised by whether they fall within or beyond the permissible credit period under Section 15 of the MSMED Act; and (b) the quantum added back under Section 43B(h). This aligns reporting with the disallowance provision it is meant to facilitate — and eliminates the rest as superfluous.

Interim Practical Approach for Tax Auditors

Until the clause is amended, the following approach can bring structure to the exercise while managing the scope to what is professionally defensible:

Recommended Protocol — AY 2025–26 Onwards

→Management representation as the primary basis. Obtain a written representation from management listing all MSME-registered vendors (with UDYAM numbers), total amounts invoiced during the year, amounts paid, and amounts outstanding at year-end with dates. This defines your verification perimeter and shifts the factual foundation to management.

→Vendor-tagged ledger data. Where the client's accounting system permits MSME-tagging of the vendor master, a ledger extract is the most efficient and defensible basis. Advocate for prospective tagging so that future years are less burdensome.

→Risk-based sampling for the "total during year" figure. Since this figure has no tax consequence, a documented risk-based sampling approach — rather than exhaustive verification — is professionally defensible, provided the methodology is clearly recorded in the working papers.

→Scope limitation disclosure. Where MSME classification data is unavailable — as will frequently be the case for vendors who have not shared UDYAM details — state this limitation explicitly in the audit file. The auditor's responsibility is bounded by information reasonably available and formally requested.

→Formal ICAI representation. Raise this through your regional branch to ICAI's Direct Taxes Committee for a representation to CBDT. The ask is narrow, technically grounded, and non-controversial: align Clause 22(ii) reporting with the operative scope of Section 43B(h).

The rationalisation of Clause 22(ii) is precisely the kind of targeted, technical reform that such representations are designed to achieve. The ask does not dilute MSME protection in any way — Section 43B(h) should remain exactly as it is. The ask is simply to align the reporting obligation with the tax consequence. That is a request that is difficult to argue against on either policy or administrative grounds.

In Summary

Clause 22(ii) as currently worded requires reporting of the total amount paid to MSME vendors during the entire previous year. Section 43B(h) disallows only what remains unpaid at year-end. The former is a flow measure; the latter is a stock-based disallowance. Aligning the two is not a radical ask — it is basic legislative housekeeping that would save the business community and the auditing profession significant effort every audit season, at no cost to revenue and no dilution of MSME protection.

Form 10-IC Filed Incorrectly? Relief Possible — ITAT Mumbai Recognizes Technical Lapse under Section 115BAA

Introduction: When One Wrong Click Costs 8% Tax

In today’s digital compliance environment, a single wrong selection on the income-tax portal — such as filing Form 10-IB instead of Form 10-IC — can change the company’s tax rate from 22% to 30%, creating unexpected tax demands, interest, and penalties.
This issue has surfaced repeatedly, and the recent Mumbai ITAT ruling in ACIT v. Magik Kraft (P.) Ltd. [[2025] 179 taxmann.com 632 (ITAT Mumbai)] provides much-needed relief and guidance.

Understanding the Legal Framework

Section 115BAA of the Income Tax Act, 1961, allows domestic companies to pay tax at 22%, provided they exercise this option by filing Form 10-IC as per Rule 21AE of the Income-tax Rules, 1962.

To avoid confusion, here’s the quick mapping:

Applicable Section	Concessional Rate	Prescribed Form	Applicable Entity
Section 115BA	25%	Form 10-IB	Certain domestic manufacturing companies (before 115BAA regime)
Section 115BAA	22%	Form 10-IC	All domestic companies (subject to conditions)
Section 115BAB	15%	Form 10-ID	New manufacturing companies incorporated after 1.10.2019

Filing the wrong form — even if the intention is correct — leads to denial of the concessional rate by CPC systems, as the technical validation is form-specific.

Case Summary: ACIT v. Magik Kraft (P.) Ltd.

The assessee, a domestic company, had opted for the 22% rate under Section 115BAA but inadvertently uploaded Form 10-IB instead of Form 10-IC. Consequently, CPC processed the return at 30%, raising a demand.

Before the Commissioner (Appeals), the assessee pleaded that the lapse was purely technical, not substantive. The CIT(A) agreed, holding that:

“Filing of Form 10-IC is a procedural requirement. Once substantive eligibility is established, such an inadvertent filing error can be rectified.”

The CIT(A) directed the Assessing Officer to allow the assessee to file Form 10-IC correctly and grant the concessional rate after verifying compliance.
The assessee complied by submitting Form 10-IC electronically and manually, after which the ITAT upheld the CIT(A)’s reasoning — confirming that the benefit of Section 115BAA could not be denied merely for a procedural lapse.

Why This Matters: The Systemic Gap

Currently, the income-tax portal offers no online rectification path for replacing an incorrect form (e.g., 10-IB instead of 10-IC). The CPC processes the return based on whatever form is uploaded, and no online correction mechanism exists even through Revised Return or Rectification u/s 154.

Thus, taxpayers and professionals often face a dead end — unless they:

1. Approach the Jurisdictional Assessing Officer (JAO) with a written application, citing CIT(A) or ITAT precedents; and

2. File the correct form electronically (if portal window allows) and manually (if closed) to demonstrate bona fide compliance.

Procedural Path: Practical Guidance for Rectification

If your client or company has made such an error, the following steps can help ensure lawful correction before escalation:

1. Identify the error clearly — Verify which form was uploaded and for which section the concessional rate was claimed.

2. Check CPC processing status — Whether the return has been processed u/s 143(1) or assessment completed.

3. Prepare an application to the Jurisdictional AO —

   • Explain the bona fide mistake.

   • Quote ACIT v. Magik Kraft (P.) Ltd. and earlier relief-based precedents (e.g., PCIT v. Wipro Ltd.).

   • Attach the correct Form 10-IC duly filed/attempted electronically.

4. File rectification u/s 154 or seek implementation of appellate order — The AO is empowered to give effect to such rectification if the conditions under Section 115BAA are substantively fulfilled.

5. Maintain supporting evidence — E-mail trail, screenshots of filing, tax computation showing intent to opt for Section 115BAA, and copy of acknowledgment.

This practical approach can often prevent the need for appeal, saving significant time and litigation cost.

Analytical Insight: Substance Over Form

The decision reinstates a core judicial principle — procedural errors cannot override substantive rights.
Where the taxpayer:

• Meets all eligibility criteria under Section 115BAA, and

• Demonstrates clear intent to opt for concessional taxation,

then an inadvertent e-filing lapse should not defeat statutory relief.
The ITAT has reaffirmed that substance must prevail over technical form, especially in automated systems where human error has no corrective outlet.

Important Points

• Double-verify form mapping before submission:
  Even experienced teams confuse 10-IB with 10-IC due to similar nomenclature. Implement internal pre-filing checklists.

• If error occurs: Act promptly—apply to the JAO with precedent-based support before escalation.

• Systemic recommendation: CBDT and CPC should consider enabling a correction mechanism or permitting post-facto validation when intent and conditions are demonstrably satisfied.

Conclusion

The Magik Kraft ruling is more than an isolated relief — it’s a precedent of fairness in a system that sometimes penalizes genuine human error.
It reminds professionals that timely rectification, proper representation, and awareness of remedial jurisprudence can protect clients from avoidable tax burdens.