Share application money pending refund

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

06 September 2013 ABC Company - Brief facts of the case:
1. Date of incorporation : 23/05/2006
2. Share Holding pattern of company ABC
XYZ an Indian Company : 49%
PQR an Foreign Company : 51%
3. Receipt of Share Application Money amounting to Rs.20,00,000 on 08/12/2006 from PQR foreign company. The same is being remitted in Indian currency and no foreign currency has been received.
4. The same is also not kept in separate bank account and also used by the company in the normal course of business.
5. Due to some dispute between the Directors no further calls were made and share application money is pending in the books of accounts.
6. The same is being represented in the Balance Sheet of ABC under head “Share Application Money Pending Refund”.
7. During year 2010-11 , XYZ Indian Company has acquired shares of PQR foreign company and thus ABC company is subsidiary to the XYZ Indian Company who held previously 49% of shares.

Issues
M/s ABC is merging with XYZ and following issues needs to be resolved
1. Whether the “Share Application Money pending Allotment” can be forfeited in the current financial year and transfer to Capital Reserve or it is to be transferred to Investor Education Protection Fund?
2. What are the documents to be executed and procedure to be followed for the option as mentioned in 1 above?
3. With regards to Income tax, what should be the accounting treatment? Whether it has to be treated as Capital Receipt or Revenue Receipt.
4. Can the “Share Application Money pending allotment” treated as Long Term Capital gain in respect of cessation of rights as per definition of transfer under Section 2(47).
5. What are the violations under FEMA Act due to non-payment of Share Application Money.

Hope the details are clear.

Querist : Anonymous

Querist : Anonymous (Querist)

06 September 2013 Dear Expert

Please go through the above and help me.

Querist : Anonymous

Querist : Anonymous (Querist)

06 September 2013 Please reply

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 This is a very detailed and multi-faceted query involving legal, accounting, tax, and FEMA aspects on **Share Application Money Pending Refund** for a company with foreign shareholding. Let me break down each issue and provide clarity based on the facts and applicable law:

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### 1. **Whether the “Share Application Money pending Allotment” can be forfeited and transferred to Capital Reserve or must it be transferred to Investor Education Protection Fund (IEPF)?**

* **Forfeiture of Share Application Money:**
The Companies Act does **not specifically authorize forfeiture of share application money** that is pending allotment. Forfeiture usually happens on shares already allotted and calls unpaid. Since shares are not allotted here, forfeiture is not straightforward.

* **Transfer to IEPF:**
As per **Section 124(6) of Companies Act, 2013** (previously Section 205C of 1956 Act), unclaimed amounts due for refund **pending for more than 7 years** must be transferred to IEPF.

* Since the money is pending since Dec 2006 and the question is asked in 2013 (over 6 years), **the company should monitor the 7-year timeline closely**. If it crosses 7 years, transfer to IEPF is mandatory.

* **Conclusion:**
The company **cannot simply forfeit this money and credit capital reserve**. It must either allot shares (which seems disputed) or refund the money. If refund is not made for 7 years, transfer to IEPF is mandatory.

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### 2. **Documents and Procedure for Forfeiture or Transfer**

* Since forfeiture is not applicable on unallotted application money, the relevant process is either:

* **Allotment of shares and then forfeiture (if needed),** following board resolutions, notice to applicants, etc.
OR
* **Refund of application money with interest (if contractually agreed).**

* For transfer to IEPF:

* Prepare a list of unpaid refunds due for 7 years.
* Transfer amount to IEPF account as per MCA guidelines.
* File necessary forms with Registrar of Companies (Form IEPF-1).
* Publish a notice to inform claimants about transfer to IEPF.

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### 3. **Income Tax Accounting Treatment**

* **Capital Receipt vs Revenue Receipt:**

* Share application money is considered **capital receipt** as it relates to share capital, not business income.
* If forfeited after allotment, it becomes capital reserve.
* If refunded, no income arises.
* If retained as loan (which is not correct practice), income tax implications may arise.

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### 4. **Can the pending share application money be treated as Long Term Capital Gain on cessation of rights under Section 2(47)?**

* Since shares are **not allotted**, no capital asset has been created in the hands of the applicant.
* **Section 2(47) defines “transfer” in relation to capital assets.**
* In absence of shares allotted, the applicant has no capital asset, so **capital gains provisions will not apply** here.
* Any compensation received in future against refund would be income, not capital gain.

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### 5. **Violations under FEMA due to non-payment of Share Application Money**

* The share application money was received **in Indian rupees**, not foreign currency.
* However, **use of funds not as per FDI norms** (e.g., money utilized without allotment of shares) may violate FEMA regulations regarding investment compliance.
* The company should ensure compliance with **Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000**, and notify RBI if required.
* Prolonged non-allotment may attract penalty or scrutiny by RBI/FEMA authorities.

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## Summary Table

| Issue | Position/Action Required |
| --------------------------------- | ----------------------------------------------------------------- |
| Forfeiture of application money | Not allowed on unallotted money; only after allotment shares |
| Transfer to IEPF | Mandatory after 7 years if refund not made |
| Documents for forfeiture/transfer | Board resolution (for allotment/forfeiture); Form IEPF-1 for IEPF |
| Income Tax treatment | Capital receipt, not revenue |
| Capital gain applicability | No capital gain without shares allotted |
| FEMA violation | Possible non-compliance; check RBI regulations |

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### Final Advice:

* The company should consider **allotting shares promptly or refunding the application money with interest** to avoid compliance issues.
* After 7 years, transfer to IEPF is mandatory.
* Consult a FEMA expert to regularize foreign investment compliance.
* Keep clear board minutes and disclosures in financial statements.

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If you want, I can help draft sample board resolutions or compliance checklist documents for this situation. Would that be helpful?

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