Tax treatment of Call money on Fully convertible debenture forfeited

This query is : Resolved

Prakash Joshi (Querist)
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10 June 2025 Dear Sir,

A Pvt Ltd company applied for Fully certain Fully Convertible Debentures of B Pvt. Ltd. on which 150lacs was due on application and allotment and 150 lacs on 1st Call.
A Pvt. Ltd paid 150 lacs on application but failed to pay call money of 150 lacs despite repeated reminders and B Pvt Ltd as a consequence of non payment of call money forfeited the 150 lacs paid on application and allotment.

Queries:
1. For B Ltd is it a capital profit hence not taxable.
2. For A Pvt. Ltd. what is the accounting treatment of debenture application money of Rs 150 lacs forfeited. Can it be claimed as loss and A Pvt. Ltd. and can take tax benefit on it.

3. What if a third company C Pvt Ltd wants to take over/merge with A Pvt. Ltd. can it take tax benefit of loss in the books of A Pvt Ltd on account of loss on forfeiture of debentures and carry forward the loss up to 8 years

Please share your views.

Thanks
PC Joshi

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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12 August 2025 Background Recap:
A Pvt Ltd applied for fully convertible debentures of B Pvt Ltd.

Paid ₹150 lakhs on application and allotment but defaulted on the ₹150 lakhs call money.

B Pvt Ltd forfeited the ₹150 lakhs paid by A Pvt Ltd due to non-payment of call money.

1. For B Pvt Ltd (Issuer):
Is the forfeited amount capital profit and non-taxable?
The forfeiture of application money is considered capital receipt for B Pvt Ltd.

It is not income from business or revenue receipt, so not taxable under normal business income head.

It is treated as a capital gain or capital receipt, generally not subject to income tax.

However, if the forfeiture is linked to business income, some tax authorities may treat it differently, but standard practice views it as capital receipt.

2. For A Pvt Ltd (Subscriber):
Accounting treatment of forfeited application money of ₹150 lakhs and tax treatment?
The forfeited amount (₹150 lakhs) is a capital loss because it relates to an investment in debentures.

In books, A Pvt Ltd should write off the forfeited amount as a loss on investment.

For tax purposes, the loss is generally treated as a capital loss.

Such a capital loss can be set off against capital gains and if unadjusted, can be carried forward for up to 8 years under Income Tax Act provisions.

However, the loss cannot be claimed as a business loss; it is a capital loss.

3. In case of Merger/Takeover by C Pvt Ltd:
Can C Pvt Ltd claim tax benefit of loss in books of A Pvt Ltd and carry it forward?
As per Section 72A of Income Tax Act and relevant merger provisions:

Carry forward and set off of losses in case of amalgamation is allowed subject to conditions such as continuity of business and shareholding pattern.

If C Pvt Ltd acquires A Pvt Ltd as a going concern and business continues, then the capital losses of A Pvt Ltd can be carried forward and set off by C Pvt Ltd, subject to compliance with conditions.

If the loss is capital loss, it can be carried forward provided the conditions of the Income Tax Act for loss carry-forward and merger are satisfied.

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