Whether amount forfeited on share warrant is taxable

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Arun Kumar (Querist)
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20 September 2012 Ours is a listed company and last year the Company has issued Convertible Warrants on preferential basis to Promoters and there friends @ Rs.15/- per warrant, 10% of which was received as subscription money and the balance was due at the time of exercising the right of converting the warrants into equity shares. As per SEBI guidelines the option should be exercised not latter than 18 months of allotment of warrants.

Warrants are subject to converted in 1 equity share of Rs.10/- at a premium of Rs. 5/- per share

Company has received Rs. 1.5/- per warrants as 10% subscription money

The 18 month deadline is expiring on 10 Feb 2010

Current market price of companyâ€™s Shares is far below from Rs. 15/- and therefore some of the subscribers are not willing to convert the warrants.

As per rules the 10% amount received against such warrants are subject to be forfeited by the company after the last date (10th Feb 2010)

My query is whether the amount so forfeited is taxable or not under the provisions of I. T. Act.

As per my opinion the amount forfeited is capital receipt as the same was received towards subscription of Capital and forfeited on account of non fulfilment of allotment criteria as required by the law and therefore not taxable, further it is not taxable capital gain as covered by the I T Act.

However I have to put sum supporting like case law or written text from reliable source to convince the directors as the amount involved is large.

Your views including counter opinions and help are invited in the above matter.

Guest

Guest (Expert)

21 September 2012 Prism Cement Limited Vs. JCIT (2006) 101 ITD 103 (Mumbai) ITAT (Mumbai 'I' Bench)

In the above case, it has been held that the shares forfeited amounts to capital receipts. Moreover the recent judgment Haryana financial Corporation vs DIT dt 20.4.12 confirms the said stand. As on date, the same is capital receipt.

swasti

swasti (Expert)
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31 October 2012 Sir, I would like to seek your advice regarding Premium on Share Warrants. If XYZ Ltd., a company in which public is not interested issues share warrants at premium, is there applicability of newly inserted Sec 56(2)(viib) or not? If not, what would happen when the warrants get converted into shares? Please guide.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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03 August 2025 Great question! Let me break down the tax treatment of amount forfeited on share warrants and also touch upon the premium on share warrants and Section 56(2)(viib).

1. Taxability of Amount Forfeited on Share Warrants
The 10% subscription money received on warrants, if forfeited due to non-exercise of conversion option by the subscriber, is generally treated as a capital receipt.

Since it is part of share capital subscription, forfeiture is not income from business or other sources, so it is not taxable as income under the Income Tax Act.

It is also not considered capital gains because it is forfeited amount on unconverted warrants, not on transfer or sale of shares.

This position is supported by case laws like:

Prism Cement Ltd. vs. JCIT (2006) 101 ITD 103 (Mumbai ITAT)

Haryana Financial Corporation vs. DIT (2012)

These judgments confirm forfeited amounts on shares or warrants as capital receipts, not taxable as income.

2. Regarding Premium on Share Warrants and Section 56(2)(viib)
Section 56(2)(viib) deals with taxation of excess consideration received on issue of shares by closely held companies (private companies) when shares are issued at a premium exceeding the fair market value.

In case of listed companies (like your company), this section does NOT apply because the shares are freely traded and market value is available.

However, if the company is unlisted or closely held, and issues warrants at a premium, then Section 56(2)(viib) may apply on the premium received (or deemed received) on issue of warrants, based on the fair market value (FMV).

When warrants get converted into shares, the premium portion is adjusted in the share capital and securities premium account; no fresh tax arises at conversion since it is a capital transaction.

Summary Table:
Aspect Treatment
Forfeited subscription money Capital receipt, not taxable as income
Premium on warrants in listed co Section 56(2)(viib) not applicable
Premium on warrants in private co Section 56(2)(viib) may apply on excess premium over FMV
Conversion of warrants into shares No tax on conversion, capital transaction

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