Share-deal money booked as a loan is still not financial debt, NCLAT rules, and alerts income tax

Rs 1.39 crore paid under a 2014 share purchase MOU was never disbursed for the time value of money, a three-member bench holds, even though Ganpati Global credited interest and deducted TDS on it for four years without paying a rupee.

The National Company Law Appellate Tribunal has dismissed Catalyst Refinery Services Private Limited’s appeal against the rejection of its Section 7 petition against Ganpati Global Private Limited, a Jaipur company that took ₹1.39 crore from Catalyst in August 2014 under a share purchase memorandum and then, for four financial years, carried the sum as an unsecured loan, credited interest on it and deducted tax at source. Catalyst claimed ₹2,73,51,364. In a judgment of 16 October 2026 written by Arun Baroka, Member (Technical), sitting with Justice Sharad Kumar Sharma, Member (Judicial), and Indevar Pandey, Member (Technical), the Principal Bench held that the money was part of a share price, not a loan, and that the debtor’s book entries could not change that. It then ordered a copy of the judgment sent to the Principal Commissioner of Income Tax.

A ₹7.70 crore share purchase that stalled after the first ₹1.39 crore

On 27 August 2014 Catalyst, Ganpati Global and Ganpati Global’s shareholders signed a tripartite memorandum of understanding. The shareholders agreed to sell their entire holding to Catalyst for ₹7.70 crore, a price worked out on the company’s net worth. The consideration clause said that sum would cover Ganpati Global’s term loan and unsecured loans as on 31 August 2014 and its other current liabilities, with only the balance going towards the shares.

Between 29 and 31 August 2014 Catalyst issued six cheques drawn on The Hongkong and Shanghai Banking Corporation in favour of Ganpati Global, for ₹25 lakh, ₹14 lakh and four further sums of ₹25 lakh, totalling ₹1,39,00,000. Then the deal stalled. Catalyst says the shareholders and the company never cleared the liabilities or obtained no-objection certificates from the lenders; Ganpati Global says Catalyst never paid the ₹7.70 crore. Catalyst’s own pleading called it a stalemate.

From there Catalyst relied on an oral arrangement, placed before the NCLT in September or October 2014, under which the part payment would continue as an unsecured loan at 11 per cent a year, repayable on demand. No formal agreement was executed.

Four years of loan entries, interest credits and TDS, and not one interest payment

What Catalyst did have was Ganpati Global’s paperwork. The audited balance sheets for 2014-15, 2015-16 and 2016-17, signed by the directors under the company seal, showed the amount under the head Unsecured Loan Received; the 2018 balance sheet listed it under unsecured loans from related parties and others, with interest payable broken out. Balance confirmation letters on the company’s letterhead, dated 30 June 2015 and 15 June 2017, acknowledged the loan, the interest credited and the TDS paid.

The tax trail matched. Under Section 194A of the Income Tax Act, 1961, which covers interest other than interest on securities, Ganpati Global deducted tax on interest credited to Catalyst of ₹5,67,493 in 2014-15, ₹15,85,182 in 2015-16, ₹17,41,015 in 2016-17 and ₹19,09,230 in 2017-18: ₹58,02,920 of interest booked, ₹5,80,292 of TDS deposited. None of that interest reached Catalyst’s bank account, as the NCLT recorded in paragraph 16 of its order, a paragraph Catalyst itself relied on.

On 27 February 2019 Catalyst sent a demand-cum-legal notice for ₹2,10,01,361 inclusive of interest, payable within seven days. There was no reply; according to Catalyst, Ganpati Global instead stopped showing the amount separately and stopped deducting TDS. Catalyst filed CP (IB) No. 68/7/JPR/2021 before the NCLT, Jaipur Bench, for ₹2,73,51,364: the ₹1.39 crore principal plus ₹1,34,51,364 of interest to 31 August 2021. The Jaipur bench dismissed it on 19 October 2022.

What the two sides argued

Catalyst, through Nivedita Sarda and Sagrika Joshi, said the three conditions from Pawan Kumar v. Utsav Securities, disbursal, consideration for the time value of money and default, were all met: the balance sheets acknowledged the debt, the TDS proved the interest, and under Swiss Ribbons and Innoventive Industries proof of debt and default left no room for refusal. In written submissions filed on 7 October 2026 it added that money a company receives from a prospective shareholder can only be share application money or an unsecured loan; that Ganpati Global’s own stand before the NCLT was that the sum was share application money converted into an unsecured loan; that under Orator Marketing v. Samtex Desinz interest is not essential to a financial debt; and that the documents sat in an information utility record. It also pointed out that the NCLT had listed its counsel, and its written submissions, as the corporate debtor’s.

Ganpati Global, through Rishabh Khandelwal, called the MOU a plain share transfer agreement. The ₹1.39 crore was part of the price payable to the shareholders, routed through the company so it could clear its own liabilities, and nothing in the MOU obliged the company to repay a rupee. Booking the sum as an unsecured loan for accounting purposes created no financial debt; nor did TDS or confirmations. There was no financial contract as defined in Rule 3(1)(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Catalyst had named no date and no individuals for the oral agreement, produced no board resolution or register of loans under Section 186(9) of the Companies Act, 2013, and its own balance sheet as on 31 March 2015 declared that it had granted no loans covered by the Section 189 register. No interest was ever actually paid, and Catalyst had sat on its hands for eight or nine years. It relied on Sanjay Kewalramani v. Sunil Parmanand Kewalramani, the Prayag Polytech decisions and Jagdambey International v. Visa Powertech.

The test is what the money was disbursed for, not how it was booked later

The bench framed two points: whether the ₹1.39 crore was a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, making Catalyst a financial creditor under Section 5(7), and whether the errors in the NCLT order justified interference. It accepted that under Swiss Ribbons, Innoventive Industries and the later Supreme Court decisions Catalyst cited, proof of debt and default compels admission. But that rule operates only once a financial debt is established, and the burden lies on the applicant. Section 5(8) requires a debt “disbursed against the consideration for the time value of money”, a test Catalyst itself accepted in the Pawan Kumar formulation.

The MOU answered the question. Its consideration clause dealt with the price of the shares and how it would be applied, part to clear the company’s liabilities and the balance to the shares. It contained no promise by Ganpati Global to repay anything and no provision for interest or any other return for the use of money over time. Catalyst’s own petition described the payment as part payment under the MOU towards the acquisition of shares. When the cheques were issued, the money was part of a purchase price, not a loan.

The bench rejected the argument that money from an intending share buyer must be either share application money or a loan. The MOU was tripartite, and all three sides had agreed that part of the ₹7.70 crore would go to the company’s debts; paying the company was simply the agreed way of applying part of the price. Even share application money is paid for an allotment, not as a loan. On neither description was there a disbursement for the time value of money.

The oral agreement nobody could date

Catalyst had not said when the oral agreement was reached, who spoke for each company, or under what authority. The resolutions of 25 and 26 August 2014 pre-dated the MOU itself and so could not evidence an agreement said to have been made after the share deal collapsed. No document signed or accepted by both parties set out a rate of interest, a tenure or a repayment date.

The bench did not hold that an oral agreement can never support a financial debt, only that Catalyst had not shown one was made or what its terms were. A Section 7 application is decided summarily on documents and admitted facts; a disputed oral agreement resting on one side’s word against the other’s cannot be tried there.

Balance sheets, TDS and the five precedents that did not help

The bench went through Catalyst’s authorities one by one. In Ravi Auto the disbursement was admitted and the debtor did not deny paying interest. In Agarwal Polysacks the adjudicating authority had itself found the advance carried interest and was repayable on demand. In Satish Balan the debtor had paid interest for two years and issued confirmations. In Pradeep Tayal the debtor admitted the loan in its reply to the demand notice. In Pancham Studios the plea that the money was a managing director’s share in family property had no document behind it. In each case the transaction was a loan from the outset, and none involved a written agreement executed by the creditor itself showing the money was paid for another purpose. “Here the MOU does exactly that.”

A balance sheet entry can be an acknowledgement for Section 18 of the Limitation Act, 1963, as Mahabir Cold Storage and Bishal Jaiswal hold, but it shows only that some money is owed, not that it is a financial debt within Section 5(8). The question is what the money was disbursed for, not how the debtor later recorded it, and an entry in one party’s own books cannot change the nature of an earlier payment. The reclassification Catalyst pressed, recorded in the NCLT order as “Share Application Money converted into unsecured Loan”, showed how the sum was classified; it did not prove an agreement that the money would be held against a return.

On TDS, the bench saw no conflict between Pradeep Tayal and Prayag Polytech v. Gem Batteries. At its highest, a Section 194A deduction shows the debtor treated a credit as interest. It does not prove the principal was lent for a return. And by Catalyst’s own case, nothing beyond the tax deducted at source was ever paid to it. Orator Marketing holds that interest is not essential to a financial debt, but here the nature of the transaction itself was in question, and the absence of any interest payment confirmed what the MOU showed. The information utility record may prove default under Section 7(3)(a); it does not decide the character of a disbursement the debtor disputes, and Ganpati Global had not authenticated it.

Drawing on Sanjay Kewalramani, the bench concluded that the MOU has no clause on the time value of money, the oral agreement is unproved, and the balance sheets, confirmations and TDS entries do not fill the gap. Nothing showed that Catalyst parted with ₹1.39 crore to earn a return on it. Catalyst’s own 31 March 2015 balance sheet declaration, confined to loans in the Section 189 register, was given little weight and the decision did not rest on it.

The money question: ₹2.73 crore left to a civil forum

The ₹1.39 crore stays with Ganpati Global and the ₹2,73,51,364 claim is unresolved. Each side blames the other for the failed deal, and whether Catalyst can recover the money, and with what interest, depends on the MOU, on what the parties did afterwards and on evidence. That needs a full trial, not a Section 7 proceeding. The bench declined to decide Ganpati Global’s remaining objections on Rule 3(1)(d), on Sections 21 and 186(9) of the Companies Act, on the varying interest rate and on delay. It noted that Catalyst’s papers give the demand notice date as both 20 February 2019 and 27 February 2019, and said that with no financial debt it need not settle which was right or whether a default under Section 3(12) occurred.

The NCLT’s mislabelling of Catalyst’s counsel and written submissions was clerical and caused no prejudice. The bench had examined both sides’ pleadings afresh. Catalyst may apply to the NCLT for correction.

Why the judgment goes to the income tax commissioner

The bench closed with Ganpati Global’s conduct. It received ₹1.39 crore and kept it for years. In its own books it showed the sum as an unsecured loan, credited interest and deducted tax at source, yet never paid the interest, and after the legal notice, according to Catalyst, stopped showing the amount separately at all. It thus credited interest and deducted TDS year after year on a liability it now says never existed. Whether that squares with the Income-tax Act was for the tax authorities. Under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016, the bench directed the Registry to forward the judgment to the Principal Commissioner of Income Tax having jurisdiction over Ganpati Global, for such action as may be appropriate in law, while expressing no opinion on the company’s tax liability.

Order

The bench found no infirmity in the NCLT Jaipur order of 19 October 2022 and dismissed Company Appeal (AT) (Insolvency) No. 1448 of 2022. Catalyst may approach the appropriate forum for the amount paid and any interest permissible in law, with all rights and contentions left open, no view expressed on merits or limitation, and liberty to claim the benefit of time spent in these proceedings. It may also raise the treatment of the amount in Ganpati Global’s books before the appropriate authorities. The Registry is to forward the judgment to the Principal Commissioner of Income Tax. No costs; pending interlocutory applications are closed.