TDS on Interest Does Not Prove Financial Debt Under Section 5(8): NCLAT

Catalyst Refinery Services Private Limited Vs Ganpati Global Private Limited (NCLAT Delhi)

TDS and Loan Entries Cannot Alone Convert Share Purchase Advance into Financial Debt: NCLAT

The National Company Law Appellate Tribunal (NCLAT) held that balance-sheet entries, balance confirmations and TDS deductions do not, by themselves, establish financial debt where the underlying payment was made towards a share purchase.

In Catalyst Refinery Services Private Limited vs. Ganpati Global Private Limited, Company Appeal (AT) (Insolvency) No. 1448 of 2022, the Tribunal upheld rejection of a Section 7 application concerning ₹1.39 crore paid under an unsuccessful acquisition arrangement.

Justice Sharad Kumar Sharma, Member (Judicial), and Members (Technical) Arun Baroka and Indevar Pandey delivered the judgment on 16 October 2026. The Tribunal also directed that the respondent’s accounting and tax treatment be brought to the jurisdictional income-tax authority’s attention.

Share Acquisition Arrangement Ends in Stalemate

A tripartite memorandum of understanding dated 27 August 2014 was executed between Catalyst, Ganpati Global and the latter’s shareholders.

The shareholders agreed to transfer their entire shareholding for ₹7.70 crore. The consideration was to discharge term loans, unsecured loans and other current liabilities, with the balance applied towards purchasing shares.

Catalyst paid ₹1.39 crore through six cheques issued between 29 and 31 August 2014.

The transaction was not completed. Each side blamed the other for the failure, and the arrangement reached a stalemate.

Alleged Oral Conversion into Interest-Bearing Loan

Catalyst claimed that the parties subsequently agreed orally to retain the payment as an unsecured loan carrying 11% annual interest, repayable on demand.

It relied on Ganpati Global’s audited accounts describing the amount as an unsecured loan, balance-confirmation letters and interest credits.

The company had also deducted and deposited TDS under Section 194A against interest entries.

Catalyst ultimately claimed ₹2,73,51,364, comprising principal and interest, through a Section 7 application. The NCLT, Jaipur, dismissed that application on 19 October 2022, prompting the appeal.

Original Disbursement Was Share Purchase Consideration

The NCLAT emphasised that a Section 7 applicant must establish financial debt before relying on default.

Examining the MOU, it found no provision requiring repayment by Ganpati Global or providing a return for use of the money over time.

Catalyst’s own pleading described the payment as part consideration for acquiring shares.

The Tribunal rejected the argument that payment directly to the company necessarily made it a loan. Under the tripartite arrangement, paying the company was the agreed means of applying part of the acquisition price towards its liabilities.

Oral Loan Agreement Not Established

The Tribunal did not hold that an oral agreement could never support financial debt.

However, Catalyst had not established when the alleged agreement was made, who represented each company or what authority supported it.

No mutually accepted document set out the asserted interest rate, tenure or repayment terms. Resolutions predating the MOU could not prove a later conversion after the acquisition failed.

The disputed oral arrangement required evidentiary examination unsuitable for summary Section 7 proceedings. On this record, its existence and terms remained unproved.

Balance-Sheet Acknowledgment Does Not Settle Debt’s Character

The Tribunal accepted that balance sheets can constitute acknowledgments of debt for limitation purposes.

It nevertheless distinguished acknowledgment of an amount owed from proof that the amount satisfies Section 5(8)’s definition of financial debt.

A later accounting classification could not independently change the purpose for which money had originally been disbursed.

Similarly, confirmation letters and classification as unsecured borrowing did not establish the missing agreement to retain the money against consideration for its use.

The Tribunal therefore declined to treat the accounting entries as conclusive.

TDS Deduction Insufficient Without Supporting Transaction Evidence

The NCLAT held that TDS under Section 194A showed, at most, that the respondent treated a payment or credit as interest.

It did not independently prove that the principal was lent for a return or that an interest-bearing arrangement had been agreed.

The Tribunal also noted that no interest was actually paid to Catalyst, apart from tax deducted at source.

It clarified that interest is not invariably essential to financial debt, referring to Orator Marketing Pvt. Ltd. vs. Samtex Desinz Pvt. Ltd. Here, non-payment was relevant as a surrounding circumstance because the original document established a share-purchase purpose.

Tax Authorities to Examine Accounting Treatment

Despite dismissing the insolvency claim, the Tribunal questioned the respondent’s conduct in retaining the money while recording interest and deducting tax on a liability it disputed.

It made no finding of income-tax liability.

However, exercising inherent powers under Rule 11 of the NCLAT Rules, it directed the Registry to forward the judgment to the jurisdictional Principal Commissioner of Income Tax for appropriate consideration according to law.

Civil Remedies Preserved

The appeal was dismissed, with no order as to costs.

Catalyst remained free to pursue appropriate legal remedies for recovery and permissible interest. The Tribunal left the parties’ rights, limitation questions and any legally available benefit for time spent in these proceedings open.

The ruling rejects insolvency admission on these facts; it does not extinguish a potential civil claim arising from the failed transaction.

Cases Discussed

• Pawan Kumar Vs Utsav Securities Private Limited — Company Appeal (AT) (Ins.) No. 251 of 2020; NCLAT, 3 August 2021. Cited for the requirements of disbursal, consideration for time value of money, and default; considered in the Tribunal’s analysis.
• Orator Marketing Pvt. Ltd. Vs Samtex Desinz Pvt. Ltd. — (2023) 3 SCC 753; Supreme Court. Recognises that a financial debt need not invariably carry interest; distinguished from the unproved loan conversion here.
• Asset Reconstruction Company (India) Ltd. Vs Bishal Jaiswal — (2021) 6 SCC 366; Supreme Court. Discussed for balance-sheet acknowledgments, which do not alone determine whether the original transaction is financial debt.
• Mahabir Cold Storage Vs CIT — 1991 Supp (1) SCC 402; Supreme Court. Cited for evidentiary effect of company accounts and acknowledgments.
• Innoventive Industries Ltd. Vs ICICI Bank — (2018) 1 SCC 407; Supreme Court. Cited for the Section 7 admission framework once financial debt and default are established.
• Swiss Ribbons (P) Ltd. Vs Union of India — (2019) 4 SCC 17; Supreme Court. Cited on the financial creditor insolvency framework and the significance of debt and default.
• Pradeep Tayal Vs Essbert Fashion Pvt. Ltd. — Company Appeal (AT) (Ins.) No. 950 of 2022; NCLAT, 12 January 2023. Raised in relation to TDS deductions and the distinction between evidence of interest and proof of financial debt.
• Sanjay Kewalramani Vs Sunil Parmanand Kewalramani — NCLAT, 12 July 2018. Respondent relied on the principle that acknowledging a loan does not automatically satisfy Section 5(8).
• Prayag Polytech Pvt. Ltd. Vs Gem Batteries Pvt. Ltd. — Company Appeal (AT) (Ins.) No. 713 of 2019; NCLAT, 24 September 2019. Respondent cited the insufficiency of TDS deduction alone to prove financial debt.
• Prayag Polytech Pvt. Ltd. Vs IWorld Digital Solution Pvt. Ltd. — Company Appeal (AT) (Ins.) No. 625 of 2019. Cited by respondent concerning proof of a financial debt.
• Prayag Polytech Pvt. Ltd. Vs Bon Lon Petrochem LLP — Company Appeal (AT) (Ins.) No. 705 of 2019. Cited concerning disputed oral arrangements and evidentiary proof.
• Jagdambey International Vs Visa Powertech Pvt. Ltd. — Company Appeal (AT) (Ins.) No. 468 of 2019; NCLAT, 2 December 2019. Cited concerning reliance on oral transactions and balance-sheet entries.
• M. Sai Eswara Swamy Vs Siti Vision Digital Media Pvt. Ltd. — Company Appeal (AT) (Ins.) No. 706 of 2021; NCLAT, 9 September 2021. Respondent cited corporate authorisation and documentary proof of loans.
• UKG Steel Pvt. Ltd. Vs Erotic Buildcon Pvt. Ltd. — (IB)-1058(PB)/2020; NCLT, 31 May 2021. Cited concerning corporate authorisation for alleged loan transactions.
• Ravi Auto Ltd. Vs Surana Mercantiles Pvt. Ltd. — Company Appeal (AT) (Ins.) No. 1059 of 2022. Appellant cited in its further written submissions concerning proof of financial debt.
• Agarwal Polysacks Ltd. Vs K.K. Agro Foods and Storage Ltd. — 2023 SCC OnLine NCLAT 624. Appellant cited concerning treatment of financial transactions.
• Satish Balan Vs Neeta Navin Nagda — Company Appeal (AT) (Ins.) No. 718 of 2023; NCLAT, 4 July 2023. Appellant cited concerning financial debt.
• Pancham Studios Pvt. Ltd. Vs Konark Aquatics & Exports Pvt. Ltd. — 2025 SCC OnLine NCLAT 1148. Appellant cited, noting subsequent Supreme Court affirmation in Civil Appeal No. 12991 of 2025.
• MRF Ltd. Vs Manohar Parrikar — (2010) 11 SCC 374; Supreme Court. Appellant cited concerning corporate authority and decision-making.
• Elegna Co-operative Housing and Commercial Society Ltd. Vs Edelweiss Asset Reconstruction Co. Ltd. — 2026 SCC OnLine SC 82. Appellant cited in support of Section 7 admission principles.
• Omkara Assets Reconstruction Pvt. Ltd. Vs Amit Chaturvedi — Civil Appeal No. 11417 of 2025; Supreme Court, 24 February 2026. Appellant cited on insolvency admission principles.
• A. Navinchandra Steels (P) Ltd. Vs SREI Equipment Finance Ltd. — (2021) 4 SCC 435; Supreme Court. Appellant cited in relation to Section 7 proceedings.