The Hindu : Treatment of forfeited advance in business

Online edition of India's National Newspaper
Monday, Mar 15, 2004

Business

Business

Treatment of forfeited advance in business

QUESTION: I am in business, where I have collected advances for a sale transaction. But the buyer has not turned up to get the advance. According to the rules of my business, where the buyer does not turn up within three months the amount is forfeited. Is such forfeited amount taxable? If taxable, can it be treated as capital gains?

ANSWER: Since the advance is in respect of sale of trading goods and not a capital asset, the amount forfeited would have to be treated as normal income. Even if there is any doubt on the matter, Sec. 28(iv), which would treat any benefit arising out of business as a perquisite or Sec. 28(va), which would treat any amount receivable in cash or kind under any agreement in specified circumstances would enable treatment of such amount as business income. In cases, where there is no stipulation of forfeiture, the amount would not have been taxable till such time as it is adjusted as non-payable in the books of the assessee, since a person, who paid the advance can always claim the same at any time. The claim that it is a gift or the amount if at all can be taxed only as capital gains is far-fetched. The amount is earned in the course of business and also incidental business. It is, therefore, taxable.

S. Rajaratnam

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