Notice recieved

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An assessee, a private limited company with trading losses, diversified into construction and paid advance fees for stock to another company, B. B forfeited the advance due to non-payment. The assessee treated this as a business loss under Section 37(1), but the IT department issued a notice arguing it's a capital loss. While B treated it as business income, the core issue is whether the forfeited advance for stock constitutes a business loss or a capital loss, especially as the assessee hadn't yet acquired the stock as a capital asset.

Charu Gupta

Charu Gupta (Querist)

25 July 2022 Assessee (Pvt Ltd comapny) was in a trading business incurring losses from a long time. Assessee diversified the business into construction in 2020 but was not able to materialise the same due to Covid. It entered into a franchise agreement with B (Pvt ltd company). B is already into cosntruction business. It paid advance fees to B for purchase of stock for construction business. However was not able to pay full fees and B forefieted the amount. Assessee treated this as Business loss as per 37(1) and B treated it as business income.
IT department has sent the notice to Assessee that the same shall be treated as Capital loss not be adjusted with other business income because asseessee was not into this new business and cannot be treated as loss arising due to same. B on the other hand is treating the same as business income
What is your view.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

25 July 2022 It's a business loss only.

Adv. Ravish Bhatt, ADIT, CIOT

Adv. Ravish Bhatt, ADIT, CIOT (Expert)

26 July 2022 Interesting! Well, firstly a business income for one can does not necessarily have to be a business expense for the other and it could be a capital loss/ expenditure and vice versa. In the facts you stated, it appears that advance was given for purchase of stock i.e. in the course of business rather than for acquisition of any capital asset and forfeiture of such amount should be allowed as business expenditure. Though, treatment of this sum as business income by B is not conclusive of Treatment of loss at assesse’s end, it could strengthen the argument of business loss. Additionally, an argument could be advanced that all what assessee had was a right to make balance payment and get stock transferred in his favour. He never was transferred with any asset in terms of s.2(47) much less a capital asset and right to acquire an stock does not fall within ambit of capital asset in terms of s.2(14); consequently there is no question of generation of any capital loss.

Author: Advocate Ravish Bhatt
Gmail: ravishdbhatt@gmail.com
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