Whether advance money forfeited will be taxable ?

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pratik upadhyay (Querist)
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11 January 2014 Dear Experts,

Suppose I have purchased a capital asset worth Rs. 10 lakhs in 2013.
I contracted with a person in 2014 to sell it at Rs. 50 lakhs and consequently received 15 lakhs as advance money.
The other person failed to pay remaining amount within stipulated time as per contract.As a result I forfeited the advance money (15 lakhs).

As per Travencore Rubber & Tea Co. ltd. vs. CIT (2000), Advance Money will be Capital receipt but not taxable.

As per Smita N.shah vs CIT (2005),this advance Money will be deducted from the Cost of Acquisition (without Indexation).
as per above case law Cost of Acqusition will be Nil in my example.

MY QUESTION IS :

Whether the 5 lakhs ( advance money - unidexed COA) will be taxed?
If Yes under which head ?

please cite relevant case law

Nikhil Kaushik

Nikhil Kaushik (Expert)
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11 January 2014 initially it should not be taxable as no asset has be relinquished and because its a capital receipt, so cannot be even be taxed as other income.

what has not been discussed in Smita shah and travancore is what will happen to this excess money when the asset would eventually sold. Logically it should be taxable in that year...

so lets say you do forfeiture in FY 2012-13, not tax liability should arise in AY 2013-14.

However, lets say if you sell it in FY 2014-15, the excess over the cost should be included in consideration...(this is my view and is without any backing of case law)

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