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CA Intermediate · Taxation · Basic Concepts

M/s Dhruv Traders, a firm in Surat, receives Rs 5,00,000 as an advance from a customer in tax year 2026-27 for goods to be supplied next year, and receives Rs 80,000 as a one-time capital subsidy. Which is the correct general classification of these receipts for tax purposes?

The customer advance is not income until the goods are supplied, and a one-time subsidy for a capital purpose is generally a capital receipt. So neither is simply a taxable revenue receipt of the current year.

  1. AThe advance is a trading receipt only when it becomes income on supply, and the subsidy for capital purpose is generally a capital receiptCorrect
  2. BBoth are revenue receipts taxable in the current year
  3. CThe advance is exempt and the subsidy is taxable salary
  4. DBoth are capital receipts and exempt

Explanation

An advance against future supply is not income until it accrues on supply, though it is a business-related receipt. A subsidy given for a capital purpose is treated as a capital receipt. Option B treats both as taxable revenue now, which is wrong.

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