Section 51: Meaning of Advance money forfeited

By | July 13, 2016

Advance money forfeited

  • Amount of sale property Rs. 50 Lac.
  • Advance received Rs. 5 Lac for this property.
  • Now the party has cancelled the deal and accordingly we have forfeited the advance amount of Rs. 5 Lac.
  • Forfeited amount is advance money.

Finance bill, 2014 has proposed to enhance the area of S. 51, Forfeiture of advance money received in process of transferring a capital asset. The modification will elevate tax collection and is therefore to the benefit of the Revenue Department. It also helps them to receive tax at an early stage.

Scope widened by Finance bill:
Finance bill 2014 has expanded the outlook of the S. 51 of Income Tax Act 1961, through the medium of S. 56(2) (ix) of the said section which is quoted below:

In S. 51 of the Income-tax Act, the following proviso shall be inserted with effect from the 1st day of April, 2015, namely:—

“Provided that where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of S. 56,then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.”.

In case the advance money received in course of negotiation for transfer of capital asset but the negotiations does not results in the transfer of such capital asset, accordingly the amount is forfeited, then as per amendment by finance act, 2014 it would be chargeable to tax as income from other sources u/s 56(2)(ix) in the income of receiver of advance money.

In general parlance, an “advance” by itself does not constitute income, but it constitutes a liability for performance under a contract. An advance with respect to a capital transaction or revenue transaction transforms from being liability to income or capital receipt, only upon specific performance pursuant to such contract.

It may be noted that the tax incidence qua reduction of cost of acquisition of the capital asset occurs only when the transfer materializes and not at any time earlier. In other words there is no incidence of tax at the time of forfeiture of the earnest money/advance money.

Corresponding amendment to S. 51 has been done so that such advance is not deducted from acquisition cost/ FMV/WDV as the case may be.

It may be noted that this amendment is yet another attempt by the legislature to bring certain capital receipts into the broadening fold of the residuary income head.

Related Cases:

S. 54 Income tax Act, 1961—Capital gain—while dismissing the appeal of the revenue High Court of Karnataka held that:—”On a site measuring (30 x 110), the assessee had a residential premises. Under a joint development agreement, she gave that property to a builder for putting up flats. Under the agreement eight flats are to be put up in that property and four flats representing 48 per cent is the share of the assessee and the remaining 52 per cent representing another four flats is the share of the builder. So, the consideration for selling 52 per cent of the site is four flats representing 48 per cent. All the four flats are situating in a residential building. These four residential flats constitute “a residential house” for the purpose of S. 54. Profit on sale of property is used for residence. The four residential flats cannot be construed as four residential houses for the purpose of S. 54. It has to be construed only as “a residential house” and the assessee is entitled to the benefit accordingly.”—CIT & Anr. vs. Smt. K. G. Rukminiamma [2011] 17 ITCD 21 (Karn)

S. 51 of IT Act, 1961—Capital gain—When the transaction has not been accepted as genuine, there is no question of taking recourse of S. 51 of IT Act, 1961—Ashwani Oberoi vs. CIT

S. 51, r/w S. 4 of IT Act, 1961—Capital Gain—Once the transfer has been held to be genuine, there is no question of the transaction being without any consideration—CIT vs. Meera Gopyal.


As Per Section 51, of the Income Tax Act, 1961-

Advance money received.

Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.

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