As per S. 51 of the act provides that any advance forfeited by the seller of a property is deductible from the cost of the asset. The effect of this provision is that when the same asset is sold at a larger amount. It becomes taxable as capital gains because of the original cost reduced by the forfeited amount.
For example if the COA is Rs. 5 lakhs and Advance forfeited is Rs.1 lakh and the sale consideration is Rs. 8 lakhs, then Capital gains would be:
Sale Consideration 8 lakhs
Less Cost of Acquisition 4 lakhs
(5lakhs-1lakh)
CapitalGains 4 lakhs
Finance bill 2014 had proposed to enhance the area of S. 51, Forfeiture of advance money received in process of transferring a capital asset. The modification had elevated tax collection and is therefore to the benefit of the Revenue Department. It also helps them to receive tax at an early stage.
Consequently, in S. 56 of the Income-tax Act, in sub-section (2), after clause (viii), the following clause shall be inserted with effect from the 1st day of April, 2015, namely:—
“(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,––
(a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset.”.
For the purpose of this section Capital Asset will be taken as defined in S. 2(14).
Date of Applicability:
These amendments has taken effect from A.Y. commencing on the 1st day of April, 2015 and accordingly, apply in relation to the A.Y. 2015-16 and subsequent years.
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 30×110, 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 situate 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 gains—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 Gains—Once the transfer has been held to be genuine, there is no question of the transaction being without any consideration. CIT vs. Meera Gopyal.
Illustration:
An Agreement for Sale of property on29.11.2014 for a total consideration of Rs.70,00,000/- to be paid on or before 5.3.2015 and, towards earnest money, an amount of Rs.4,00,000/- was paid on 29.11.2014 and another Rs.3,00,000/-on 30.11.2014, that means, altogether Rs.7,00,000/- was paid, being 10% of the total sale consideration. The purchaser, however, could not pay the balance amount of Rs.63,00,000/- before 5.3.2015, consequently, the sale deed could not be executed. Seller, therefore, did not return the earnest money to the purchaser. The same property was purchased by the assesse in Sept, 2010 for Rs.50,00,000/-. Thus, 10% of advance money forfeited i.e. Rs.7,00,000/- will be taxable as income from other source u/s 56(2)(ix) for the A.Y. 2015-16.
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.
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.
Reference:
As Per Section 51 of, the Income Tax Act, 1961-
Advance money received.
51. Where any capital asset, on any previous occasion, for the subject of 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.
As Per Section 51 of, the Finance Bill, 2014-
In section 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 section 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.”.