Advance money forfeited till FY 2013-14 i.e. for AY 2014-15 related to capital asset/property for which negotiation for transfer was going on will be treated as capital receipt and will be reduced from the cost of acquisition of assets, but with effect from the 1st day of April, 2015 any advance money forfeited against capital assets for which the negotiations do not result in transfer of such capital asset will be treated as Income under Income tax under the head “Income from Other Sources” as per section 56(2)(ix).(As Proposed /Amended by Finance bill 2014).
Example: Sale property for Rs.50 Lac Advance received Rs.5 Lac for the property. Now the party has cancelled the deal and so we have forfeited the advance amount of Rs.5 Lac. Forfeited/Retained amount is advance money for which negotiations for its transfer is going on. The amount so forfeited will be reduced from cost of acquisition of asset before indexation, even though the assets may be long term assets. But with effect from 1st April 2015 such forfeited amount will be treated as Income from other sources and will be taxed according to income tax slab/rate as applicable to assesses
In case advance money forfeited is more than cost of acquisition than the excess of the advance money forfeited over the cost of acquisition of such asset shall be a capital receipt not taxable. Travancore Rubber & Tea Co. Ltd v. CIT (2000)243 ITR 158 (SC). In case where forfeited amount is more than Cost of Asset and when such asset is actually transferred, the cost of acquisition in such a case shall be taken as NIL and capital gain shall arise accordingly
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.
Reference: – 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.
“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.”
section 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:—
Income from other sources.
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, 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.”.