Many times we observed in property transaction that buyer enter into the transaction paid advance money against the consideration and then after some time if something went wrong he cancelled the transaction. In such cases, generally seller of that property forfeit the advance money received by buyer. So if such situation occur how tax will be levied on such advance money forfeited by seller? Hence today I am covering this topic to enlighten you all regarding taxability of advance money forfeited by seller.
Clause (ix) is inserted in section 56(2) by Finance (No. 2) Act, 2014 to provide for taxability of any sum received as an advance or otherwise in the course of negotiations for transfer of capital asset. Since it is a capital receipt it was earlier allowed as a deduction from the cost of acquisition under section 51. The same is now taxed as a revenue receipt in the year of receipt under the head “Income from other sources”.
Section 51 – Advance money received.
51. 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 – Income from other sources.
56(2)(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;
An Agreement for Sale of property on 29.11.2017 for a total consideration of Rs.70,00,000/- to be paid on or before 5.3.2018 and, towards earnest money, an amount of Rs.4,00,000/- was paid on 29.11.2017 and another Rs.3,00,000/-on 30.11.2017, 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 5.3.2018, 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,2019 for Rs.50,00,000/-. Compute taxable income for assessment year 2020-21.
Answer as per old provision:
In the present case, 10% of advance money forfeited will be reduced from the cost of acquisition i.e. Rs.50,00,000/- which in turns reduce the cost of acquisition to Rs.43,00,000/-
Answer as per new provision:
In the present case, 10% of advance money forfeited i.e. Rs.7,00,000/- will be taxable as income from other source under section-56(2)(ix) for the assessment year 2018-19.
No, the amount cannot be claimed as revenue expenditure. If the payment is made for the purpose of acquiring a capital asset, the amount lost upon forfeiture will not be considered as revenue loss though the amount may not have the same consequence or character in the hands of the recipient or beneficiary.
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, would be chargeable to tax as income from other sources under section 56(2) (ix) in the income of receiver of advance money.
Republished with Amendments