Riddhi Vasistha
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”.
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The extract of relevant sections is as under:
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;
Brief Illustration
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.
Tax impact on buyer:
- Forfeiture of earnest money by the vendor if due to default on the part of vendee, will not amount to relinquishment of a right in that asset. Therefore the amount forfeited will not be allowed as a capital loss under the head capital gains.
- However, if the seller fails to honor the deal and pays the buyer double the compensation, this will be treated as capital gain because it amounts to relinquishment of a right by the buyer.
- Does advance money for the purchase of a commercial property be treated as business expenditure incurred by the buyer?
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.
Conclusion:-
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
Respected sir,
One of client received any advance of rs 50 lakhs as advance from the buyer in the year of 2016 – 17 but in the current situation both parties are expired. Seller received amount invested in joint account wit wife. But banker transferred t wife SB account of rs 50LAkhs. Till date seller not received balance amount and agricultural land also not transferred till date. But now income tax department sent notice for about 50L. How can I compute details. Kindly guide me
i have paid rs 50000 towards booking of seat for my son for adm in IIM udaypur. He did not take admission. Application for refund was made after 2 days of lclosing date.They hv forfeited the money.Can i show as loss in my return and under which section.thanks regards
If Advance Money paid by buyer is Rs. 5,00,000 and the seller forfeits Rs. 2,00,000 and returns 3,00,000 to the buyer.
Will it amount to Capital Loss in the hands of Buyer?
Is section 52 applicable for amount forfeited via application money of shares?
Reaction (wprt certain readers’ queries, seen to have remained UN-responded for so long)
“…..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,…”
As borne out by the above specially marked language of the provision, the advance money could be treated as income and be charged to tax in the recipient’s hands, for the year in which it is, as agreed, entitled to be forfeited. Thus it comes into play and can be invoked provided a given case falls squarely covered within the letter and spirit of the provision. If so, allowing credit for the 1% TDS as per section 194IA may pose no problem.
Now, consider other types of instances in which it is the payer who, for varying reasons, – such as seller, not buyer, being at fault, the intended transfer fails to be effected, – will be entitled to claim and get a refund of the advance money. Should that happen, difficult questions might arise as to how and who can claim and be granted a refund of the TDS.
As brought out in the critical study of the sec 194 IA – REF. the earlier published articles on this website – there are several lacunae in the provision; and unless those are plugged in, have the obvious potential to give rise to disputes and litigation, resulting in undue hardships to taxpayers.
Key note: To be specially noted, under the provision, even before its amendment wef April 1 2015, 2015, similar problems and unintended consequences are very much in store, by reason of the very same pinpointed deficiencies in the framing and structuring OF sec 194 IA.
Dear Sir/Madam,
Lets assume the same example
I’ve received an advance on 15-Mar-2014 of Rs. 7,00,000/- & subsequently was forfeited, later on the sale was done in the FY 2014-15.
Now will that amount be deducted from the Cost or it has to be declared as IFOS.
Considering the cases:
1. If the amount forfeited in the month of March’14 itself
2. If the amount forfeited in the month of June’14
In case the transfer of assets is done within the agreement between seller & buyer, then will the advance money taken by seller in previous FY be termed as forfeited amount. How this amount can be shown in ITR form. Will this advance money be taxable under new IT rule Sec 56(2)(ix).
Pl clarify as i am facing this issue presently.
In case of sale of rural agriculture land also the advance forfeited will be liable to tax
It is unfortunate that people who got the agreement amounts and was forfeited by the payer (for whatever reasons) were not showing under any head! How it can happen. Is it necessary for the govt to notify for every items for showing in the tax returns? It was expected of the assessee to show all incomes.
They should have one more sub-column under income from other sources, ‘not specified above’.