Section 56(2)(ix) – Taxability of forfeited advance for transfer of a capital asset
Issue/Justification
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”.
Making it taxable in the year of receipt is a good move and in the interest of the revenue. However, the other side of the same transaction also needs consideration i.e. from the payer’s point of view whose money has been forfeited. Since the receipt is deemed to be revenue due to the enactment, it follows that the expenses in the hands of the payer would also be revenue in nature. Consequently, corresponding benefit needs to be provided to the payer.
Budget 2018 Suggestion by ICAI
It is suggested that a suitable amendment may be made in the Act which allows the benefit of deduction of forfeited amount to the payer of such amount.
A property was to be sold and a sum of Rs. 20 lakhs was recieved as advance. The proposed buyer did not fulfill the commitment and the advance was forfeited. Simultaneously on the strength of this agreement Rs. 10 lakhs advance was given by us for buying another property. Since the fellow who was to buy our property failed we also failed in our commitment and the person from whom we had to buy forfeited Rs 10 lakhs. Now we have to offer to tax Rs.20 lakhs u/s 56 (2)(ix). Can we claim our loss of Rs 10 lakhs against the gain of Rs. 20 lakhs as expenses incurred in connection with the transfer u/s 57((iii).
Refer
CIT vs Sterling Investment Corporation Ltd (1980) 123 ITR 441.
Loss due to forfieture of token money is a revenue loss
REFER
CIT vs Sterling Investment Corporation Ltd (1980) 123 ITR 441.
I had booked a property and had paid 25% of value under 25:75 scheme. Contract was signed giving me the right to get the property on completion and on payment of balance amount. After 2 years the market prices had fallen sharply and I declined to pay the balance 75%. Developer forfeited most of the paid amount claiming termination charges. I got back about 7% of my money incurring a big loss.
Can I claim this loss under capital loss since right to buy the property was held for more than a year.
If yes, please advise relevant provisions, case law etc.
If not, please advise if this can be treated as revenue loss and relevant provisions.
I will be grateful for your reply