Section 51 - Treatment of Advance Money received - Income Tax - Ready Reckoner - Income Tax

Section 51 : Treatment of Advance Money Forfeited Where any capital asset was on any previous occasion the subject matter of negotiations for its transfer, and any advance money or other money received is forfeited by the assessee, then the amount so forfeited shall be deducted from The cost for which the asset was acquired or The Fair Market Value of the asset The WDV in case of depreciable assets as the case may be, in computing the cost of acquisition. Advance Money Forfeited by Seller on or after 01.04.2014 As per Sec. 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, such sum is forfeited and the negotiations do not result in the transfer of such capital asset shall be taxable in the hands of seller as Income From Other Sources (IFOS). Notes: Any advance or other money forfeited before 01-04-2014 shall be dealt with as per section 51 , i.e. reduced from actual cost, WDV, etc. Any advance or other money forfeited on or after 01-04-2014 shall be treated as Income from Other Sources and shall not be reduced from Actual cost of the Asset. In case of forfeiture of share for non-payment of call money, it has been held that it will be treated as extinguishment of right and consequently there will be a short-term capital loss. Tax treatment in the hands of the buyer The amount paid by the buyer which has been forfeited does not amount to relinquishment of a right and therefore would not be allowed to be claimed as a Capital Loss . If the seller fails to honor the deal and pays back the buyer the advance as well as some amount because of failure to dishonor the deal, this amount would not be treated as Capital Gain because it amounts to relinquishment of a right by a buyer. The amount forfeited which was paid for purchase of a Commercial Building will not be regarded as Capital Loss.