Forfeiture of advance for transfer of a capital asset not to be deducted from the cost, etc. but to be taxed under the head "income from other sources" [Section 51] [W.e.f. A.Y. 2015-16The existing provisions of section 51 of the Income-tax Act provide that in computing cost of acquisition, where any capital asset was, on any previous occasion, subject to negotiations for its transfer, any advance, or other money received and forfeited by the assessee in respect of such negotiation is to be deducted from the cost for which the asset was acquired or from the written down value or fair market value, as the case may be.
A situation may arise where advance money forfeited is more than the cost of 'acquisition'. In such a case, 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)].The Finance (No. 2) Act has inserted section 56(2)(ix) to provide for the taxability of any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset.Such sum shall be chargeable to income-tax under the head 'income from other sources' if: (a) such sum is forfeited; and(b) the negotiations do not result in transfer of such capital asset.