Taxability on the Advance/Token Money Forfeited from the buyer or purchaser
In practical life the situation of receiving advance/token money and than getting the deal cancelled by the buyer is not very often but one has to understand the impact of the revenue/token money received.
|Capital Gain: Advance Forfeit Taxability|
Section 51 of the Income-tax Act, 1961
Where on any capital asset, on any previous occasion, for the subject of its transfer ,any advance or other money received and retained by the assessee in respect of such negotiations, shall be deducted from the cost of acquisition (COA):
- Advance or other money will be deducted from COA only if it was received and retained or forfeited by the assessee himself and not by the previous owner.
- If the advance money forfeited was received by the assessee before 1-4-1981 and the assessee has assumed the FMV of the asset as on 1-4-1981 as the COA ,such advance will still be deducted from FMV.
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.
Refer: [Travancore Rubber & Tea Co. Ltd v. CIT (2000)243 ITR 158 (SC)]
Treatment in the hands of 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.
Refer: [CIT V. Sterling Investment Corporation Ltd (1980)123 ITR 441 (BOM)]
- Due to default on the part of vendor, vendee receives some compensation besides the refund of the earnest money paid by him, such compensation shall be subject to capital gains as it will amount to relinquishment of a right by the vendee.
Refer: [CIT V. Vijay Flexible Container (1990)186 ITR 693(BOM)] and [K.R.Srinath v. Asst.CIT (2004)268 ITR 436 (MAD)]
Reviewed by Sanyam Jain on Nov 10 2012