The forfeiture of advance money received for the transfer of capital assets is a significant aspect of taxation under the Income Tax Act, 1961. Such forfeitures often occur when the intended transaction does not materialize, and the seller retains the advance. Section 56(2)(ix) governs the taxation of such forfeited amounts, ensuring they are treated appropriately under ‘Income from Other Sources.’

Scope of Section 56(2)(ix)

Applicability of Section 56(2)(ix):

• Introduced by the Finance Act, 2014, and applicable from Assessment Year 2015-16 onwards.
• Covers advance or earnest money forfeited in connection with the transfer of a capital asset.
• Ensures that the forfeited amount is taxable as income, even if the transfer of the capital asset does not occur.

Taxability Under Section 56(2)(ix)

1. Head of Income:
   • The forfeited advance money is taxed under the head ‘Income from Other Sources.’
2. Year of Taxability:
   • The amount is taxable in the year in which the money is forfeited.
3. Exclusion from Capital Gains:
   • The forfeited amount is not reduced from the cost of acquisition of the asset for calculating capital gains if the asset is subsequently sold.

Examples of Tax Treatment

1. Forfeited Advance Money:
   • Mr. A receives ₹5,00,000 as an advance for the sale of his property. The buyer later backs out, and the amount is forfeited. The entire ₹5,00,000 is taxable as ‘Income from Other Sources’ in the year of forfeiture.
2. Subsequent Sale of the Asset:
   • If the property is later sold, the cost of acquisition for computing capital gains is not adjusted for the forfeited advance.

Judicial Precedents

In CIT vs. Sterling Investment Corporation Ltd., the court clarified that forfeited advance money does not form part of the capital gains computation and should be taxed separately as income.

Compliance Tips for Taxpayers

1. Report Income in the Correct Year:
   • Disclose the forfeited amount in the year of forfeiture under ‘Income from Other Sources.’
2. Maintain Documentation:
   • Retain agreements, receipts, and correspondence to substantiate the forfeiture.
3. Seek Professional Advice:
   • Consult a tax expert to ensure accurate reporting and compliance with Section 56(2)(ix).

Conclusion

Section 56(2)(ix) ensures that forfeited advance money related to the transfer of capital assets is brought into the tax net. Taxpayers must report such income accurately and maintain proper documentation to avoid disputes. Understanding these provisions helps ensure compliance and avoid penalties.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

Want to consult a professional? Contact us: 09463224996

For more information and related blogs, click here.