Earnest money forfeited is a capital receipt not liable to tax

0 comments Tuesday, February 12, 2013

It is not disputed that there was an agreement to sell between the assessee and M/s Shinestar Buildcon P Ltd. and in terms of the agreement the assessee received Rs. 18 crores as earnest money. Subsequently, the said earnest money was forfeited by the assessee and the same was claimed as capital receipt. Assessing Officer was not satisfied, therefore, a reference was made to Addl. Commissioner of Income Tax, u/s 144 of the IT Act. The Ld. Commissioner of Income Tax (Appeals) has given a categorical finding that in respect of the issue of forfeiture ofearnest money, the Addl. Commissioner of Income Tax, after taking into consideration the provisions of section 51 of the IT Act and decision of the Hon’ble Supreme Court in the case ofTravancore Rubber and Tea Company Ltd., issued directions that forfeited earnest money is not liable to tax and the same is to be considered as charge against the property and value of the property is to be suitably adjusted for the purpose of computation of capital gain, as and when the property is sold.
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