Earnest money forfeited to be taxable as income-no more a capital receipt

It has been proposed to insert a new clause in section 56(2) to provide that any advance received on transfer of capital assets shall be chargeable to tax under head 'income from other sources', if such sum is forfeited and the negotiations do not result in transfer of capital assets. A consequential amendment is also proposed to section 2(24) to include such income in the definition of the term 'income'.

Where any sum of money is received as advance or otherwise in the course of negotiations for transfer of a capital asset and it is subsequently forfeited by the transferor and the negotiation does not result in transfer of such capital asset, the amount of advance money forfeited is chargeable to tax under the head 'income from other sources'.

In Travencore Rubber & Tea Co. Ltd. v. CIT [2000] 243 ITR 158/109 Taxman 250 (SC) it was held that forfeiture of advance money received for transfer of capital asset cannot be treated as revenue receipt chargeable to tax.

It is proposed to insert a proviso in the said section, so as to provide that where any sum of money received as an advance or otherwise in the course of the negotiations for transfer of a capital asset has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. 

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years, therefore advance money forfeited before A.Y. 2015-16 will not be treated as income under the head other source and will continue to be treated as capital receipt.


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