Section 51 - Advance Money Forfeited - Capital Gains Taxability

• Section 51 of the Income Tax Act, 1961 provides for taxation of forfeiture of advance money received by the assessee in relation to negotiations for transfer of capital asset. 

• Where any advance money is received and such money is forfeited by the assessee, then such advance money shall be reduced from the cost or fair market value of the asset, as the case may be, at the time of calculation of capital gains liability. 

• If advance money was forfeited with regard to depreciable assets, it shall be deducted from the WDV (Written Down Value) of the depreciable asset. 

• Important to note here that advance money forfeited by previous owner shall not be reduced from cost of acquisition. 

• Above provisions are applicable only in case of advance money forfeited before 1st April, 2014.

• Section 56(2)(ix) was added by Finance Act, 2014 which prescribes that any advance money forfeited shall be taxable under this section i.e. under the head Income from Other Sources. 

• Accordingly, a proviso was added to section 51 which prescribed that if advance money forfeited has been charged to tax under section 56(2)(ix) i.e. under the head IFOS, then that money shall not be reduced from cost or FMV or WDV, as the case may be. 

• Thus, advance money forfeited on or after 1st April, 2014 shall be taxable under the head Income from Other Sources and not under the head Capital Gains.