Provision: Section 56(2)(ix) – Income from Other Sources

 

 

"Any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset shall be chargeable to income-tax under the head ‘Income from other sources’ if such sum is forfeited and the negotiations do not result in transfer of such capital asset."

 Key Elements of the Provision

1.      Applies to Advance Money:

o    The section covers any sum received as advance or otherwise during negotiations.

2.      In Connection With Transfer of a Capital Asset:

o    The capital asset can be land, building, shares, etc., which qualifies as a capital asset under Section 2(14).

3.      Negotiations Fail → Amount is Forfeited:

o    The section applies only when the negotiations for sale/transfer fail, and

o    The advance is forfeited (i.e., not returned to the payer).

4.      Taxable as "Income from Other Sources":

o    The forfeited sum is treated as taxable income in the hands of the recipient, even though the asset is not transferred.

o    It is not reduced from the cost of acquisition of the asset (as was previously done under Section 51 — now redundant for amounts received after 1 April 2014).

 Example:

·         Mr. A owns a piece of land (capital asset).

·         Mr. B offers to buy it and pays ₹5,00,000 as advance.

·         Later, Mr. B backs out, and Mr. A forfeits the advance.

✔ As per Section 56(2)(ix), the ₹5,00,000 will be taxable in the hands of Mr. A as Income from Other Sources in the year of forfeiture.

 Earlier Treatment under Section 51 (before AY 2015-16)

Before 1 April 2014

After 1 April 2014 (Section 56(2)(ix))

Forfeited advance was reduced from cost of asset

Forfeited advance is taxable as income

Taxed only when asset is sold

Taxed in year of forfeiture, even if not sold

Applicable under Section 51

Now governed by Section 56(2)(ix)

 Section 51 is now applicable only for forfeited advances received before 01.04.2014.

 Exceptions / Not Applicable When:

·         The amount is not forfeited (i.e., returned to the buyer).

·         The asset is not a capital asset (e.g., stock-in-trade).

·         The advance is related to business transactions, not capital assets.

·         The asset is actually transferred — in which case the amount becomes part of sale consideration, not taxable under 56(2)(ix).

 Important Points for Taxability:

Criteria

Status

Nature of Asset

Must be a capital asset

Outcome of Negotiation

Must not result in transfer

Nature of Receipt

Advance or token money

Recipient's Treatment

Forfeited & retained by recipient

Head of Income

Income from Other Sources

Year of Taxability

Year in which forfeiture occurs

 Conclusion

Section 56(2)(ix) ensures that any forfeited advance received during failed negotiations for the transfer of a capital asset does not escape taxation. It is now taxable as income in the year of forfeiture, rather than being adjusted in cost of acquisition (as was previously the case under Section 51).

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