Advance money forfeited, under section 51 (as set, 1961 Act, AY 2019-20)

The rule of section 51

Where a capital asset was earlier the subject of negotiations for its transfer, and the assessee received and kept an advance or other money in those negotiations (because the buyer backed out), the amount kept is deducted from the cost of acquisition when the asset is later transferred (section 51). It is deducted from the cost for which the asset was acquired, or from its written down value or fair market value, whichever is the base used. The forfeited advance is thus not taxed when it is kept; it lowers the cost, and so raises the gain, when the asset is sold.

Advance forfeited on or after 1 April 2014

Since assessment year 2015-16, a sum received as an advance or otherwise in negotiations for the transfer of a capital asset is income from other sources in the year it is forfeited, if the negotiations do not lead to the transfer (section 56(2)(ix)). Such a sum is not deducted again from the cost under section 51 (proviso to section 51). So for assessment year 2019-20:

Points to note

1. Only the amount kept by the assessee himself is deducted. An advance kept by a previous owner, where the asset came by gift or will, is not deducted from the cost to the assessee.
2. The reduced figure is the cost of acquisition, so where the gain is long-term and indexation applies, it is applied to the cost after the deduction (second proviso to section 48 and its Explanation (iii)). Indexation does not apply to the gain of a non-resident from transferring an Indian company's shares or debentures of the kind the first proviso covers (gains worked out in the foreign currency first used to buy them), to equity shares and units referred to in section 112A, or to bonds and debentures other than capital indexed bonds of the Government and Sovereign Gold Bonds (the later provisos to section 48).
3. The rule applies whatever the kind of capital asset (land, a building, shares, jewellery); it is not limited to immovable property.

Example (our own figures)

Mr. Varun bought a plot for ₹8,00,000 in 2005-06. In 2012-13 a buyer paid an advance of ₹50,000 and backed out; Mr. Varun kept it. In 2016-17 another buyer's advance of ₹1,00,000 was forfeited and taxed in that year under section 56(2)(ix). On selling the plot in 2018-19, his cost of acquisition is ₹8,00,000 − ₹50,000 = ₹7,50,000 (before indexation); the ₹1,00,000 already taxed is not deducted.