Section 51 of Income Tax Act, 1961: Advance money received
Updated: Oct 14, 2022
The section states that:
Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall 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 :
Provided that where any sum of money, received as an advance or otherwise in the course of 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.
The provisions of section 51 of the Income-tax Act deal with advance money received for transfer of a capital asset. As per the old provisions where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost of acquisition of the asset or the WDV or Fair Market Value as the case may be. As such the effect is that if an assessee receives some advance money which is forfeited without the asset being actually transferred, the cost of acquisition in the hands of the assessee gets reduced and as such the amount forfeited gets taxed in the year when the asset is actually transferred in an indirect manner by reducing the cost of acquisition. This is for the obvious reason that though the advance money has been received by the assessee, it cannot be taxed under the head of capital gains in absence of “transfer” which is essential for invoking the provisions of section 45 of the Act. But the provisions of sec 51 have changed w.e.f. 01.04.2014 and the amount forfeited cannot be taxed under any other head as the nature of receipt is capital received. In order to ensure that amount does not escape taxation, section 51 of the Income tax Act 1961 provides for reducing the same amount from the cost of acquisition of the asset. However, a new section 56(2)(ix) was introduced, which provides for taxing the amount so forfeited under Income from other sources. Effectively, therefore the said amendments seek to prepone the taxability of the advance money forfeited to the year of receipt of the money as against the current provision where the same is taxed in an indirect manner in the year of transfer of the capital asset. Since in the year of receipt of advance money, the essential element of transfer is missing, it cannot be taxed as Capital Gains and hence the government has put to tax it as Income from other sources in the year of receipt of the money.