Advance Money Received and Forfeited

Section 81 — ADVANCE MONEY RECEIVED AND FORFEITED

Section 81 is the substantive equivalent of 1961 s. 51. Where a capital asset has, on a previous occasion, been the subject of negotiations for transfer that fell through, and the assessee retained the advance / earnest money received: Clause (a) — the retained advance is DEDUCTED from cost-of-acquisition / WDV / FMV in computing future cost-of-acquisition. Clause (b) — EXCEPTION: if the advance was already INCLUDED in total income under s. 92(2)(h) [or 1961 s. 56(2)(ix)] as 'income from other sources' in the year of forfeiture, then NO deduction from cost (avoids double tax / double benefit).

STATUTORY ARCHITECTURE — TWO REGIMES

Pre-FA 2014 era: forfeited earnest money was tax-FREE in the year of forfeiture; only impact = reduced cost-of-acquisition (clause a) on subsequent transfer. Post-FA 2014: forfeited earnest money is taxed as 'Other Sources' u/s 56(2)(ix) [now s. 92(2)(h)] in YEAR OF FORFEITURE. To prevent double-counting, clause (b) excludes such forfeited advance from cost-reduction at subsequent transfer. Section 81 thus operates a DUAL regime: (a) for pre-FA 2014 forfeitures (cost-reduction only); (b) for post-FA 2014 forfeitures (current-year OS tax + no cost-reduction).

CASE LAW

Travancore Rubber & Tea Co. Ltd v. CIT (SC) — forfeited earnest money is a CAPITAL receipt, not revenue; pre-FA 2014 ratio. Reversed prospectively by FA 2014 amendment. CIT v. K.R. Srinath (Mad HC) — clause (a) cost-reduction operates as on the date of forfeiture, not retrospectively. ITAT (various) — clause (b) requires PROOF of inclusion in total income — taxpayer must demonstrate the s. 92(2)(h) / 56(2)(ix) tax-paid in the year of forfeiture.

PLANNING NOTES

(i) For long-held assets where pre-FA 2014 forfeiture occurred, maintain documentary evidence: (a) prior agreement-to-sale; (b) earnest money receipt; (c) forfeiture event (cancellation letter / breach). On subsequent transfer, reduce cost-of-acquisition by the forfeited amount (pre-FA 2014 forfeiture). (ii) For post-FA 2014 forfeiture, the OS-tax is paid in year of forfeiture; on subsequent transfer, original cost stands (no reduction). (iii) For multiple-forfeiture history (e.g., property repeatedly almost-sold), aggregate the cost-reductions ONLY for pre-FA 2014 forfeitures; post-FA 2014 amounts are kept off the cost-reduction. (iv) Maintain ITR-OS-Schedule entries for FA-2014-onwards forfeitures — these become the audit-trail to prevent cost-double-deduction.

CROSS-REFERENCES

• Section 92(2)(h) — Other Sources head — forfeited earnest money.
• Section 72 / 73 — Cost-of-acquisition framework (cost as reduced by s. 81).
• 1961 s. 56(2)(ix) — predecessor of s. 92(2)(h).