FORFIET OF ADVANCE AGAINST SALE OF CAPITAL ASSET-TAX APPLICABLE

QUS:Case is that we had to sale our property for 50 Lac and we had received Rs. 5 Lac as an advance. Now the party has cancelled the deal and accordingly we have forfeited the advance amount of Rs. 5 Lac. My entity is proprietorship. I am taking depreciation on this property.
My query is that whether Rs. 5 Lac is my Other sources Income or its capital receipt and will adjust whenever I will sale this property.

ANS:Treatment of forfeit of Advance money against capital assets has been given in section 51 of the income Tax act which is reproduced here under

• 51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money80 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.

as per section 51 above any advance or other money received or retained due to cancel of transfer deal of capital asset is to be deducted from the

1. cost for which assets was acquired or
2. written down value or
3. fair market value

whichever is applicable ,In computing the cost of acquisition

As in your case ,

1. you have just forfeited the advance money
2. Depreciation has been claimed on the asset in the question
3. In block of asset ,you have only one building(I assume)
   

on the above point ,in my opinion

• Amount you have received is a capital receipt and should be booked in books of account to capital reserve or capital account
• WDV of the block of assets is not be reduced in the year in which amount is forfeited.
• WDV of the Block of the assets will be reduced when will actually sell the property for calculation of capital gain means in no case depreciation will be charged on reduced WDV.

other members are requested to kindly give their valuable opinion on the matter(post ur view here)

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