Contractual right to buy property is a capital asset, but forfeited earnest money was not a deductible capital loss.

A contractual right to obtain conveyance of immovable property for a price is property and therefore a capital asset. Under section 12B of the Income-tax Act, 1922, however, a loss is allowable only where it arises from sale, exchange, relinquishment or transfer of that capital asset. Forfeiture of earnest money after failure of the purchase transaction and mutual cancellation of the agreement did not amount to relinquishment by the purchaser, and the proviso concerning money received in negotiations for sale did not assist the purchaser's claim. The retained amount was therefore not deductible as a capital loss.

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Issues: Whether the assessee's contractual right to purchase immovable property constituted a capital asset, and whether the amount retained by the vendor on cancellation of the agreement gave rise to a capital loss within section 12B of the Income-tax Act, 1922.

Analysis: A contractual right to obtain conveyance of immovable property for a price is property and therefore a capital asset. However, the statutory requirement under section 12B is not satisfied merely because money is lost in the course of a failed transaction. The loss must arise from sale, exchange, relinquishment or transfer of the capital asset. On the facts, the amount retained by the vendor represented forfeiture of earnest money following failure of the purchase transaction and mutual cancellation of the agreement. Such forfeiture is not the same thing as relinquishment of the assessee's capital asset. The proviso relating to money received in negotiations for sale was also inapplicable to the purchaser's claim.

Conclusion: The assessee was not entitled to treat the retained amount as a capital loss under section 12B, and the reference was answered against the assessee and in favour of the Revenue.

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