Forfeited advance on cancelled sale agreement is not capital gains without transfer; section 51 applies on future transfer.

Advance money received under an agreement to sell agricultural land, later cancelled and forfeited before 31.03.2014, was not taxable as capital gains because no transfer of the capital asset occurred. In the absence of a sale deed or other transfer, the charging provisions for capital gains did not apply to the receipt in the year of forfeiture. The amount retained on forfeiture was treated as falling within section 51 of the Income-tax Act, 1961, which requires such advance money to be adjusted against the cost or other relevant base only when the asset is eventually transferred. The addition as capital gains was therefore unsustainable.

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Issues: Whether advance money received under an agreement to sell, which was later cancelled and forfeited before 31.03.2014, could be assessed as capital gains in the absence of any transfer of the capital asset.

Analysis: The advance was received against an agreement to sell agricultural land, but the bargain was subsequently cancelled and no sale deed or transfer of the land took place. In the absence of transfer, the receipt could not be brought to tax as capital gains under the charging provisions. The amount retained on forfeiture was held to attract section 51 of the Income-tax Act, 1961, which governs advance money received in negotiations for transfer of a capital asset and directs that such amount be adjusted against the cost of acquisition or other relevant base when the asset is actually transferred in future. The view was supported by the cited judicial authorities.

Conclusion: The addition made as capital gains was unsustainable; the forfeited advance was not taxable as capital gains in the year of receipt and was liable to be dealt with under section 51 at the time of any future transfer.

Final Conclusion: The assessee succeeded and the addition was directed to be deleted.

Ratio Decidendi: Where advance money received for transfer of a capital asset is forfeited before the statutory amendment and no transfer of the asset occurs, it is not taxable as capital gains in the year of receipt and must be considered only by way of cost adjustment under section 51 when the asset is eventually transferred.

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