Advance Money on Proposed Property Transfer Not Taxable as Forfeited Income; Section 51 Applies to Retained Advance

Advance money received in connection with negotiations for transfer of immovable property was held not taxable as forfeited income under section 56(2)(ix) where the agreement contained no forfeiture clause and there was no evidence of actual forfeiture or retention as forfeiture. The discussion distinguishes section 56(2)(ix), which applies only when advance money is forfeited and the transfer does not occur, from section 51, which governs advance money received and retained in transfer negotiations and requires adjustment against the cost of acquisition on a later transfer; the addition as income from other sources was deleted.

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Issues: Whether the amount received as advance in connection with the proposed transfer of immovable property could be taxed as forfeited income under section 56(2)(ix) of the Income-tax Act, 1961, or was to be dealt with under section 51 of that Act.

Analysis: The agreement placed on record did not contain any clause for forfeiture of the amount. The dispute regarding the proposed transfer was still sub judice, and there was no evidence that the assessee had forfeited or retained the advance as forfeiture. Section 56(2)(ix) applies only where an advance or other money received in the course of negotiations for transfer of a capital asset is forfeited and the negotiations do not result in transfer. In contrast, section 51 governs advance money received and retained in respect of negotiations for transfer of a capital asset and requires such amount to be adjusted against the cost of acquisition when the asset is ultimately transferred.

Conclusion: The amount could not be taxed as forfeited income under section 56(2)(ix), and the addition sustained by treating the assessee's share of the advance as income from other sources was deleted.

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