Forfeiture of Earnest Money received during Negotiation of Capital Assets not taxable as Other Income before 2015: ITAT [Read Order]

Capital Assets - ITAT - Taxscan

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the forfeiture of earnest money received during the negotiation of capital assets not taxable as other income before the amendment in the year 2015.

The assessee had entered into an agreement to sell his property with one Sanjay Pashi after accepting the earnest money of Rs. 4,62,50,000/-, which was subsequently forfeited as the prospective buyer Sanjay Pashi has failed to perform his part of the contract. The property was ultimately sold by assessee to M/s. HAP apparel pvt. Ltd. for Rs. 21.75 crore, where the assessee got a share of 50% and offered the same to tax.

The assessee deducted Rs. 4,62,50,000/- the amount of sale proceeds forfeited from the cost of acquisition of the property in question u/s 51 of the Act and treated the excess of forfeited amount and cost of assets i.e. 2,76,17,652/- as capital receipts.

However, the Assessing officer treated the same as income from Other Sources.

The first appellate authority held that under section 56(2), a new subsection (IX) has been inserted with effect from 01.04.2015 to treat the forfeited sum as income from other sources, but it is not applicable to the year under assessment which is A.Y 2010-11.

“A co-ordinate bench of Tribunal in case cited as Randhir Singh Kadan vs. Department of Income Tax decided the identical issue by treating the earnest money received and forfeited by the assessee in respect of any negotiation for transfer of capital assets to be deducted from the cost of assets. Since in A.Y. 10-11 there was no provision under the Act for treating the forfeiture of earnest money received during the negotiation of a capital assets as income from other sources, the Ld. CIT(A) has rightly deleted the addition. The issue in controversy is also covered by decision rendered by Co-ordinate bench of Tribunal in case of Vijay Singh,” the Tribunal said.

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