Tax implication of forfeiture of advance
Meaning of forfeiture:
According to the dictionary meaning of the word ‘forfeiture’, the loss or the deprivation of goods has got to be in consequence of a crime, offence or breach of engagement or has to be by way of penalty of the transgression or a punishment for an offence.
Unless the loss or deprivation of the goods is by way of a penalty or punishment for a crime, offence or breach of engagement, it would not come within the definition of forfeiture.”
Section 56: Income from other sources.
(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—
(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,—
(a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset;
Section 56(2)(ix) was inserted by the Finance (No 2) Act 2014, with effect from assessment year 2015-16. It provides for taxability as Income from Other Sources of any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if such sum is forfeited and the negotiations do not result in transfer of such capital asset. Section 51 has now been amended to provide that any amount taxed under section 56(2)(ix) shall not be deducted from the cost or written down value.
A forfeiture has to be either in terms of the right to forfeit such advance under the contractual terms of the agreement, or as agreed upon with the prospective purchaser.
It must be a positive action on the part of the assessee. However, once the assessee has forfeited the amount, then the matter will be taxed under this clause.
A mere notice of forfeiture by the assessee, which is contested by the other party, may not amount to forfeiture. In such a case following one situation may arise:
- if the amount is not written back by the assessee, taxing of such amount is not required merely on the grounds of issue of notice of forfeiture.
- In case such amount is written back by the assessee, such amount should be reported under this clause, giving the stand of the assessee.
Mere unilateral writing back of an advance by credit to the profit and loss account, asset account or capital account may not by itself amount to an act of forfeiture by the assessee. Such a write back is however an indication of a possible act of forfeiture
Requirement in Tax Audit form 3CD:
- Whether any amount is to be included as income chargeable under the head ‘income from other sources’ as referred to in clause (ix) of sub-section (2) of section 56? (Yes/No)
- If yes, please furnish the following details:
- Nature of income:
- Amount thereof:
A new clause 29A has been inserted, requiring disclosure of whether any amount is chargeable to tax under section 56(2)(ix), and if so, to furnish prescribed details of such income.
Point to consider in taxing forfeiture of advance:
- The auditor is not required to report any such forfeited amount if it is in respect of a personal capital asset, where neither the asset, the advance nor the forfeiture is recorded in the books of account relating to the business or profession.
- The requirement of reporting arises only on forfeiture of such amount.
- If an advance has been received and has been outstanding for a considerable period of time, there is no requirement to report such amount unless and until it is forfeited by an act of the assessee.
- Only forfeiture of amounts received as advance towards transfer of a capital asset is required to be reported under this clause.
- Any advances received and forfeited towards sale of stock-in-trade would be taxable under section 28(i), and would not be required to be reported since the amount would be credited to profit & loss account.