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CA Final · Direct Tax Laws & International Taxation · Income from Other Sources

Meera Iyer agreed to sell a plot to Karan Shah, who paid Rs. 5,00,000 as advance during negotiations. Karan backed out, and Meera forfeited the advance. The plot was held by Meera as a capital asset. How is the forfeited Rs. 5,00,000 taxed in Meera's hands?

The Rs. 5,00,000 is taxable as income from other sources. The law charges an advance received during negotiations for transfer of a capital asset when it is forfeited and the negotiations fail to result in transfer. Both conditions are satisfied, so capital receipt treatment is not available.

  1. AAs income from other sources, because the sum was forfeited and the negotiations did not result in transferCorrect
  2. BNot taxable, since it is a capital receipt
  3. CAs capital gains, reducing the cost of the plot
  4. DTaxable only if the advance exceeds Rs. 50,000 of stamp duty value

Explanation

The Act charges under income from other sources any sum received as advance during negotiations for transfer of a capital asset, if it is forfeited and the negotiations do not result in transfer. Both conditions are met here. Treating it as a non-taxable capital receipt is the key error, since this clause specifically brings it into this head.

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