Section 81
Section 81: advance money received
Section 81 deals with money an assessee received and kept (forfeited) from an earlier round of negotiations to sell a capital asset, where that particular deal later fell through. It reduces the cost of acquisition of the asset when it is eventually sold - unless the forfeited amount was already taxed separately as income from other sources.
How the forfeited advance is treated
Where a capital asset was, on an earlier occasion, the subject of negotiations for its transfer, any advance or other money the assessee received and retained (kept) in connection with those negotiations is:
- Deducted from the cost for which the asset was acquired, or from its written down value or fair market value (as applicable), when computing the cost of acquisition for a later transfer; but
- Not deducted from that cost if the advance/money has already been included in the assessee's total income for any tax year under Section 92(2)(h) of this Act, or under Section 56(2)(ix) of the Income-tax Act, 1961.
Frequently asked questions
What happens to a forfeited advance from a deal that fell through when I later sell the asset?
It reduces the cost of acquisition used to compute capital gains on the eventual sale, per Section 81(a) - unless that amount was already taxed separately as income from other sources.
Can the same forfeited advance be taxed twice?
No - Section 81(b) prevents double taxation by not reducing the cost of acquisition where the advance was already included in total income under Section 92(2)(h) of this Act or Section 56(2)(ix) of the old 1961 Act.
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