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Capital gain

Basavaraj (Associate) (147 Points)

11 September 2014

Please answer this ASAP.

Suppose I have purchased a land in 1990 for Rs.50000/- and in 1995 I entered into an agreement for sale which is not sold and I forfeited the sum of Rs 100000/-. Now in the year 2014 I'm selling the same land for Rs 3Crores .

What is the Tax liability in the above incidence .

We understand that as per Sec 51 the forfeiture amount must be deducted from the COA which further leads to the negative balance. So guide us with the computation.

Thank You.

Awaiting your response.

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6 Replies

Joswin Punchakunnel (Chartered Accountant) (314 Points)
Replied 11 September 2014

entire sale consideration shall be considered as long term capital gain.nothing to do with the -50000

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(Guest)

Greetings Basavaraj,

Here's my brief:

1. As per s/48 of the IT Act read with sec 51, your asset value is required to be taken as NIL.

You might want to refer to the decision in Smt Sunita N. Shah (2005) 94 ITD 492 (Mum) that is in line with the above statement.

2. Also, if excess of money is forfeited over the cost of acquisition, such asset shall be a capital receipt and not chargeable to tax .

The same was held in the case of Travancore Rubber & Tea Co. Ltd (2000) 243 ITR 158 (Supreme Court)

3. Consequently, Capital gains liable to tax for 31.3.14 will be as:

3cr - [ 50000 - (1 lakh restricted to 50,000) ]= = 3cr. If you have made any constructions on the property, take indexed cost and deduct accordingly.

On another note: Had you booked the 100000 as income of that year itself and paid tax accordingly, you would be well off right now by claiming an indexed cost on 50000 original purchase. The law is silent on this because the earnest money received by you is a capital receipt and not an income.

Hope it helped.

Regards

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