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Capital introduction

CA. Abhinav (CA) (47 Points)

17 September 2013

Friends, I need an advise for a following case:

A partnership concern wishes to increase its capital as on 31-03-2013. For this one of the partner has consented to introduce capital in cash. This amount the partner has received after forfeiting advance received against sale of Land. The advance was also received in cash on various dates in the Last Previous Year. The Agreement to Sale made with forfeited party clearly had a clause that in case of non-payment of balance amount within 30days, the advance would be forfeited.

My query is that

1. Will this forfeiture result in Capital Gain or any kind of Tax?

2. Can this advance be introduced as partner's capital being in cash?

3. As an auditor, what precautions we should take if case is subjected to Scrutiny?

Hope you would reply soon. Thanks

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2 Replies

Ramakrishna Kamat (CA) (76 Points)
Replied 17 September 2013

The amount forfeited is not taxable if the land was held as capital asset. The amount is to be deducted from the cost of acquisition when the property is eventually sold. Please refer section 51 of Income tax act.

Advance money received.

51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.