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House Property - Case study

swapnil (CA Final) (598 Points)

31 October 2010

if suppose father has an house, and he is plan 2 sales this house 4 Rs.1,20,00,000, he also find the buyer and buyer has paid 20,00,000/- as token money, but 10 days after buyer not agree or not interested 2 purchase this house, than father had immediatly forfeited the token money amt to Rs.20,00,000/-

2-3 month after, father has transfer this house to his son as a gift. so at now his son is owner of the house. son has immediatly sell this house.

than my quetion is what is the treatment for token money amt to Rs.20,00,000/- received by father from the buyer to forfeited the money. The amt to Rs.20,00,000 is deducted from the cost of the house or not, when his son has sell this house.

This is a practical case study in my life, which i share with u,

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15 Replies

Narayanan (Chartered Accountant) (189 Points)
Replied 31 October 2010

Absolutely, u must adjust the deposit against the cost of acquisition of the father... if he has bought it before 1.4.81, then adjust it against the FMV... one of the weirdest provisions of the IT Act, but thats how it goes...

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CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 01 November 2010

As Answered by Narayanan, it shall be deducted from the original cost of the house.

Suppose the cost of house is Rs. 50,00,000 then after the adjustment of forfeited amount, it shall be Rs. 30,00,0000.

CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 01 November 2010

You Can refer Section 51 of the Act, " Treatment of Advance of money received"

CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 01 November 2010

Also, please note the situation when the amount of such forfeited money is more then the cost of acquisition.If it so, such excess over the "cost of acquisition" of asset, shall be a CAPITAL RECEIPT NOT TAXABLE .

dinesh (B.com,CS student) (169 Points)
Replied 03 November 2010

i agree with narayanan

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CA PARAS BAFNA (Practising CA ) (33428 Points)
Replied 11 November 2010

1. Section 51 refers to the advance or other money received and retained by the assessee. It does not

refer to advance forfeited by the previous owner.

2. Section 49(1) makes it clear that where the capital asset became the property of the assessee under a gift or will

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred by the previous owner or by the assessee, as the case may be.

Section 49(1) strictly prohibits any other adjustment while deciding the cost to previous owner.

From the above, it can be concluded that Rs 20.00 lac can not be deducted from the cost of acquisition when the previous owner had forfieted the money.

bhavna (ca-final student) (120 Points)
Replied 11 November 2010

first of all it is a case of capital gain n not house property....sorry for being rude but ye silly mistake 4m a CA student is not accepted.

I totally agree with Paras Sir.

the act says 'if any advance money is forfeited by the ASSESSEE.......................... "

aage kya likha hai totally irrelevant.

Narayanan (Chartered Accountant) (189 Points)
Replied 11 November 2010

Very interesting point laid out by Mr. Paras... has enlivened the discussion!!!

But in my view, the cost of acquisition as defined u/s 49 is to be supplemented by section 51, simply because of the chronological order of the sections and keeping in mind the principle of taxation... the intent is simply that what the prev owner wud ve done had he held the asset, the same thing wud be applicable for the successor... Moreover, section 49 does not override section 51, and hence 51 is to be applied with 49...

and as for the "assessee" confusion, the prev owner's cost of acquisition is what is defined with sec 49 + 51... so the advance forfeited is part of HIS cost of acquisition... and so thats what is deemed to be the cost of acquisition for the successor...

In any case, this is a purely subjective matter... and in such cases i really believe that rather than looking into the wordings or the missing links in the act, the intention is to be given prime importance...

If someone can get some relevant case laws on this, it might help the cause...

bhavna (ca-final student) (120 Points)
Replied 12 November 2010

Cost with reference to certain modes of acquisition.

49. [(1)] Where the capital asset became the property of the assessee—

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;

(ii) under a gift or will;

(iii) (a) by succession, inheritance or devolution , or

(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987, or]

(d) under a transfer to a revocable or an irrevocable trust, or

(e) under any such transfer as is referred to in clause (iv) [or clause (v)] [or clause (vi)] [or clause (via)] [or clause (viaa)] [[or clause (vica) or [clause (vicb)] of section 47];

(iv) such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969,]

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

the act does not say any thing about the treatment of advance money forfeited by the previous owner.

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.

In this section forget about the treatment of advance money forfeited by the previous owner, "PREVIOUS OWNER" ye word to entire section me kahin use bhi nahi hua hai.