income tax

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DEEPAK GOYAL (Querist)
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23 April 2009 one of my client received Rs. 5 Laks in Feb 09 against token money for sale of plot, but today buyer refuse to purchase the plot because he haven't sufficient amount to pay. now my client(seller) forfitt the whole amount. could any body tell me, what will be the treatment of this amount in income tax.
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taxindiaconnect

taxindiaconnect (Expert)
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23 April 2009 It is important to note that the following conditions are necessary to attract section 41(1) of the Act:
(a) an allowance or deduction has been made in respect of trading liability incurred by the assessee, and
(b) some benefit in respect of such trading liability by way of remission or cessation thereof has been obtained.
The amount received through cancellation of a contract of sale of capital assets do not constitute trading liability in the hands of the recipient as the same have not been incurred on account of a trading transaction but constitute a receipt on capital account. Further, no allowance or deduction has been claimed earlier by the recipient in respect of such liability while computing its taxable income for any of the years. The benefit accruing to the recipient as a result of termination of sale contract cannot be said to be on account of a trading liability for which an allowance or deduction had been made.
As discussed, amount so received can be brought to tax under the provisions of section 41(1) of the Act, only if a deduction has been allowed in respect of the liability in any previous year. Thus the amount received on account of termination of the sale contract sould be only a capital receipt not liable to tax.