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ADVANCE MONEY UNDER SALES AGREEMENT

ca tarun sharma (SERVICE) (277 Points)

13 November 2009

if there is n agreement btwn seller & buyer of a property for transfer of such property 2 months later & buyer has given an advance money of rs 100000 aginst thst property but now seller refuse to sell the property & repay to buyer rs 200000.

now my question is

i) whether whole amnt of rs 200000 will be taxable in hand of buyer or a deduction of rs 100000 already paid to seller will be allowed

ii) if it is taxable then under which head capital gain or other source

please give d computation of taxable amnt

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4 Replies

Sunil (Trader) (2611 Points)
Replied 13 November 2009

It is Rs.1 lakhs is Income From Other Source. If he gave 1 Lakh Advance for Purchase and Got back 2, the amount of 1 lakh is like a compensation for cancelling the deal. The buyer has no property in his hands to transfer back and call it Capital Gain. 1 lakh is refund and 1 lakh is amount received other than for adequate consideration and taxed as IFOS.

In income tax computation:-

Advance Money Paid for MOU to Purchase Property.

Then you simply adjust 1 lakh to the advance paid as refund and in computation you show 1 lakh as compensation for cancelling MOU.

CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 14 November 2009

Yes, only Rs.1,00,000/- will be taxable under the head "Income From Other Sources".

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 14 November 2009

It would be sale of right and Rs. 100,000/- taxable under the head capital gains. The relevant case law:

‘Capital asset’ includes every kind of property as generally understood - The term ‘capital asset’ has an all embracing connotation and includes every kind of property as generally understood except those that are expressly excluded from the definition. So too, the meaning of the expression ‘property’. It includes every conceivable thing, right or interest or liability - Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681 (Kar.).

Sunil (Trader) (2611 Points)
Replied 14 November 2009

The right is created if there is an agreement to sell and the seller backs out. In this case it is a capital gain. However, on rescindment of an MOU that is signed just confirming the price, there is no right created to the aggrived buyer. What he is getting is a sort of a compensation that he will not file any suit to get the sale of property stopped. It is a matter of buying peace. Even if the buyer has no right for creation of the capital gain, he has a piece of paper to create nuisance value and therefore a settlement. The sellers new buyer will not go ahead with a transaction if he reads an advertisement in a newspaper that the aggrived byer may place. The buyer should have a document that has partially created a right to the property by a sale deed for a capital gain and therefore with MOU cancellation he cannot even adjust this gain with a carried forward capital loss. MOU is not conferring such rights to him. Normally when only a small amount is given, it is an MOU. An Agreement to Sell even without giving conveyance creates a right for the buyer. Therefore it depends on the document between Buyer & Sellers. Sellers who have intentions of fishing for a better deal are very smart in what documents they sign.