Advance money received
81
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––
(a) 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;
(b) shall not be deducted from the said cost, where such advance or other money has been included in the total income of the assessee for any tax year as per the provisions of section 92(2)(h).
Section Summary:
Section 81 of the new income tax law deals with the treatment of advance money received during negotiations for the transfer of a capital asset. It specifies how such advances should be accounted for when calculating the cost of acquisition of the asset. This section ensures that any advance money retained by the taxpayer is either deducted from the cost of acquisition or excluded from such deduction if it has already been taxed as income.
Key Changes:
Clarification on Advance Money Treatment: The section explicitly states how advance money received during negotiations for the transfer of a capital asset should be treated in two scenarios:
- Deducted from the cost of acquisition, written down value, or fair market value.
- Not deducted if the advance money has already been included in the taxpayer's total income under Section 92(2)(h).
Alignment with Section 92(2)(h): The section now clearly links the treatment of advance money to its inclusion in total income under Section 92(2)(h), ensuring consistency in tax treatment.
Practical Implications:
For Taxpayers: Taxpayers who receive advance money during negotiations for the sale of a capital asset must carefully track whether this amount has been included in their total income. If it has, they cannot deduct it from the cost of acquisition. If it hasn’t, they must deduct it to compute the correct cost of acquisition.
For Businesses: Businesses involved in the sale of capital assets must ensure proper documentation of advance money received and its tax treatment to avoid discrepancies during tax assessments.
Critical Concepts:
- Cost of Acquisition: The original cost incurred to acquire the capital asset, adjusted for certain factors like advance money received.
- Written Down Value (WDV): The value of an asset after accounting for depreciation, used primarily for depreciable assets.
- Fair Market Value (FMV): The price at which the asset would change hands between a willing buyer and seller in an open market.
- Section 92(2)(h): A provision that includes certain types of advance money in the taxpayer’s total income if specific conditions are met.
Compliance Steps:
- Track Advance Money: Maintain records of any advance money received during negotiations for the transfer of a capital asset.
- Determine Tax Treatment: Check whether the advance money has been included in total income under Section 92(2)(h).
- Adjust Cost of Acquisition:
- If the advance money is not included in total income, deduct it from the cost of acquisition, WDV, or FMV.
- If the advance money is included in total income, do not deduct it from the cost of acquisition.
- Document and Report: Ensure proper documentation and reporting in tax returns to reflect the correct cost of acquisition.
Examples:
Scenario 1: Mr. A receives ₹10 lakh as an advance during negotiations to sell a property. This amount is not included in his total income under Section 92(2)(h). When calculating the cost of acquisition for capital gains, he deducts ₹10 lakh from the original cost of the property.
Scenario 2: Ms. B receives ₹5 lakh as an advance during negotiations to sell a plot of land. This amount is included in her total income under Section 92(2)(h). She cannot deduct ₹5 lakh from the cost of acquisition when computing capital gains.
This section ensures clarity and consistency in the treatment of advance money, helping taxpayers and businesses comply with tax laws effectively.