Section 51 of ITA, 1961 : Section 51: Advance Money Received

Explanation using Example

Imagine Mr. Sharma enters into negotiations to sell his plot of land in 2021. The potential buyer gives him an advance of INR 10 lakhs to hold the property, but the deal falls through, and Mr. Sharma keeps the advance. Later in 2023, Mr. Sharma sells the land to someone else for INR 60 lakhs. The original cost of the land was INR 40 lakhs.

According to Section 51 of the Income-tax Act, 1961, when calculating the capital gains on the sale of the land, Mr. Sharma should deduct the advance retained (INR 10 lakhs) from the cost of acquisition (INR 40 lakhs). So, the cost of acquisition for the purpose of calculating capital gains would be considered as INR 30 lakhs (INR 40 lakhs - INR 10 lakhs). This would mean that the capital gains would be calculated as INR 30 lakhs (INR 60 lakhs sale price - INR 30 lakhs adjusted cost).

However, if that advance of INR 10 lakhs had already been included as income in Mr. Sharma's total income in the year 2021 under the provisions of clause (ix) of sub-section (2) of section 56, then he cannot deduct this amount again while computing the cost of acquisition for the land in 2023.