Identify the two conditions before treating a deposit as income
For FY 2025–26/AY 2026–27, section 56(2)(ix) of the Income-tax Act, 1961 addresses money received as an advance or otherwise during negotiations to transfer a capital asset where the money is forfeited and the negotiations do not result in transfer. Both facts matter. A company holding a refundable advance has not established forfeiture merely because negotiations are slow. An advance applied against a completed transfer requires the sale computation, rather than automatic taxation again as a failed-negotiation receipt.
Read the applicable text: Income-tax Act, 1961: sections 51 and 56(2)(ix) Department transition FAQs CBDT: ITR-6 for AY 2026–27 Income Tax Department: forfeited advances and the FY 2014–15 commencement.
Separate the legal asset from its ledger description
Confirm that the proposed disposal concerned a capital asset. A property developer’s trading inventory, an ordinary customer service advance or a contractual damages receipt cannot be put into this clause simply because the ledger calls it an earnest-money deposit. Record ownership, investment or business-use classification, proposed transaction and correspondence. This guide concerns the recipient company’s evidence and computation, not the payer’s deductibility, GST, cash-receipt restrictions or enforceability of a forfeiture clause. Those questions need separate analysis.
Establish when and how much was forfeited
Prepare a receipt-to-settlement timeline showing each receipt, refundable balance, agreed refund, forfeited amount and actual refund payment. Preserve the contract, cancellation or termination notice, settlement and any live dispute. Receipt in an earlier financial year does not by itself establish that forfeiture occurred then. A unilateral accounting transfer from liability to income is not a substitute for examining the rights. Where forfeiture or cancellation is disputed, determine the position on the facts rather than treating every retained balance as conclusively taxable under this clause.
Prevent a second charge through reduced capital cost
Section 51 ordinarily addresses advances or other money received and retained from earlier negotiations by reducing the acquisition cost, written down value or fair market value used as the cost base, as applicable. Its proviso prevents that reduction where the sum has been included in total income under section 56(2)(ix). Maintain an asset-linked history of amounts included in tax computations and their assessment years. Do not assume every old forfeiture has the same treatment: the date, provision applicable then and actual prior inclusion matter. The register should distinguish earlier sums subject to the main cost-reduction rule from sums protected by the proviso.
Reconcile book income and the later disposal separately
A forfeiture credited in profit and loss and already included in the computation must not be added a second time merely to show the legal section. For ITR-6, reconcile a receipt chargeable under section 56(2)(ix) to Schedule OS and remove the same book credit from the business-income starting profit where applicable; the head-of-income reclassification must not duplicate or omit income. Conversely, a qualifying forfeiture remaining in a liability ledger needs reconciliation to the tax computation. On a later asset sale, establish the correct cost independently, including the section 51 history, rather than copying a net ledger asset balance that has already absorbed the receipt. These examples exclude indexation, exemptions, special deemed consideration and tax-rate computations; they illustrate the receipt and cost bridge only.
Use the income-period law
The Department’s transition guidance confirms that FY 2025–26 returns remain governed by the 1961 Act even when filed after 1 April 2026. Do not mechanically apply these section numbers to a fresh Tax Year 2026–27 receipt. The later disposal illustration below is a computation model, not a statement that all future sales remain governed by the old Act. Retain the historical inclusion evidence so the law applicable to the later sale can be applied without taxing the same retained money through an unsupported cost reduction.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Entire advance forfeited
A company receives ₹3,00,000 during negotiations to sell a capital asset. Both statutory conditions are established in FY 2025–26 and nothing is refundable. The section 56(2)(ix) amount is ₹3,00,000. If the asset’s tax cost is ₹12,00,000, that taxed sum does not reduce cost to ₹9,00,000 under section 51’s proviso.
Illustrative example 2: Part-refund settlement
Receipts total ₹5,00,000. A supported settlement refunds ₹2,00,000 and forfeits ₹3,00,000 after the negotiations fail without transfer. The qualifying forfeiture is ₹5,00,000 − ₹2,00,000 = ₹3,00,000. The gross receipt is not automatically the taxable amount.
Illustrative example 3: Receipt year differs from forfeiture year
₹4,00,000 received in FY 2024–25 remains refundable at that year-end. Forfeiture and failed negotiations are established in FY 2025–26. On those assumed facts, the earlier refundable closing liability is ₹4,00,000 and the current qualifying income is ₹4,00,000. The original bank-credit date alone does not establish earlier forfeiture.
Illustrative example 4: A completed transfer uses the advance as part of price
A short-term non-depreciable investment asset is sold for ₹12,00,000, including an earlier ₹4,00,000 advance and ₹8,00,000 final payment. Tax cost is ₹7,00,000 and eligible transfer costs ₹50,000. The ordinary gain is ₹4,50,000. The completed negotiations do not also generate ₹4,00,000 failed-transfer income under this clause.
Illustrative example 5: Historical cost-reduction cohort
Assume a ₹1,00,000 negotiation receipt forfeited in FY 2013–14 is established to fall under section 51’s main rule; it predates section 56(2)(ix), which applies from AY 2015–16. Original tax cost ₹10,00,000 becomes ₹9,00,000. In a simplified disposal in March 2026 for ₹15,00,000 with no other adjustments, the resulting gain is ₹6,00,000. This assumption must be supported by the historical law and evidence, not inferred from age alone.
Illustrative example 6: Book credit already included
Profit before tax ₹20,00,000 already includes a qualifying ₹3,00,000 forfeiture. Assuming the remaining ₹17,00,000 is ordinary business income with no other adjustments, the reclassification is business income ₹17,00,000 plus Schedule OS forfeiture income ₹3,00,000. Total income remains ₹20,00,000, not ₹23,00,000. The asset history separately marks ₹3,00,000 as included under section 56(2)(ix) so a later cost computation does not reduce the relevant base again.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the income period | FY/AY and applicable Act. |
| 2 | Confirm capital-asset character | Asset register and transaction purpose. |
| 3 | Trace the original receipts | Contract and bank entries. |
| 4 | Establish failed negotiations | Termination and no-transfer evidence. |
| 5 | Establish forfeiture | Enforceable rights and settlement documents. |
| 6 | Split refunded and retained sums | Receipt-to-settlement schedule. |
| 7 | Check prior tax inclusion | Filed computations and relevant orders. |
| 8 | Apply section 51 history | Asset-linked taxed/non-taxed cohorts. |
| 9 | Reconcile book and tax income | One inclusion with no duplicate addition. |
| 10 | Preserve later-sale evidence | Cost register and reviewed reporting trail. |
Sixteen practitioner FAQs
1. Is every retained deposit forfeited?
No. Examine the rights and settlement rather than retention alone.
2. Must negotiations fail without transfer?
Yes, that is one of the clause’s express conditions alongside forfeiture.
3. Does the clause only apply to individuals?
Its text is not limited that way; the examples concern recipient companies.
4. Is trading inventory automatically a capital asset?
No. Determine the asset’s legal character before applying this clause.
5. Is an ordinary service advance covered just because cancelled?
Do not assume so; this clause concerns negotiations to transfer a capital asset.
6. Is receipt-year taxation automatic?
No. A refundable receipt and a later established forfeiture require a timeline analysis.
7. Can a liability-to-income journal prove forfeiture?
It is accounting evidence, not a substitute for examining the contractual facts.
8. How is a partial refund handled?
Reconcile gross receipts to the amount actually forfeited and the remaining refundable or repaid balance.
9. What if the advance becomes part of a completed sale price?
Account for the completed transfer under its governing computation, without automatically taxing the advance again under this failed-negotiation clause.
10. What does section 51’s proviso prevent?
Reducing the cost base again for the same sum already included under section 56(2)(ix).
11. Do all historical forfeitures escape cost reduction?
No. Check dates, applicable provisions and actual inclusion.
12. What evidence supports prior inclusion?
Filed computations, returns and applicable processing or assessment records linked to the receipt.
13. Should P&L forfeiture income always be added again?
No. Reconcile whether it is already included in the starting profit and tax computation.
14. Does this article decide the payer’s deduction?
No. That is a separate question with different facts and provisions.
15. Does a refundable balance disappear when talks are suspended?
Not automatically. Examine the contractual liability and subsequent events.
16. Which Act governs AY 2026–27?
The 1961 Act governs FY 2025–26 income; later Tax Year transactions need their own law mapping.
Official sources
Income-tax Act, 1961: sections 51 and 56(2)(ix) Department transition FAQs CBDT: ITR-6 for AY 2026–27 Income Tax Department: forfeited advances and the FY 2014–15 commencement