Finance minister Arun Jaitley has quietly introduced provisions in the Finance Bill, 2014, to plug a loophole in the income tax law that is rampantly used to legitimise unaccounted wealth using bogus real estate sale deeds.

Henceforth, advance received for sale of property, if forfeited by the buyer due to not honouring the purchase agreement, shall be treated as taxable income in the hands of the purported seller, not as capital receipts.

Tax practitioners say this effectively puts an end to the practice of exchange of unaccounted wealth in cash for a legitimate cheque of equal amount between purported sellers and colluding buyers after which only the receipt of the cheque is recorded in bogus sale agreements as advance received for sale of property.

At the end of the term of the agreement, the buyer does not honour the purchase deal as per the understanding with the other party, allowing the seller to keep the cheque as legitimate advance forfeited by the buyer. The bogus buyer does not lose anything as he had already received cash— although unaccounted — in exchange of the cheque of equal amount he had given, explained a tax practitioner.

As per the proposed amendments to sections 56 and 24 of the Act, such receipts need to be shown by the recipient as income from other sources.

“Proposed amendments to Section 56 of the Income Tax Act effectively put a lid to this rampant practice of laundering unaccounted wealth. The amendment also prevails over certain judicial pronouncements that endorsed the existing treatment of advance received for sale of property and its subsequent forfeiture as a capital receipt,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.

The Finance Bill 2014 also proposed an amendment to section 51 so that these income receipts will not be taxed twice. At present, advance received for property sale treated as capital receipt need to be reduced from the cost of acquisition of the asset so that if it is eventually sold, capital gains tax is levied on the difference between the sale price and the reduced cost of acquisition. As per the proposed amendments, an advance receipt treated as income shall not be reduced from the cost of acquisition henceforth. The changes will come into force from the financial year starting April 1, 2014. (Financial Express)