Where a capital asset was on a previous occasion the subject of negotiations for its transfer and the assessee received and retained advance or other money in respect of those negotiations, clause (a) requires that money to be deducted from the cost of acquisition, the written down value or the fair market value, as the case may be, when computing the cost of acquisition. Clause (b) switches that off where the same advance or other money has already been included in the assessee's total income for any tax year under section 92(2)(h) of this Act or section 56(2)(ix) of the Income-tax Act, 1961.
Why it is there
Forfeited advance money is a benefit the assessee has kept without parting with the asset; reducing the cost of acquisition recovers it when the asset is eventually sold. Clause (b) prevents the same sum being taxed twice where it has already been charged as income on forfeiture.
Who it applies to
An assessee who received and retained advance or other money on earlier negotiations for the transfer of a capital asset
What this means in practice
When you eventually compute capital gains on the asset, go back through earlier aborted sale negotiations: any advance received and retained comes off the cost, the written down value or the fair market value used as the starting point. The one thing to check first is whether that advance was already taxed as income — under section 92(2)(h) of this Act or section 56(2)(ix) of the 1961 Act — because if it was, clause (b) says it is not deducted again.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
A firm bought a plot for Rs. 40 lakh. Two years before selling it, negotiations with an earlier intending buyer collapsed and the firm kept the Rs. 5 lakh advance it had received. On the eventual sale, clause (a) requires that Rs. 5 lakh to be deducted from the Rs. 40 lakh, so the cost of acquisition becomes Rs. 35 lakh and the taxable gain is Rs. 5 lakh larger. But if that Rs. 5 lakh had already been charged as income on forfeiture under section 92(2)(h) of this Act — or under section 56(2)(ix) of the Income-tax Act, 1961 — clause (b) blocks the deduction and the cost stays at Rs. 40 lakh, so the amount is taxed once and not twice.
Where you meet this section
You meet it inside a capital gains computation, at the cost of acquisition line of the return, and in an assessment order where the Assessing Officer reduces that cost by an advance forfeited on earlier negotiations. It is never a proceeding of its own.
The words themselves
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) of this Act or section 56(2)(ix) of the Income-tax Act, 1961
Section section 81(b), Income-tax Act, 2025.
What people get wrong
Deducting an advance that has already been taxed on forfeiture. Clause (b) excludes it, and deducting anyway taxes the same amount a second time through a reduced cost.
Overlooking the express reference to section 56(2)(ix) of the Income-tax Act, 1961 — advances taxed under the earlier Act are within clause (b).
Applying it only to money received from the eventual buyer. The clause covers any previous occasion of negotiations for transfer, whoever the counterparty was.
Deducting an advance that was received but not retained — the text requires the money to have been received and retained.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
F.No. 275/192/2018-IT (B) — Income-Tax Deduction from Salaries during the Financial Year 2018-19 under Section 192 of the Income-tax Act, 1961 2019-02-08
Circular No. 617 — 1065. Clarification regarding extension of applicability to interest on time deposits with banks 1991-11-22
Circular No. 64 — 594. Whether natonalised banks would be regarded as banking companies for the purposes of deduction of interest on deposits with t 1971-08-25
Circular No. 42 — 1072. Banks exempted from deducting tax at source from interest paid on deposits under clause (vii) of sub-section (3) from 1-4-19 1970-06-20
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 81. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.