As per section 51 of the I.T act, 1956, where an assesse in process of selling any capital asset, receives advance money or any other sum, forfeits such amount, then the cost of acquisition of such capital asset shall be reduced by the amount of money forfeited earlier by the assesse . The point to be noted is that the amount has to be reduced before indexation where the capital gain is long term.

However, if the advance money forfeited exceeds the cost of asset, excess shall be capital receipt not chargeable to tax as decided in the case of Travancore Rubber & Tea Co. ltd. Whenever the asset is actually transferred, the cost of acquisition in such a case shall be taken as NIL and capital gain shall arise accordingly