Amount spent to make property habitable allowable as deduction from Capital gain

Komal Gurumukh Sangtani Vs ITO (ITAT Mumbai)

Section 48-  Capital gains – Cost of improvements- 

The assessee always pleaded that the purchase of various items as tabulated supra were made in order to make the house habitable and proper for living condition which is very normal and would be incurred by every citizen of the country who is purchasing a property from a builder.

From the perusal of the list of expenses incurred as stated supra, we find that majority of the items are embedded to the wall and becomes part and parcel of the building itself which is subject matter of sale by the assessee and her husband. Of course in the said list, items like refrigerator, air conditioner, LED Tvs, furnitures, dining tables etc., would certainly fall under the ambit of “personal effects” not liable for deduction. However, in respect of remaining items, the assessee would certainly be eligible for deduction as it becomes an integral part of the building.

It is not in dispute that majority of the items were also purchased by making payments in cheques through regular banking channels as stated earlier. It is not in dispute that assessee never carried on any business and accordingly not liable for any tax audit. Hence, there is no bar for the assessee to incur certain expenditures for the purpose of house in cash. As long as the source for the said cash payment is explained from the disclosed income of the assessee, no fault could be attributed on the assessee. It is not a case of the Revenue that the assessee alongwith her husband did not have sufficient cash or cheque source to make the aforesaid payments. Hence, the aforesaid payments cannot be summarily disbelieved by the Revenue. In view of the aforesaid observations, we hold that assessee would be eligible for deduction along with her husband totaling to Rs.9,68,575/- towards cost of improvement made in the house which has to be reduced while computing capital gains in the hands of the assessee as well as in the hands of her husband. The assessee along with her husband would also be eligible for due indexation benefit on the same.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These appeals in ITA No.1200/Mum/2020 & 1201/Mum/2020 for A.Y.2010-11 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-45, Mumbai in appeal No. CIT(A)-45/ ITO-33(1)(3)/ITA-40/2017-18 & CIT(A)-45/ITO-33(2)(2)/ITA-98/2017-18 dated 26/07/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/11/2017 & 27/12/2017 respectively by the ld. Income Tax Officer 33(1)(3), Mumbai (hereinafter referred to as ld. AO).

Identical issues are involved in both these appeals and hence, they are taken up together and disposed of by this common order for the sake of convenience.

2. None appeared on behalf of the assessee. We proceed to dispose of these appeals by hearing the ld. DR and after perusing the materials available on record.

2.1. Let us take up the appeal of the assessee in ITA No.1200/Mum/2020 for A.Y.2010-11 in the case of Komal Gurumukh Sangtani.

3. We have heard the ld. DR and perused the materials available on record. We find that assessee is an individual NRI and had not filed her return of income u/s.139 of the Act for A.Y.2010-11. The assessee had entered into a property transaction during the year along with her husband resulting in capital gains. Since, no return of income was filed, the ld. AO reopened the assessment after issue of notice u/s.148 of the Act. The facts that are relevant for the purpose of adjudication of the issue of capital gains are as under:-

3.1. The assessee purchased two residential flats jointly with her husband Shri Gurumukh I Sangtani in the building known as “The Breezy Corner”, Mahavir Nagar, Kandivili (W), Mumbai. The details of the said purchases are as under:-

3.2. The ld. AO observed that the main source of purchase of this property was housing loan availed from HDFC Ltd., on 06/05/2006 for Rs.30,00,000/-. The assessee is 50% owner of the subject mentioned properties and remaining 50% is held by her husband.

3.3. These properties were sold by the assessee together with her husband during the year under consideration as under:-

3.4. The assessee in the return of income filed in response to notice u/s.148 of the Act offered capital gains but also claimed certain expenditure on account of purchase of furniture and fixtures and interest paid on housing loan adding to the cost of acquisition and cost of improvement to the property. The assessee was asked to file the copies of evidence for purchase of furniture and fixtures and proved all the payments made for the same together linking the said payments with the bank statements. The ld. AO observed that assessee vide letter dated 28/11/2017 expressed inability to provide copy of bank account. However, the assessee filed the following bills which are described as hereunder:-

3.5. The ld. AO issued notice u/s. 133(6) of the Act to the aforesaid suppliers and observed that no replies were received from the said parties. Accordingly, the ld. AO did not give deduction towards cost of improvement of property in respect of the aforesaid items and correspondingly denied the benefit of indexation also thereof claimed by the assessee while computing the long term capital gains. Similarly, the assessee also claimed the interest paid on housing loan to HDFC Ltd., as part and parcel of cost of acquisition eligible to be deducted while computing capital gains. The ld. AO observed that assessee had given the loan account No.1910036 dated 06/05/2006 wherein the EMI amount of Rs.62,276/- was duly mentioned. Since assessee could not provide the entire repayment schedule and the appropriation of EMI towards principal and interest portion thereof by HDFC Ltd., and that the assessee had bifurcated the interest by her own calculations by arriving at the interest figure of Rs.19,233/- per month on fixed amount basis, the ld. AO disbelieved the same and did not give deduction towards interest on housing loan to be part and parcel of cost of acquisition while computing capital gains. The ld. AO also observed that assessee would have claimed interest on housing loan as a deduction under the head ^„income form house property‟ u/s.24 of the Act in the returns of income. Accordingly, he observed that assessee is not entitled for deduction u/s.48 of the Act while computing capital gains. With these observations, he denied the benefit of deduction and correspondingly, the indexation benefit thereon on the interest paid on housing loan component while computing capital gains.

3.6. The assessee always pleaded that the purchase of various items as tabulated supra were made in order to make the house habitable and proper for living condition which is very normal and would be incurred by every citizen of the country who is purchasing a property from a builder. The notices u/s.133(6) of the Act issued by the ld. AO to the concerned suppliers were duly served and the suppliers had not responded to the same. The assessee is merely an individual not liable for any tax audit and not having any business income. It is quiet usual for an assessee to make payments in cash for the purchase of the aforesaid items. With regard to interest cost, the assessee pleaded that the ld. AO having accepted the fact that assessee together with her husband availed housing loan from HDFC Ltd., on 06/05/2006 for Rs.30,00,000/- and had also furnished the loan account details thereon , ought to have granted deduction towards interest. Even assuming if the interest component has been wrongly calculated by the assessee on fixed monthly basis, still the same is very much workable by the ld. AO himself and even that figure was not granted deduction by the ld. AO. The said figure could have easily been obtained by the ld. AO from HDFC Ltd., also by calling for information u/s 133(6) of the Act. The assessee vehemently pleaded that without incurring the aforesaid expenses as tabulated in the table, the flats purchased by it would not be habitable at all. Accordingly, the aforesaid costs would form an integral part of the total amount invested for acquisition of the house property. The assessee also placed reliance on the decision of Ahmedabad Tribunal in the case of Shrinivas R Desai Vs. ACIT reported in 155 TTJ 743 (Ahd) in support of its contentions. The assessee also pleaded before the ld. CIT(A) that the following expenditures were incurred by the assessee towards improvement of the house through regular banking channels:-

3.7. All the aforesaid payments were made by cheques routed through regular banking channels. The ld. CIT(A) simply brushed aside the entire contentions of the assessee by stating that the aforesaid expenditures were incurred only on account of personal effects and the same would not be eligible to get added to the cost of acquisition or cost of improvement of the property and consequently not eligible for deduction while computing capital gains. With regard to claim of deduction towards interest of housing loan to be added to the cost of acquisition, the ld. CIT(A) upheld the action of the ld. AO.

3.8. At the outset, from the perusal of the list of aforesaid expenditure as detailed in the 3^rd table supra, we are in complete agreement with the arguments advanced by the assessee before the lower authorities with the aforesaid expenses were incurred only in order to make the house habitable. From the perusal of the list of expenses incurred as stated supra, we find that majority of the items are embedded to the wall and becomes part and parcel of the building itself which is subject matter of sale by the assessee and her husband. Of course in the said list, items like refrigerator, air conditioner, LED Tvs, furnitures, dining tables etc., would certainly fall under the ambit of “personal effects” not liable for deduction. However, in respect of remaining items, the assessee would certainly be eligible for deduction as it becomes an integral part of the building. Accordingly, out of the total sum of Rs.14,54,375/- as tabulated supra, we hold that the following items would not be eligible for deduction to be treated as cost of acquisition / cost of improvement u/s.48 of the Act:-

3.9. It is not in dispute that majority of the items were also purchased by making payments in cheques through regular banking channels as stated earlier. It is not in dispute that assessee never carried on any business and accordingly not liable for any tax audit. Hence, there is no bar for the assessee to incur certain expenditures for the purpose of house in cash. As long as the source for the said cash payment is explained from the disclosed income of the assessee, no fault could be attributed on the assessee. It is not a case of the Revenue that the assessee alongwith her husband did not have sufficient cash or cheque source to make the aforesaid payments. Hence, the aforesaid payments cannot be summarily disbelieved by the Revenue. In view of the aforesaid observations, we hold that assessee would be eligible for deduction along with her husband totaling to Rs.9,68,575/- towards cost of improvement made in the house which has to be reduced while computing capital gains in the hands of the assessee as well as in the hands of her husband. The assessee along with her husband would also be eligible for due indexation benefit on the same.

3.10. With regard to deduction claimed on account of interest on housing loan, though the ld. AO had accepted the fact that assessee and her husband had indeed availed housing loan from HDFC Ltd., at Rs.30,00,000/- for purchasing two flats, the assessee could not produce the EMI chart evidencing the total payment of principal and interest portion made to HDFC Ltd., But we also find that assessee had also claimed deduction on account of interest on housing loan of Rs.75,000/-under the head ^„income from house property‟. Hence, there is a possibility that the assessee could have claimed the interest on housing loan both under the head ^„income from house property‟ as well as trying to take further benefit by adding it to the cost of acquisition while computing capital gains. This doubt has been rightly raised by the ld. AO in the assessment order. We find that this fact has not been clarified by the assessee even before the ld. CIT(A). However, since this matter requires factual verification, we deem it fit and appropriate to remand this aspect of the issue alone i.e. claim of interest on housing loan to be treated as cost of acquisition of Rs.5,49,454/- while computing the capital gains to the file of the ld. AO for denovo verification in accordance with law. The assessee is at liberty to furnish further evidences in support of her / his contentions in this regard. Needless to mention that the assessee and her husband be given reasonable opportunity of being heard with regard to adjudication of this issue.

3.11. Accordingly, the ground No.1 raised by the assessee is partly allowed and ground No.2 raised by the assessee is allowed for statistical purposes.

4. The decision rendered hereinabove in ITA No.1220/Mum/2020 shall apply mutatis mutandis in the case of Gurumukh I Sangtani in ITA No.1221/Mum/2020 in view of identical facts and grounds.

5. In the result, both the appeals are partly allowed for statistical purposes.

Order pronounced on 14/07/2022 by way of proper mentioning in the notice board.