Rustom Homi Vakil Vs ACIT (ITAT Mumbai)
The appeal before the Income Tax Appellate Tribunal (ITAT) Mumbai in Rustom Homi Vakil vs ACIT concerned whether expenses incurred for making a newly purchased residential house habitable qualify for exemption under Section 54 of the Income Tax Act, 1961. The assessee, a contractor, sold tenancy rights in a residential property for ₹2 crore during the Assessment Year 2009–10. He invested ₹1.31 crore in a new residential property in Pune and claimed exemption of that amount under Section 54, including ₹14,26,705 spent on making the house habitable. The Assessing Officer (AO) disallowed this ₹14.26 lakh, treating it as “cost of improvement” allowable only when the property is sold, not at the time of purchase.
The AO observed that the assessee had claimed the following expenses toward the new property: ₹1.10 crore for purchase, ₹7.51 lakh for registration, stamp duty, brokerage, and legal charges, and ₹14.26 lakh as cost of improvement. The AO held that since the latter was incurred after the purchase, it did not qualify as cost of acquisition under Section 54. The expenditure was considered renovation rather than acquisition cost, and thus added back to taxable long-term capital gains.
Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee contended that the newly purchased house was in a dilapidated condition and needed repairs and restoration to be habitable. The amount of ₹14.26 lakh was spent on plumbing, electrical, painting, and other essential work, supported by contractor bills. He argued these expenses were necessary to make the house livable and should be included in the cost of the new asset under Section 54. The assessee also cited case laws including Saleem Fazalbhoy v. DCIT (ITAT Mumbai) and B.B. Sarkar v. CIT (Calcutta HC).
