Cost of consumable cannot be claimed as cost of improvement of Capital Assets

Meeta Hasmukh Gandhi Vs ITO (ITAT Mumbai)

From the details, it is evident that assessee is claiming cost of improvement, which are consumable items on account of furnishing sofa etc. The authorities below are correct that these items cannot be considered as cost of improvement for computation of capital gain.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-38 dated 29.05.2019 and pertains to assessment year 2016-17.

2. Grounds of appeal read as under:-

1. On the facts in the circumstances of the case and in law, the ld.CIT(A) has erred in upholding the addition of a sum of Rs. 5,09,120/- made u/s. 68 by considering cash deposits as cash credits.

2. On the facts, in the circumstances of the case and in law, the Ld CIT-A has further erred in upholding the disallowance of indexed cost of improvement consisting of Repairs, renovation, furniture and fixtures amounting to Rs.24,47,045/- while Computing capital gain/ loss on sale of house property.

3. Alternatively, the Ld. CIT-A has erred in not allowing indexed cost of furniture and fixture as a deduction as the agreement for sale specifically mentioned that the sale of premises was along with furniture and fixtures and a sale consideration included the value of furniture and fixture.

3. Apropos ground No.1, the issue of addition u/s.68

On this issue on verification of details of bank statement submitted by the assessee during the scrutiny assessment proceedings, it was seen by AO that during the year under consideration, the assessee has made certain cash deposits in his bank accounts maintained with Kotak Mahindra Bank Ltd. and Aixs Bank Ltd. The details of which are as under.

4. Before the AO assessee submitted year wise opening and closing cash balance and made following submission. This was noted by AO are as under:-

“In this regard, the assessee has submitted a year wise opening and closing cash balance and its average per year and accordingly worked out the average cash balance of 5 years starting from FY 2012-13 to 2016-17 at Rs.7,63,455/-. In this regard, the assessee submitted that if the average cash balance is considered to be the opening, then also the assessee had sufficient cash balance to deposit the same in the bank account. Further, the assessee also submitted a chart of cash summary after considering the average cash balance as the opening balance for the FY 2015-16 relevant to the assessment year under consideration which is as under:

Accordingly, the assessee, without prejudice to her contention of not making any addition on account of cash deposits, has offered to the amount of Rs.1,45,665/- being the short fall in cash deposits worked out as per above charts, towards excess cash deposits in bank. Therefore, submitted that the said, amount of “Rs.1,45,665/- may be added to her income for the year.”

5. However, the AO was not satisfied. He granted a relief of Rs. 4,00,000/- cash balance. The order of the AO in this regards reads as under:-

“The submission of the assessee is duly considered but the same is not tenable. As submitted by the assessee,, the assessee is doing tuitions and job work which are the only source of her income for the past 20 years and for the year under consideration has earned a sum of Rs.1,70,880/- from the said business/profession. These income earned by the assessee is mainly in cash. The working of average cash balance of 5 years Starting from FY 2012-13 to 2016-17 at Rs.7,63,455/- is totally unrealistic as far as the income of the assessee is concerned and also without any corroborative documentary evidence to support her claim. Maintaining such huge cash balance on hand against the meager income of Rs.1,70,880/- earned by her doing tuitions on religious books and preparing foods is far from real. Moreover, while working out the cash summary, the assessee herself failed to reconcile the cash deposits with cash balance available for the year and accordingly the net shortfall worked out at Rs.1,45,665/- though on prejudice. Moreover, the assessee has also considered the total withdrawals of Rs.2,00,000/- for cash deposits which is not correct as the withdrawals are for expenditure and not for cash deposits. The cash deposits can be seen as sourced from the opening cash balance in each year and therefore, the huge opening cash balance every year. The assessee has never disclosed its cash balance in any return of income. The chart prepared by the assessee to arrive at the average cash balance for five years is totally on surmises and the same is not backed by the any documentary evidence. Even going by the assessee’s submission that the cash withdrawals and deposit have some pattern or logic, analysis of cash withdrawals and cash deposits do not support this logic in as much as the withdrawals are made even though on the given date the assessee was having cash balance in excess of the withdrawals made. Why would anyone withdraw cash when he/she has more than the given amount of cash in hand with him/her? The assessee has been repeatedly asked to submit the documentary evidence to prove the source of cash deposits made by her in bank account but failed every time. Mere written submission is not enough to prove the genuineness of any claim as it should be backed by valid documentary evidence. Here in this case, the assessee has failed to do produce any documentary evidence apart from written submission.

In view of the aforesaid facts of the case, the working of average opening cash balance at Rs.7,63,455/- of the assessee for the financial year under consideration is not acceptable. However, to arrive at a fair conclusion after considering the nature of income of the assessee over the past 20 years and total receipt of the year under consideration and also considering the deposits and withdrawal of cash by the assessee in banks, the opening balance of cash on hand of the assessee would be at around Rs.4,00,000. Considering this, cash summary of the assessee is worked out as under:

Cash summary (considering average)

In view of the aforesaid facts of the case, the cash deposits to the extent of Rs.5,09,120/-is sourced by the opening cash balance which is found to be credited in the books of accounts of the assessee for which no plausible explanation, reasoning and corroborative evidence about the nature and source thereof is furnished, is hereby charged to the income tax as the income of the assessee of the previous year as unexplained cash credit as per the provisions of section 68 of the Act, Hence, the amount of Rs.5,09,120/- is hereby added back to the total income of the assessee under the head “Income from Other Source”. By doing so, the assessee has furnished inaccurate of income and therefore, penalty proceedings u/s.271(1)(c) of the Act are being initiated separately for furnishing inaccurate particulars of income.”

6. Upon assessees appeal, ld.CIT(A) held as under:-

“The above summary of the cash book is analyzed with reference to the following contentions of the appellant raised during the appellate proceedings.

a) It is stated that the appellant was having responsibility of looking after other members of her family as well as of her mother in law, therefore for their medical emergencies, huge cash balance is withdrawn by her, however from the above chart the appellant has not withdrawn any cash in certain years which is not practically possible,

b) From the balance sheet of the appellant it is noticed that the appellant has three motor vehicles whereas, no expenses have been incurred by her for fuel, maintenance, driver’s salary etc.

c)”Deposit made by her in F.Y 2015-16 was till 17^thDecember 2015 only whereas withdrawal of Rs.6,00,000/- made by her was after that, therefore the same cannot be considered as source for deposit made during the year under consideration.

d) The cash withdrawn in the previous years were already deposited by her in the respective year itself.

e) The claim that cash received by her from Mr, Hasmukh Gandhi was utilized for making investments is not supported by any documentary evidences.

f) Last but not the least she had shown an opening cash balance of Rs.6,53,600/- as on 01.04.2012 whereas from the cash book of previous three years, it is evident that the source of cash generated during the-year is totally utilised during the year itself, hence no surplus cash is available to be carried forwarded by her to the subsequent years also.

The above facts demonstrate that the appellant had adjusted the opening cash balance as on 01.04.2012 and the drawings in every year so that sufficient cash balance can be reflected in the cash book, however in reality no cash balance was available with the appellant. Therefore, it can rightly be concluded that cash deposit made by her during the year under consideration is not supported by any collaborative evidence. Accordingly, the AO has correctly computed the opening cash balance at Rs.5,09,120/-and made addition of the same by invoking the provision of section 68 of the Income Tax Act, 1961. In view of the above facts and circumstance, this ground of appeal is dismissed.”

7. Against the above order, assessee is in appeal before the ITAT.

8. I have heard the ld. DR and perused the record. None appeared on behalf of the assessee despite notice. I note that in explanation for the cash deposit in the bank account assessee, whose income is only from tuitions fees and job work submitted that she was having huge cash balance.

9. However, authorities below have duly analyzed the details and have granted part relief of Rs. 4 lacs and thereafter upheld the addition of balance. In my considered opinion, on the facts and circumstances of the case, assessee has been granted sufficient credit for opening balance in justification of cash deposit. Revenue is not in appeal against the same. Hence, in my considered opinion, there is no need of interference in the orders of the authorities below.

10. Apropos ground No.2

On this issue, the grievance is cost of improvement claimed by the assessee. In this regard, it is noted that in response to the query made by the AO about the details of cost of improvement incurred by the appellant, the details of cost of improvement are submitted along with the revised claim of cost of improvement wherein, the cost of improvement is reduced from Rs.19,83,181/- to Rs.10,87,891/-. Against the revised claim of Rs.10,87,891/- the AO had allowed a claim of Rs.3,18,300/- comprising of registration fee and stamp duty as purchase cost and another amount of Rs.74,681/-incurred for purchase of tiles and laying of tiles as cost of improvement. However for the remaining amount of Rs.6,94,910/- no corroborative evidence was filed by the appellant and therefore the AO disallowed the claim of cost of improvement to that extent.

11. Ld.CIT(A) noted that assessees submissions are as under:-

“During the appellate proceeding, along with the written submission which is reproduced in para-6 of this order, the Ld. AR submitted photocopy of so-called ledger account of expenses and copy of invoices of expenses claimed as incurred on cost of improvement of the impugned property and the appellant requested to allow the cost of improvement at Rs.19,83,181/-. Further, the appellant had also relied on the judgment of Hon’ble Tribunal, Vadodara Bench in the case of Rajat B Mehta vs. Income Tax Officer – International Taxation.”

12. Upon assessees appeal, ld.CIT(A) placed reliance upon the Hon’ble Delhi High Court decision on similar issue held as under:-

“It is observed from the assessment order and the submission of the appellant, that the appellant had sold a house property for ‘sale consideration of Rs.1,15,28,265/-against which cost of improvement amounting to Rs.19,83,181/- has been claimed as cost of improvement of the impugned property. Further, during the assessment proceedings itself the appellant has filed a revised claim of cost of improvement at Rs.10,87,891/- which is lower than the expenses claimed by the appellant in the return of income. On perusal of the aforesaid documents filed by the appellant in respect of the cost of improvement it is evident that most of the expenses were incurred in cash, From the perusal of the ledger account and the purchase invoices, find that the expenses stated therein is for purchase of wall papers and labour charges, furniture such as dining table, dinning chair, centre table, side table, sofas and crockery etc. which consist of furniture & fixture, furnishings, kitchen appliances etc. The purchase invoices also show purchase of kitchen items such as chimney, microwave, oven, coffee maker, shoe rack cabinet, Juice Bar Drawer, Laundry basket, handles etc. The above items are not capital assets. Hence, the above expenses cannot be allowed as cost of improvement of the impugned house property. In the given facts and circumstances, I do not find any merit in the contention of the appellant that cost of improvement was incurred for renovating the Flat. 1 stand to disagree with the contention of the appellant that all the expenses incurred were necessary for making the flat habitable. If the structure of the building is strong and intact and there is proper supply of electricity and water, the building is considered habitable. Apart from laying the tiles, the expenses of which has been allowed by the AO, no other improvement of a permanent nature involving usage of capital asset has been brought about to the impugned property. The above items are accessories and luxury items totally out of the purview of capital asset. Further, in respect of the invoices of furniture and fixtures filed by the appellant, it is found that payment of said expenses is not made vide the appellant’s bank accounts and no proof of delivery of goods has been produced and filed by the appellant. In short, the claim of the appellant regarding the cost of improvement is factually and legally not tenable. It is pertinent to reiterate here that there is no proof that the above items claimed as incurred by the appellant during the year 2012-13 have been expended for the impugned house property as they are not capital assets within the meaning of ‘asset’ spelt out in Section 2(14) of the Income Tax Act, 1961.

In this regard, reliance is placed on the ratio laid down by the Hon’ble Delhi High Court in the case of Sac hinder Mohan Mehta vs. Assistant Commissioner of Income Tax [2015] 53 taxman.com 114 (Delhi), wherein it has been held as:

“Section 2(14), read with section 48, of the Income-tax Act, 1961 – Capital gains – Capital assets (Personal effects) – Assessment year 2009-10 – Whether where assesses white computing cost of acquisition in terms of section 48 claimed deduction of amount spent on items like wooden temple, crockery, fans, light fittings etc., in view of fact that said items were primarily ‘personal effect’ excluded from definition of capital asset under section 2(14), assessee’s claim deserved to be rejected – Held, yes (Para 17] [In favour of Revenue}”

Duly considering the documentary evidences filed by the appellant and the above judicial pronouncement, I find that the AO has correctly disallowed the cost of improvement claimed by the appellant and no interference is called for. Accordingly, the action of the AO is upheld. This ground of appeal is dismissed.”

13. Against the above order, assessee is in appeal before the ITAT

14. I have heard the ld. DR and perused the records. From the details, it is evident that assessee is claiming cost of improvement, which are consumable items on account of furnishing sofa etc. The authorities below are correct that these items cannot be considered as cost of improvement for computation of capital gain. The reliance on the Hon’ble Delhi High Court decision referred above is also germane and applies on the facts of the case. Hence, I uphold the orders of the authorities below.

15. In the result, appeal of the assessee stands dismissed.

Pronounced in the open court on 01 .04.2022