Facts of the Case

The assessee, an individual and co-owner of an immovable property, sold his share in land originally held on leasehold basis. Prior to sale, the property was converted from leasehold to freehold upon payment of prescribed conversion charges to the competent authority.

While computing long-term capital gains, the assessee claimed deduction of his proportionate share of conversion charges as cost of improvement under Section 48 of the Income-tax Act, 1961.

During assessment proceedings under Section 143(3), the Assessing Officer disallowed the claim on the ground that such conversion charges were not allowable as cost of improvement. The Commissioner of Income Tax (Appeals) upheld the disallowance.

Issues Involved

Whether the amount paid by the assessee towards conversion of property from leasehold to freehold qualifies as cost of improvement deductible under Section 48 while computing capital gains.

Petitioner’s (Assessee’s) Arguments

  • The conversion of leasehold rights into freehold ownership enhanced the nature, value, and marketability of the property.
  • Such expenditure was directly linked to improvement of the capital asset.
  • The property could not have been transferred with full ownership rights without conversion.
  • In similar cases involving co-owners of the same property, the Tribunal had allowed such expenditure as deductible cost of improvement.

Respondent’s (Revenue’s) Arguments

  • Conversion charges paid to obtain freehold rights do not constitute physical improvement to the asset.
  • The payment was viewed as not falling within the statutory scope of “cost of improvement” under Section 48.
  • Therefore, the deduction claimed while computing capital gains was not allowable.

Court Order / Findings (ITAT Decision)

  • Conversion of leasehold property into freehold substantially enhances ownership rights and value of the asset.
  • The expenditure incurred for such conversion is intrinsically linked to improvement of the capital asset.
  • Accordingly, the conversion charges paid by the assessee constitute cost of improvement within the meaning of Section 48.
  • The Assessing Officer was directed to allow the deduction while computing capital gains.

Important Clarification

  • The allowability applies to the proportionate share of conversion charges paid by each co-owner.
  • The deduction is available only when the expenditure is directly attributable to enhancing ownership rights in the capital asset.
  • Such expenditure must be incurred prior to transfer and supported by documentary evidence.

Link to download the order - .https://itat.gov.in/public/files/upload/1611815897-68%20Alld%202018%20Sanjay%20Majumdar.pdf

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