Facts of the Case

The assessee filed his return of income declaring total income of ₹41,12,890. During the relevant assessment year, the assessee sold a residential house situated at Rana Pratap Marg, Lucknow for a consideration of ₹5,80,00,000. The property had originally been purchased on 15 June 1982.

While computing Long Term Capital Gains, the assessee claimed indexed cost of acquisition and cost of improvement based on a valuation report issued by a registered valuer.

The Assessing Officer observed that certain expenses claimed as cost of improvement were based on the valuer’s report which relied largely on the version provided by the assessee. The AO further noted that photographs produced were vague and did not adequately establish the year of expenditure.

Accordingly, the Assessing Officer disallowed a portion of the indexed cost of improvement amounting to ₹12,53,213 while computing capital gains.

The dispute also involved improvements claimed in another residential property located in Bangalore, including installation of facilities and structural enhancements.

In addition, the Revenue challenged the deduction claimed under section 54 on the ground that the new residential house was not purchased directly by the assessee but was received as a gift from his parents.

Issues Involved

  1. Whether the disallowance of cost of improvement relating to the Lucknow property while computing capital gains was justified.
  2. Whether improvements such as air conditioning installation, modular kitchen, chimney, tube well, flooring and other residential facilities can be treated as cost of improvement.
  3. Whether the assessee was entitled to deduction under section 54 when the new residential property was registered in the name of his parents.
  4. Whether the order of the CIT(A) allowing deduction towards cost of acquisition and improvement for the Bangalore property was correct.
  5. Whether initiation of interest proceedings under sections 234A, 234B, 234C and 234D was justified. 

Petitioner’s Arguments (Assessee)

The assessee contended that the cost of improvement was properly substantiated through a valuation report issued by a registered valuer.

It was further submitted that improvements such as central air conditioning, modular kitchen, chimney, flooring, tube-well and other structural enhancements formed an integral part of a residential house and were necessary to make the property habitable.

The assessee also argued that the deduction under section 54 cannot be denied merely because the new residential property was registered in the name of his parents, especially when the investment for purchase of the property had been made by the assessee. 

Respondent’s Arguments (Revenue)

The Revenue contended that the valuer’s report relied heavily on statements made by the assessee and lacked sufficient documentary evidence to establish the year in which the expenditures were incurred.

The Assessing Officer also argued that certain items such as air conditioning systems and kitchen installations could not be treated as part of the building under CPWD valuation guidelines.

Further, the Revenue argued that the assessee should not be eligible for deduction under section 54 because the new residential property had not been purchased directly in his name but had been gifted by his parents.

Court Findings / Tribunal Decision

The Income Tax Appellate Tribunal examined the valuation report and the reasoning adopted by the Assessing Officer while disallowing the cost of improvement.

The Tribunal observed that the improvements made in the residential property, including installation of facilities and structural enhancements, contributed to increasing the value of the property and were part of making the house habitable.

Accordingly, the Tribunal held that the disallowance of the cost of improvement by the Assessing Officer was not justified and allowed the assessee’s claim.

With regard to the Bangalore property, the Tribunal accepted the claim of cost of improvement, including expenditure incurred for installing a lift, considering that such installation enhanced usability and habitability of the property.

On the issue of deduction under section 54, the Tribunal upheld the view that the deduction cannot be denied merely because the property was registered in the name of the assessee’s parents, particularly when the investment for acquisition had been made by the assessee himself.

Consequently:

  • The appeal filed by the assessee was allowed.
  • The appeal filed by the Revenue was dismissed. 

Important Clarification

The Tribunal clarified that:

  • Improvements that enhance the usability and value of a residential property can be considered as cost of improvement while computing capital gains.
  • Deduction under section 54 cannot be denied merely on the ground that the new property is registered in the name of parents, if the investment for purchase is made by the assessee.

Link to download the order - https://itat.gov.in/public/files/upload/1703666897-8490%20&%209212%20Rajiv%20Ghai.pdf

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