ITAT directs AO to allow cost of Improvement with Indexation and Re-Compute Capital Gains u/s 48 of Income Tax Act [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) directed the Assessing Officer ( AO ) to allow the cost of improvement with indexation and to re-compute capital gains under Section 48 of the Income Tax Act, 1961

In the assessment proceedings, a significant discrepancy emerged regarding the sale of a property. The assessee  in question reported the sale of a property valued at Rs.4 crores, subsequently claiming a deduction under section 48 of the Income Tax Act totaling Rs.3,40,43,088/-. However, further scrutiny revealed a declaration of capital gains amounting to Rs.59,56,912/-. Of particular interest was the assertion of renovation expenses at Rs.9,50,000/-, later adjusted to Rs.20,04,015/- upon indexation.

This claim, however, raised suspicions as the assessee had failed to provide crucial documentary evidence to substantiate the expenditure. The Assessing Officer ( AO ) rejected the assessee’s response, citing a lack of details regarding the recipient of the payment, along with the absence of invoices and bank statements reflecting the purported transactions. Consequently, the AO proposed an addition of Rs.20,04,015/- as the indexed cost of renovation. The taxpayer subsequently lodged objections before the Dispute Resolution Panel ( DRP ) in response to these findings.

The Counsel for the assessee M.S. Dagar argued that the aforementioned factual stance can be readily confirmed through examination of cheque counterfoils and bank statements, among other documents. Moreover, it was emphasized that when a flat is transferred to a buyer, extensive renovation work is often imperative to render it suitable for habitation. Considering a flat size of approximately 5250 square feet, the claimed renovation expenditure of Rs. 9.50 lakhs was deemed reasonable and justifiable.

Furthermore, the Appellant appealed to DRP-1 Delhi to consider admitting Additional Evidence concerning the Cost of Improvement, pursuant to Rule 9 of the Income-tax ( Dispute Resolution Panel ) Rules, 2009. This additional evidence was submitted to support objections against the proposed addition, as outlined in the Draft Assessment order under section 144C, while also pleading for the allowance of incurred renovation expenses.

The AO asserted that due to the appellant's residence in the USA, all expenses related to the renovation were managed by his mother, Smt. Sunita Kapur. Upon meticulous examination of historical bank records and documentation, it was revealed that the renovation work was contracted to Mr. Alok Lal, operating under his sole proprietorship firm, M/S Fourth Dimension, located at 242, Sector-17, Urban Estate, Gurgaon 122001, with PAN No. AAXPL6937C.

The Assessing Officer ( AO ) has emphasized that the assessee did not formalize any contract or agreement with M/S Fourth Dimensions or Mr. Alok Nath for the renovation work carried out at Flat No GH-3/PHC, GARDEN HEIGHTS-III, GURUGRAM. The AO noted that over 12 years have elapsed since the renovation, and as an individual taxpayer, the assessee does not maintain regular accounting records.

Furthermore, the AO raised concerns regarding the financing of the renovation, stating that all material purchases for the addition/renovation of the new flat were made through cash withdrawals from the bank via bearer cheques in the name of Mr. Alok Lal. Despite efforts, the assessee could not produce bills or invoices for the material purchases. However, detailed records of the work done were presented during the assessment proceedings, along with proof of payment to the contractor through account pay cheques and cash withdrawals from the bank for raw material purchases.

The AO noted the absence of documentary evidence. The assessee clarified that Fourth Dimensions is Mr. Lal's sole proprietorship firm. In support, invoices issued by Mr. Lal for his services were provided, along with proof of payment made through bank transactions. Additionally, signatures on documents submitted matched those on the PAN card, and it was highlighted that even when a cheque for Rs.200,000/- was issued in Mr. Lal's individual capacity, he provided a bill from his sole proprietorship firm, underlining the firm's association with him as its proprietor, as sole proprietor firms do not possess separate registration documents and are assessed under the proprietor's PAN.

The bench evident that the assertions made by the assessee carried substantial merit. The claim put forth by the assessee, asserting that as a Non-Resident Indian ( NRI ), he had issued cheques to Alok Lal for cash withdrawals from his bank account with the intention of utilizing the funds for renovation purposes, could not be easily dismissed. This explanation provided by the assessee appeared reasonable and credible.

Additionally, the assertion by the Assessing Officer ( AO ) that the absence of a written agreement undermines the relationship between the assessee and Fourth Dimension, along with its proprietor Alok Lal, does not suffice as grounds to discredit the payments made for renovation work. Moreover, there is no dispute regarding the execution of the renovation work, with the expenditure amounting to Rs. 9,50,000/- specifically allocated for kitchen cupboards, among other elements.

The two member bench of the tribunal comprising G.S.Pannu ( Vice president ) and C.N.Prasad ( Judicial member ) directed the Assessing Officer to permit the cost of improvement with indexation and to recalculate the capital gains accordingly.

In the result, appeal of the assessee was allowed.

To Read the full text of the Order CLICK HERE

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