ITAT rules Pre-Possession Fit-Out Expenses as Cost of Improvement for Capital Gains Calculations [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that pre-ownership fit-out expenses incurred for making a bare-shell flat habitable qualifies to be a cost of improvement for capital gains calculation.

The assessee Shivani Bhasin Sachdeva filed her income tax return for the Assessment Year (AY) 2021-22, declaring a total income of ₹2,16,40,200/-, which included capital gains from the sale of a flat in Haryana. The property was sold for ₹15.21 crores, and while computing capital gains, the assessee claimed a cost of acquisition of ₹9,59,95,053/- and a cost of improvement of ₹2,46,66,340/- for interior enhancements.

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The assessee had booked the pertinent flat in October 2009 and entered into an agreement in May 2010 with DLF Hotels and Apartments Pvt. Ltd. for interior fit-out work, which included flooring, electrical fittings, and other civil improvements. She received possession in March 2014 and leased the flat in June 2014 before eventually selling it in November 2020.

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During the assessment, the Assessing officer (AO) observed that the assessee had officially purchased the flat in December 2017, whereas the claimed improvement expenses were based on an agreement dated May 2010, executed much earlier. The AO questioned how the assessee could have incurred improvement costs before owning the property and also raised doubts about the validity of the unregistered agreement as proof of cost incurred.

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The AO disallowed the cost of improvement, which the Commissioner of Income Tax (Appeals) ( CIT(A) ) later upheld. The assessee then appealed the decision before the ITAT.

The revenue, represented by Departmental Counsel, Bhangepatil Pushkaraj Ramesh, maintained that the claimed improvement costs could not be allowed as they were incurred before the assessee became the legal owner of the property.

The assessee’s counsel Sukhsagar Syal countered by explaining that the property was purchased as a "Khoka" flat(bare shell flat) requiring improvements for making it habitable.

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The counsel provided evidence of the agreement, payment records, and the timeline of events, demonstrating that the fit-out work was completed by 29.03.2014, possession was granted on 31.03.2014, and the property was leased out on 25.06.2014. The assessee argued that the AO’s assumption that improvements could not be made before ownership was factually incorrect.

The assessee also requested  that if the expenses were not allowed as "cost of improvement," they should be considered as part of the "cost of acquisition" This fallback position was supported by detailed documentation of the scope of work and payments made, which were not disputed by the AO. The assessee asserted that these records established a legitimate basis for the claimed expenses.

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After hearing both sides, the bench headed by Sunil Kumar Singh (Judicial Member) and Narendra Kumar Billaiya (Accountant Member) stated that the property was originally acquired as a "Khoka" flat, requiring significant improvements to make it habitable. Since the expenses were directly linked to enhancing the property and were duly substantiated with records, they qualified as a cost of improvement for capital gains calculation.

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The tribunal observed that the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) erred in assuming that improvements could only be made after ownership was legally transferred . Considering that the assessee had submitted adequate documentary proof of the payments made and the nature of the work undertaken, the tribunal found no valid grounds to uphold the disallowance.

Thus the tribunal set aside the findings of the AO and CIT(A) and directed the AO to allow the cost of improvement as claimed by the assessee.

To Read the full text of the Order CLICK HERE

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