March 26, 2023

(This story originally appeared in on Jul 28, 2022)

The Income-Tax Appellate Tribunal (ITAT)’s Mumbai bench, in a tax litigation over capital gains arising on the sale of residential flats, has allowed the NRI taxpayer to claim a significant portion of the costs of improvement, like fixing of tiles or painting of walls, even though they were paid for in cash.

Tax experts explain that unaccounted money was not used for such payments and as the taxpayer was not engaged in business, various restrictive provisions relating to payment in cash did not apply in this case.

Tax laws provide that the sale consideration minus the cost of acquisition and cost of improvement (both are adjusted by applying cost inflation index) determines capital gains. Higher the cost of these two components, lower is the taxable capital gains and consequently the tax outgo.

The cost of acquisition comprises the purchase price of the flat, registration cost and broker fees. The cost of improvement includes capital expenditure that increases the value of the property.

‘Petitioner must only show cash source’

Non-resident Indians, Komal Gurumukh Sangtani and her husband, had filed an appeal related to her capital gains assessment with the ITAT. The financial year to which the dispute related was 2009-10.

Sangtani pleaded that the expenditures incurred were to make the flat habitable, which is very normal and would be incurred by every citizen of the country who is purchasing a property from a builder. It is also quite usual to make such payments in cash, she added.

The bench observed that the taxpayer never carried on any business and was thus not liable for a tax audit. Consequently, there was no bar on incurring certain expenditure towards the flat in cash, as long as the source of the cash payment was explained from her reported income.

The bench, though, distinguished between expenditure that could be considered as cost of improvement and that which would be treated as personal effects. On review of the list of expenses, the ITAT bench observed: “We find that the majority of the items are embedded to the wall and become part and parcel of the flat itself which is a subject matter of sale by the taxpayer and her husband.” The bench held items such as refrigerator, air conditioner, LED

, furniture, among such others, as “personal effects” not eligible for deduction. Out of a total claim of Rs. 14.5 lakh towards the cost of improvement, the ITAT allowed Rs 9.7 lakh.

Sangtani had also claimed an interest of Rs 5.5 lakh on the housing loan to be a part of the cost of acquisition. There is a possibility that the taxpayer has claimed this interest (as a deduction) under the head income from house property and is trying to take a further benefit by adding it to the cost of acquisition while computing capital gains, observed ITAT. It remanded this aspect back to the I-T officer for re-verification.

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