Whether personal effects purchased for house allowed for computation of cost of improvement

Komal Gurumuk Sangtani v. ITO ( Mumbai) ( Tribunal) - ITA No.1200/Mum/2020
(Assessment Year :2010-11)

Hon'ble Tribunal Held That: The amount spent on cost of improvements to make the property habitable allowable as deduction and indexation while computing the capital gains however the amount spent on personal effects such as refrigerator, air conditioner LED, TVS furniture, dining table etc are not eligible for deduction.

LEGAL PROVISION
MODE OF COMPUTATION OF COST OF ACQUISITION AND COST OF IMPROVEMENTS

Section 48-provides that

The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

PROVIDED THAT in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company

PROVIDED FURTHER THAT where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted:

PROVIDED ALSO THAT nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government :

PROVIDED ALSO THAT where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section :

PROVIDED ALSO THAT no deduction shall be allowed in computing the income chargeable under the head "Capital gains" in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.

Explanation.—For the purposes of this section,

(i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);

(ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf;

(iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;

(iv) "indexed cost of any improvement" means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place;

(v) "Cost Inflation Index", in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the 96[Consumer Price Index for urban non-manual employees] for the immediately preceding previous year to such previous year, by notification97 in the Official Gazette, specify, in this behalf

BRIEF FACTS

1. These appeals in ITA No.1200/Mum/2020 & 1201/Mum/2020 for A.Y.2010-11 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-45, Mumbai in appeal No.CIT(A)-45/ITO-33(1)(3)/ITA-40/2017- 18 & CIT(A)-45/ITO-33(2)(2)/ITA-98/2017-18 dated 26/07/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/11/2017 & 27/12/2017 respectively by the ld. Income Tax Officer 33(1)(3), Mumbai (hereinafter referred to as ld. AO).

2. We find that assessee is an individual NRI and had not filed her return of income u/s.139 of the Act for A.Y.2010-11. The assessee had entered into a property transaction during the year along with her husband resulting in capital gains. Since, no return of income was filed the ld. AO reopened the assessment after issue of notice u/s.148 of the Act. The facts that are relevant for the purpose of adjudication of the issue of capital gains are as under:-

i) The assessee purchased two residential flats jointly with her husband Shri Gurumukh I Sangtani in the building known as “The Breezy Corner”, Mahavir Nagar, Kandivili (W), Mumbai. Total Cost of purchase was Rs. 43,42,860/-.

ii) The ld. AO observed that the main source of purchase of this property was housing loan availed from HDFC Ltd., on 06/05/2006 for Rs.30,00,000/-. The assessee is 50% owner of the subject mentioned properties and remaining 50% is held by her husband.

iii) The assessee had sold the properties purchased above 04/02/2010 total sale consideration was Rs. 79,48,800/-.

iv) The assessee in the return of income filed in response to notice u/s.148 of the Act offered capital gains but also claimed certain expenditure on account of purchase of furniture and fixtures and interest paid on housing loan adding to the cost of acquisition and cost of improvement to the property.

v) The assessee has not provided details of invoices and bills subsisting purchase of above various household items.

3. The ld. AO issued notice u/s. 133(6) of the Act to the aforesaid suppliers and observed that no replies were received from the said parties. Accordingly, the ld. AO did not give deduction towards cost of improvement of property in respect of the aforesaid items and correspondingly denied the benefit of indexation also thereof claimed by the assessee while computing the long term capital gains.

4. Similarly, the assessee also claimed the interest paid on housing loan to HDFC Ltd., as part and parcel of cost of acquisition eligible to be deducted while computing capital gains. The ld. AO observed that assessee had given the loan account No.1910036 dated 06/05/2006 wherein the EMI amount of Rs.62,276/- was duly mentioned. Since assessee could not provide the entire repayment schedule and the appropriation of EMI towards principal and interest portion thereof by HDFC Ltd., and that the assessee had bifurcated the interest by her own calculations by arriving at the interest figure of Rs.19,233/- per month on fixed amount basis, the ld. AO disbelieved the same and did not give deduction towards interest on housing loan to be part and parcel of cost of acquisition while computing capital gains.

5. The ld. AO also observed that assessee would have claimed interest on housing loan as a deduction under the head „income form house property‟ u/s.24 of the Act in the returns of income. Accordingly, he observed that assessee is not entitled for deduction u/s.48 of the Act while computing capital gains. With these observations, he denied the benefit of deduction and correspondingly, the indexation benefit thereon on the interest paid on housing loan component while computing capital gains.

6. The AO on the basis of observations made above denied above expenses held by assessee in her house for calculation of Cost of Improvement and issued assessement order. The assessee appealed the order before CIT(Appeals).

7. The ld. CIT(A) simply brushed aside the entire contentions of the assessee by stating that the aforesaid expenditures were incurred only on account of personal effects and the same would not be eligible to get added to the cost of acquisition or cost of improvement of the property and consequently not eligible for deduction while computing capital gains. With regard to claim of deduction towards interest of housing loan to be added to the cost of acquisition, the ld. CIT(A) upheld the action of the ld. AO.

8. THE HON'BLE TRIBUNAL 

i) At the outset, from the perusal of the list of aforesaid expenditure as detailed in the 3rd table supra, we are in complete agreement with the arguments advanced by the assessee before the lower authorities with the aforesaid expenses were incurred only in order to make the house habitable. From the perusal of the list of expenses incurred as stated supra, we find that majority of the items are embedded to the wall and becomes part and parcel of the building itself which is subject matter of sale by the assessee and her husband. Of course in the said list, items like refrigerator, air conditioner, LED Tvs, furnitures, dining tables etc., would certainly fall under the ambit of “personal effects” not liable for deduction

ii) It is not in dispute that majority of the items were also purchased by making payments in cheques through regular banking channels as stated earlier. It is not in dispute that assessee never carried on any business and accordingly not liable for any tax audit. Hence, there is no bar for the assessee to incur certain expenditures for the purpose of house in cash. As long as the source for the said cash payment is explained from the disclosed income of the assessee, no fault could be attributed on the assessee. It is not a case of the Revenue that the assessee alongwith her husband did not have sufficient cash or cheque source to make the aforesaid payments.

iii) Hence, the aforesaid payments cannot be summarily disbelieved by the Revenue. In view of the aforesaid observations, we hold that assessee would be eligible for deduction along with her husband totaling to Rs.9,68,575/- towards cost of improvement made in the house which has to be reduced while computing capital gains in the hands of the assessee as well as in the hands of her husband. The assessee along with her husband would also be eligible for due indexation benefit on the same.

iv) With regard to deduction claimed on account of interest on housing loan, though the ld. AO had accepted the fact that assessee and her husband had indeed availed housing loan from HDFC Ltd., at Rs.30,00,000/- for purchasing two flats, the assessee could not produce the EMI chart evidencing the total payment of principal and interest portion made to HDFC Ltd., But we also find that assessee had also claimed deduction on account of interest on housing loan of Rs.75,000/- under the head „income from house property‟. Hence, there is a possibility that the assessee could have claimed the interest on housing loan both under the head „income from house property‟ as well as trying to take further benefit by adding it to the cost of acquisition while computing capital gains. This doubt has been rightly raised by the ld. AO in the assessment order.

v) We find that this fact has not been clarified by theassessee even before the ld. CIT(A). However, since this matter requires factual verification, we deem it fit and appropriate to remand this aspect of the issue alone i.e. claim of interest on housing loan to be treated as cost of acquisition of Rs.5,49,454/- while computing the capital gains to the file of the ld. AO for denovo verification in accordance with law.

vi) The assessee is at liberty to furnish further evidences in support of her / his contentions in this regard. Needless to mention that the assessee and her husband be given reasonable opportunity of being heard with regard to adjudication of this issue.

vii) Accordingly, the ground No.1 raised by the assessee is partly allowed and ground No.2 raised by the assessee is allowed for statistical purposes.

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