AO Must Include Previous Owner’s Costs in “Cost of Improvement”; Matter Remanded for Verification.
Issue
Whether the “cost of improvement” for the purpose of calculating capital gains must include improvement costs incurred by the previous owner (as per Section 49(1)), and whether an Assessing Officer (AO) can disallow such a claim without examining crucial additional evidence presented by the assessee.
Facts
- For the Assessment Year 2016-17, the assessee sold an immovable property and computed long-term capital gains (LTCG).
- In the computation, the assessee claimed a deduction for “cost of improvement.”
- This claim was a combination of:
- Expenditure incurred by the assessee himself (on the first floor and interiors).
- Expenditure incurred by his brother (a previous owner) on the second-floor construction and interiors.
- The Assessing Officer (AO) disallowed the entire claim, arguing that the property was already a completed house when the assessee acquired it and that mere repair/renovation cannot be treated as a cost of improvement.
- The assessee furnished “additional evidence” during the appellate proceedings to substantiate the claim, which had not been examined by the AO.
Decision
- The High Court (implied) set aside the disallowance and remanded the matter back to the Assessing Officer for fresh adjudication.
- It held that, as per Section 49(1) of the Income-tax Act, the cost of acquisition for an asset includes the cost for which the previous owner acquired it, “as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee.”
- The court found that the additional evidence furnished by the assessee (which the AO had not seen) would have a “crucial bearing” in determining the facts of the dispute.
- The AO was directed to pass a fresh order after considering this evidence.
Key Takeaways
- “Cost of Improvement” Includes Previous Owner’s Costs: This is a crucial clarification. When calculating capital gains on an asset acquired under Section 49(1) (e.g., by gift, will, or inheritance), the “cost of improvement” includes not only the current assessee’s costs but also any verifiable improvement costs incurred by the previous owner.
- AO Must Examine All Evidence: An Assessing Officer cannot disallow a claim based on assumptions (like “it was just renovation”) without examining the evidence presented by the assessee.
- Remand for Factual Verification: When significant new evidence is produced at the appellate stage, the correct judicial procedure is to remand the case to the AO to conduct a fresh factual verification of that evidence.
- Renovation vs. Improvement: While the AO dismissed the claim as “renovation,” the matter of whether an expenditure is a mere repair or a capital “improvement” that adds value to the asset is a factual question that must be decided based on evidence.
IN THE ITAT MUMBAI BENCH ‘F’
Vishnukumar Gokalchand Gupta
v.
ACIT*
SAKTIJIT DEY, Vice President
and Narendra Kumar Billaiya, Accountant Member
and Narendra Kumar Billaiya, Accountant Member
IT Appeal No. 4578 (Mum.) of 2025
[Assessment year 2016-17]
[Assessment year 2016-17]
OCTOBER 23, 2025
Ajay R. Singh and Akshay Pawar for the Appellant. Ms. Kavita Kaushik for the Respondent.
ORDER
Saktijit Dey, Vice President.- This is an appeal by the assessee against order dated 29.05.2025, passed by National Faceless Appeal Centre (‘NFAC’ for short), Delhi pertaining to the assessment year (A.Y.) 2016-17.
2. The solitary dispute in the appeal relates to disallowance of indexed cost of improvement while computing income under the head long term capital gain (‘LTCG’ for short). Briefly the facts are, the assessee is a resident individual. For the assessment year under dispute, the assessee filed his return of income on 04.10.2016, declaring total income of Rs.5,93,20,140/-. The major part of the income was on account of LTCG, arising out of sale of an immovable property. Brief factual background relating to the property sold are, the assessee and his wife along with his brother Shri Kamal Kishore Gupta and his wife Mrs. Sandhya Kama Kishore Gupta had purchased an immovable property, being Vikas Bungalow situated at Chembur through registered sale deed executed on 15.12.1988. While the assessee and his wife owned the first floor of the building, the second floor was owned by assessee’s brother and his wife. Subsequently, in the financial year (‘F.Y.’ for short) 1993-94, the assessee’s brother and his wife gifted their share in the property to the assessee. The said property was sold by the assessee in the financial year relevant to the assessment year under dispute for a consideration of Rs.7,93,55,000/-. While computing LTCG, the assessee claimed deduction towards cost of acquisition and cost of improvement and offered net LTCG of Rs.5,77,55,811/-. Insofar as, cost of improvement is concerned, the assessee claimed an amount of Rs.36,52,783/- incurred by him for the first-floor construction and interior work. Whereas, for the second floor, he claimed that his brother has incurred expenditure of Rs.1,04,81,602/- for construction and interior work.
3. In course of assessment proceeding, the assessee furnished certain documentary evidences to justify the claim of cost of improvement. The Assessing Officer (‘A.O.’ for short), however, was not convinced with the claim made by the assessee. He was of the view that firstly, the said immovable property was a completed house when purchased by the assessee, hence, required no further improvement. He observed, any repair, renovation cannot be considered as ‘cost of improvement’. Secondly, he observed, the assessee did not produce any documentary evidences that the expenditure was actually incurred. Accordingly, he disallowed the claim of indexed cost of improvement of Rs.1,41,34,385/-
4. The assessee contested the aforesaid disallowance before ld. first appellate authority. In course of hearing, the assessee furnished certain additional evidences to justify the claim. Evidences furnished and submissions made were forwarded to the A.O. for verification. After verifying the evidences furnished and submissions made, A.O. submitted a remand report sticking to his decision taken in the assessment order. Based on the remand report, ld. first appellate authority ultimately confirmed the disallowance.
5. Before us, ld. Counsel appearing for the assessee referred to the registered sale deed dated 15.12.1988, to emphasize that what the assessee and his brother had purchased was a plot of land with an incomplete building. He submitted, after purchasing the property, both the assessee and his brother had subsequently invested in construction of the building and it was completed in the F.Y. 1993-94. He submitted, the investment made in construction of building was reflected in the balance sheet as well as Wealth Tax returns of both the assessee and his brother. He submitted, on completion of construction, the competent authority, i.e., Brihanmumbai Municipal Corporation (BMC) had issued a Completion Certificate on 08.04.1995. Thus, he submitted, there are enough documentary evidences produced before the Departmental Authorities to establish that after the purchase of the property was made in 1988, substantial investment was made towards cost of improvement. To further substantiate the claim of cost of improvement, ld. Counsel for the assessee furnished before us an application dated 10.10.2025, seeking admission of following additional evidences submitted in a separate paper book:
| i. | Building Completion Certificate, acknowledged on 15.02.1994 |
| ii. | Commencement Certificate, acknowledged on 05.02.1991 |
| iii. | Intimation of disapproval (IOD), acknowledged on 21.09.1992 |
| iv. | Letter of appointment of Architect addressing to Executive Engineer, BMC acknowledged on 21.09.1992 |
| v. | Intimation for completion of construction upto plinth level, acknowledged on 04.03.1992 |
| vi. | Confirmation of appointment of site Supervisor, acknowledged on 23.03.1992 |
| vii. | Sample copies of invoices evidencing construction work |
6. He submitted, since matter relates to more than 18 years back, assessee found it difficult to collate all the evidences at a time. Therefore, was not able to furnish them before the Departmental Authorities. He submitted, after taking great effort, the assessee has been able to collect further evidences from the office of the Municipal Corporation, which are being produced now. Thus, he submitted, the cost of improvement claimed by the assessee has to be allowed.
7. The ld. Departmental Representative (‘ld. DR’ for short) strongly objected against admission of additional evidences. She submitted, since the assessee had sufficient opportunity to furnish the evidences before the Departmental Authorities, they cannot be furnished at this stage. Without prejudice, ld. DR submitted, in case the additional evidences are admitted, since their authenticity needs to be factually verified, the matter may be restored back to the A.O.
8. We have considered rival submissions and perused the materials available on record. The assessment order itself reveals that in course of assessment proceedings, the assessee had furnished certain documentary evidences such as Completion Certificate issued by BMC on 08.04.1995, Wealth Tax Returns of the assessee and his brother, balance sheet etc. to establish that after purchase of the land and structure standing over it in the year 1988, both the assessee and his brother have made investments in construction of the building. Further, the registered sale deed indicates that the assessee and his brother had purchased a property in the nature of ‘land’ on which an incomplete building was standing. The fact that the assessee owned the first floor of the building and the second floor was subsequently gifted by his brother to the assessee, has not been disputed by the Department. As per section 49(1) of the Act, the cost of acquisition of the asset shall be deemed to be the cost for which previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner of the assessee, as the case may be.
9. It is the case of the assessee that an amount of Rs.1.41 crores was incurred by him and his brother for construction of the house. To further augment his claim, the assessee has furnished certain additional evidences before us, as noted above. On perusal of these documentary evidences furnished as additional evidence, prima facie, we find some force in the claim of the assessee that after purchasing an incomplete building in the year 1988, both, the assessee and his brother have made investments in further construction. Even, in the submissions before the Departmental Authorities, the assessee has consistently taken this stand. Since the additional evidences furnished by the assessee will have crucial bearing in determining the issue in dispute, we are inclined to admit them. However, considering that the Department has raised concern about the authenticity of these documents and requirement of factual verification of their content, we are inclined to remit the issue back to the file of the A.O. for fresh adjudication, after carefully verifying all the documentary evidences including the additional evidences furnished before us by the assessee in support of its claim of incurring expenditure towards cost of construction. In this context, we may further observe that to verify assessee’s claim of cost of improvement, the A.O. in addition to verifying the evidences including the additional evidences, may also make such enquiry as he deems fit to verify the claim of the assessee. Further, it is made clear, the A.O. must pass a reasoned order after considering all the evidences available on record and only after providing reasonable opportunity of being heard to the assessee.
10. In the result, the appeal is allowed for statistical purpose.