Furnishing Expenses are Part of Cost of Improvement for Capital Gains if Integral to Habitable Flat

I. Furnishing Expenses are Part of Cost of Improvement for Capital Gains if Integral to Habitable Flat

Issue:

Whether furnishing expenses, such as furniture, almirahs, bed sets, and electronics, can be considered as part of the “cost of improvement” for a residential flat under Section 48 of the Income-tax Act, 1961, thereby eligible for indexation benefit when computing capital gains.

Facts:

For the assessment year 2017-18, the assessee sold a residential flat and claimed a deduction of ₹49.64 lakhs as indexed cost of improvement, attributing it to furnishing expenses. The Assessing Officer (AO) disallowed this claim, holding that items like furniture, almirahs, bed sets, and electronics could not be treated as part of the “cost of improvement” for the flat. The Commissioner (Appeals) confirmed this disallowance. However, it was observed that the assessee had furnished a summary of improvement bills and an explanation, and that such expenses formed an integral part of the “furnished house.”

Decision:

Yes, the court held that the findings of the lower authorities were unsustainable and the addition was to be deleted.

Key Takeaways:

• “Cost of Improvement” Definition (Section 55): Section 55(1)(b) defines “cost of any improvement” as all expenditure of a capital nature incurred in making any additions or alterations to the capital asset.
• Integral Part of Habitable Property: While typically, movable furniture and standalone electronics are not considered part of the “cost of improvement” of an immovable property, judicial precedents have recognized that expenses for furnishings or interiors that make a property habitable and enhance its usability or longevity, especially if built-in or integral, may qualify as capital expenditure on improvement. The key is whether these items are merely “personal effects” or whether they are inextricably linked to making the structure functional as a residence.
• Factual Matrix: The phrase “such expenses formed integral part of furnished house” is critical. This suggests that the items were not merely movable personal effects but perhaps fitted, built-in, or part of a comprehensive interior design that enhanced the value and functionality of the flat itself as a “furnished” property.
• Burden of Proof and Documentation: The assessee’s submission of “summary of improvement bills and explanation” suggests an attempt to substantiate the capital nature of these expenditures. Proper documentation is crucial for such claims.
• Favor of Assessee: This decision is beneficial to the assessee, allowing the deduction of indexed cost of improvement, thereby reducing their capital gains tax liability.

II. No Double Taxation: Unexplained Cash Deposit Already Assessed in Joint Account Holder’s Hands

Issue:

Whether an addition for unexplained cash deposits made during the demonetization period in a joint bank account can be made in the hands of one co-owner (assessee) under Section 69, when the same amount has already been assessed and relief granted in the hands of the other co-owner (assessee’s husband), to avoid impermissible double taxation.

Facts:

For the assessment year 2017-18 (demonetization period), the assessee deposited ₹14.50 lakhs in a joint bank account held with her husband. The Assessing Officer (AO) treated this as an unexplained investment under Section 69, primarily on the ground that the cash withdrawals claimed as the source were made more than one to two years prior to the deposit. The Commissioner (Appeals) upheld this disallowance.

However, it was observed that the cash in hand was duly reflected in earlier balance sheets of the assessee. Furthermore, there was no finding that the withdrawn cash was utilized elsewhere. Most importantly, the same amount of ₹14.50 lakhs had already been assessed in the hands of the assessee’s husband (the other joint account holder), and relief had been granted by the Commissioner (Appeals) to the husband after accepting the genuineness of the source (presumably the pooled or common cash from the household).

Decision:

Yes, the court held that in such circumstances, taxing the same amount again in the hands of the assessee would result in impermissible double taxation. Therefore, the impugned addition was to be deleted.

Key Takeaways:

• No Double Taxation: A fundamental principle of tax law is that the same income cannot be taxed twice in the hands of the same person or different persons for the same period, especially when the source has been explained and accepted in one assessment.
• Joint Accounts and Pooled Funds: In cases of joint bank accounts or household cash, it is common for deposits to originate from the pooled resources of multiple family members. If the source is satisfactorily explained by one co-owner and the amount is brought to tax or accepted in their hands, it cannot be added again in the hands of another co-owner.
• Onus Probandi (Section 69): While Section 69 places the onus on the assessee to explain unexplained investments, if an explanation is provided and supported by facts (like cash in hand reflected in balance sheets and no finding of utilization elsewhere), and the amount has already been addressed in a related assessment, the onus is discharged.
• Demonetization Context: While cash deposits during demonetization faced intense scrutiny, the department still needs to prove that the cash is unexplained and has not already been taxed or genuinely accounted for elsewhere.
• Importance of Appellate Relief in Other Cases: The fact that the assessee’s husband received relief on the same amount from the Commissioner (Appeals) strengthened the current assessee’s case, as it implied acceptance of the genuineness of the source by a higher authority.
• Favor of Assessee: This decision provides significant relief to the assessee by preventing the double taxation of the same cash deposit.