MANJU PARAS PORWAL,MUMBAI vs. DEPUTY COMMISSIONER INCOME TAX MUMBAI, PIRAMAL CHAMBER, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “J” (SMC) MUMBAI

BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI ANIKESH BANERJEE (JUDICIAL MEMBER)

ITA No. 2694/MUM/2026 Assessment Year: 2023-24

Manju Paras Porwal, Deputy Commissioner Income B-2101, 21st Floor Shanti Tax, Mumbai, Vs. Kamal, Dr. B.A. Road Maharashtra- 400013 Chinchpokli, Mumbai Maharashtra- 400012. PAN NO. AAJPP 1941 L Appellant Respondent

Assessee by : Shri Karna Thaker, CA Revenue by : Ms. Jayshree Thakur, Sr- DR

Date of Hearing : 01/07/2026 Date of pronouncement : 14/08/2026

ORDER PER OM PRAKASH KANT, AM This appeal by the assessee is directed against order dated 08/01/2026 passed by the Ld. Commissioner of Income-tax (Appeals)- National Faceless Appeal Centre, Delhi [in short the Ld. CIT(A)] for assessment year 2023-24, raising following grounds;- i. On the facts and in the circumstances of the case and in law, the learned CIT(A)/NFAC erred in sustaining the

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disallowance of Rs. 1,28,78,742/- out of the cost of improvement claimed u/s 55(1)(b) of the Act, by classifying such expenditure as "movable" or "non-capital" in nature, without appreciating that the said items were permanently affixed to and formed an integral part of the residential property. ii. The learned CIT(A)/NFAC erred in classifying expenditure on air-conditioning installations (Rs. 11,23,369/-), built-in carpentry (Rs. 26,23,451/-), modular kitchen fittings (Rs. 5,30,099/-), home automation systems (Rs. 5,60,330/-), and other items as non-qualifying, without conducting any physical verification, enquiry, or calling for further evidence to ascertain whether such items were permanently embedded in the structure of the flats. iii. The learned CIT(A)/NFAC erred in sustaining the disallowance without appreciating that the very same cost of improvement details, including party-wise ledger accounts and bank records, were furnished and examined during the scrutiny assessment proceedings for AY 2016- 17, wherein no adverse inference was drawn and the same were accepted, and in the absence of any change in facts or law, the Department cannot take an inconsistent stand in the present assessment year. iv. The learned CIT(A)/NFAC erred in placing reliance on Paville Projects P. Ltd. v. CIT [2024] 160 taxmann.com 759 (SC), which is distinguishable on facts, as the present case involves bonafide expenditure on improvement of residential flats substantiated by ledger accounts and bank records spanning multiple financial years, and accepted in earlier assessment proceedings for AY 2016-17. v. Without prejudice, the learned CIT(A)/NFAC ought to have held that the AO erred in disallowing the entire cost of improvement of Rs. 2,95,59,739/- without identifying any specific defect in the ledger accounts, bank statements, and party-wise payment details furnished by the Appellant, and that the disallowance was based on mere suspicion and surmise.

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vi. The learned CIT(A)/NFAC erred in dismissing the ground challenging the initiation of penalty proceedings u/s 270A of the Act as premature, without appreciating that the very initiation on unsubstantiated allegations of misreporting is without jurisdiction and liable to be quashed. vii. The Appellant craves leave to add, alter, amend, or delete any of the above grounds of appeal at or before the hearing. 2. Briefly stated, the assessee filed her return of income on 27.07.2023 declaring total income of Rs.1,65,020/-. The return was selected for scrutiny, inter-alia, for examining the substantial claim made towards cost of improvement. Statutory notices under the Income Tax, 1961 (in short the Act) were issued and served upon the assessee. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had sold a residential flat during the year under consideration and had declared long- term capital loss of Rs.7,26,03,566/-, comprising, inter-alia, indexed cost of acquisition of Rs.16,50,07,274/-, interest paid to the developer of Rs.2,22,94,584/- and cost of improvement of Rs.2,95,59,739/-. 2.1 The Assessing Officer accepted the claim relating to indexed cost of acquisition and interest paid to the developer. The claim towards cost of improvement, however, was not accepted and the same was disallowed while completing the assessment under section 143(3) read with section 144B of the Act on 26.03.2025 by the Assessment Unit, NFAC, Delhi (i.e., The Assessing Officer)

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2.2 In appeal, the learned CIT(A) examined the claim with reference to section 55(1)(b) of the Act. The Ld. CIT(A) noted that the three conditions must be fulfilled for claim of the cost of the improvement namely, (i) expenditure must be capital in nature (not routine maintenance or repairs); (ii) it must be incurred by the assessee or previous owner (for inherited/gifted assets); and (iii.) only allowed for long-term capital assets (held more than 24/36 months). The Ld. CIT(A) noted that out of the total claim of the cost of the improvement, the assessee satisfied all the three conditions in respect of the amount of Rs. 1,66,80,998/- and in respect of balance amount only condition No. (ii) and (iii) were fulfilled and the condition No. (i) was not fulfilled. He accepted the assessee's claim to the extent of Rs.1,66,80,998/- but rejected the balance claim of Rs.1,28,78,742/- accordingly. The list of the said items rejected is reproduced for ready reference as under:

Sl. Item Vendor Classifi Notes Amount (Rs.) No cation 1 Air-conditioning Acme Not Portable not 11,23,369 / Refrigeration Refrigeratio Allowed allowed work n Co. 2 Home theatre / Advance Not Portable not 3,37,500 Audio setup Audio Allowed allowed Solutions Bangalore Pvt. Ltd. 3 Professional Ajmera Not Not related to 1,96,716 services Investment Allowed renovation/constru Co. ction. 4 Wall paper / Anita Not Always disallowed 8,27,726 Furnishings Enterprises Allowed

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5 Furniture/Furn Anpi Home Not Movable furniture 1,81,000 ishings Decor Decor Allowed always disallowed 6 Curtains / Bharat Not Movable soft 43,950 Furnishings Furnishings Allowed furnishings 7 Plants / Decor Blossoms Not Decor, movable 1,21,651 accessories Allowed 8 Gym equipment Caxton Not Movable 3,00,000 Sports Allowed 9 Glass Mirrors Classic Not Movable mirrors 2,56,442 Glass Allowed not allowed Solutions 10 Wallpapers / Elemento Not Always disallowed 2,04,188 Furnishings Lifestyles Allowed Pvt. Ltd. 11 Bath Essenza Not Decor not allowed 1,36,438 accessories / Allowed Fragrance fittings 12 Kitchen / Expert Not Standalone 5,30,099 Utility Equipments Allowed appliances not equipment Pvt. Ltd. allowed 13 Curtains / Soft Ganga Not Decor / removable 11,30,231 furnishings Decor Allowed 14 Miscellaneous Gopichand Not Not specified 8,140 Material Puri & Bros. Allowed hence not allowed 15 Paints / Hindustan Not Painting is 36,782 Chemicals Chemical Allowed maintenance Industries Ltd 16 Furniture H K Not Standalone not 15,00,000 fabrication Furniture Allowed allowed 17 Upholstery / Huda Not Décor / removable 22,00,000 Curtains Tailors Allowed 18 Home Kofco Not Movable not 2,87,013 appliances Appliances Allowed allowed Pvt. Ltd 19 Artwork / Limrah Not Movable décor 1,00,000 Paintings Interiors Allowed 20 Interior Limrah Not Décor not allowed 58,100 finishing Interiors Allowed 21 Miscellaneous Misc.-others Not Not specified 6,00,400 expenses Allowed hence not allowed

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22 Home Nandi Not Movable not 5,60,330 automation / Electronics Allowed allowed Electronics 23 Pest control / Prestage Not Maintenance 1,63,688 Termite pest control Allowed expense treatment services 24 Home RBS Home Not Movable 3,22,942 appliances appliance Allowed appliances Pvt. Ltd 25 Timber / Shree Jain Not Movable not 11,23,451 Carpentry Timber Allowed allowed material Depot Pvt. 26 Mirror work Stealth Not Movable not 2,56,898 view Ltd Allowed allowed 27 Glass works Studio Not As above 30,000 Golden Allowed Glass Pvt. Ltd 28 Decor / Retail Taurus Not Movable décor 1,50,000 purchases Retail Pvt. Allowed Ltd 29 Furniture Vardhaman Not Movable not 91,688 accessories Allowed allowed Total 1,28,78,742

2.3 Further, the Ld. CIT(A) relied upon the decision of the Hon’ble Supreme Court in the case of CIT v. Paville Projects (P.) Ltd., [2023] 149 taxmann.com 115 (SC), wherein it is held that assessee’s claim did not qualify as capital expenditure not did they result in any enduring improvement to value of capital asset. Accordingly, he allowed the appeal of the assessee partly.

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4.1 The learned counsel further submitted that the expenditure was duly supported by invoices, ledger accounts and banking records and that similar expenditure had also been examined in an earlier assessment year. It was accordingly contended that the expenditure was capital in nature and represented additions or alterations to the capital asset within the meaning of section 55(1)(b) of the Act.

4.2 The learned Departmental Representative, on the other hand, relied upon the orders of the lower authorities and submitted that expenditure on movable furniture, furnishings, appliances, curtains, artwork, gym equipment and other removable articles could not constitute cost of improvement of the residential flat. It was further submitted that expenditure on routine maintenance or decorative articles could not be converted into capital expenditure merely because it was incurred in connection with the property.

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(i) where the capital asset became the property of the previous owner or the assessee before the 62[1st day of April, 63[2001]], 64[***] means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and (ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in [sub-section (1) of] section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head "Interest on securities", "Income from house property", "Profits and gains of business or profession", or "Income from other sources", and the expression "improvement" shall be construed accordingly. (2) 67[For the purposes of sections 48 and 49, "cost of acquisition"68,--

5.2 On perusal of the above provisions, we find that as far as capital assets other than goodwill of business, the expenditure of capital nature incurred for addition or alteration to the capital assets would qualify for cost of improvement subject to that said expenditure is not deductible while computing income under the heard ‘interest on securities’; ‘income from house property’; ‘profit and gains of the business or profession or income from other sources and the expression ‘improvement’ shall be construed accordingly. The statutory language is clear. Every expenditure incurred in connection with a capital asset does not, merely by reason of its magnitude or its association with the asset, become “cost of improvement”. There are two distinct requirements: first, the expenditure must be capital in nature; and secondly, it must

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be incurred in making an addition or alteration to the capital asset. The expression “improvement” must, therefore, be understood in the context of the capital asset itself and not merely in the context of the expenditure having been incurred while the assessee was in possession or enjoyment of that asset. 5.3 The Hon'ble Supreme Court in Paville Projects Pvt. Ltd. v. CIT, [2024] 160 taxmann.com 759 (SC), has emphasised that, for expenditure to qualify as “cost of improvement”, it must satisfy the statutory requirements of section 55(1)(b); an expenditure cannot be so regarded merely because it has some connection with, or facilitates the transaction concerning, the capital asset. The expenditure must bear the requisite character and nexus with an addition or alteration to the capital asset. 5.4 Thus, we have to examine whether the list of the item mentioned in the order of the Ld. CIT(A) are in the nature of the capital expenditure and whether improved the character of the property which was sold by the assessee. The test is whether the buyer has option of not taking the said item of improvement alongwith property. If, yes then it can’t be inseparable part of building and cost recovered if any from the buyer would be separately taxed in the hand of seller in accordance with law and will not be eligible as cost of improvement.

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5.5 Applying the aforesaid principle on the list of the items disallowed by the Ld. CIT(A), items which are in the nature of the routine repairs or which are not embedded in the property, definitely could not alter or improve the property which includes Pest control termite treatment (Rs. 1,63,688), Miscellaneous Expenses Rs. (6,00,400) Artwork/Paintings (1,00,000/-), Upholstery/Curtains of (Rs. 22,00,000/-), Paints/Chemicals (Rs. 36,782/-), Curtains and Soft furnishings of (Rs. 11,30,231/-), Gym equipment (Rs. 3,00,000/-), Plants /Decor accessories (Rs. 1,21,651/-), Curtains furnishing of (Rs. 43,950/-), Furniture/Furnishings (Rs. 1,81,000/-), Furniture accessories (Rs. 91,688/-) aggregating to Rs. 4,969,390/-. Such expenditure does not bring about any addition to or alteration of the residential flat and, therefore, cannot qualify as “cost of improvement” under section 55(1)(b) of the Act. The disallowance to this extent is accordingly upheld. 5.6 The other expenses incurred on ‘Glass work’, ‘mirror works’, ‘kitchen equipment’, bath accessories’, ‘wallpaper furnishing’ etc. the ld counsel submitted that same goes to fix in the wall of the property of the flat, and therefore, qualify for altering the property and expenditure being in the nature of capital expenditure, qualify for deduction as a cost improvement. Further, regarding the ‘air conditioning /refrigeration work’, the Ld. Counsel for the assessee submitted that air conditioning was installed into the

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wall or ceiling of the flat and was not removable. Similarly, item of the home theatre audio setup also was submitted the same were fixed and installed in walls of the flat and were not removable. Regarding the professional expenses, he has submitted that the same were rendered for ‘interior work’ of the property and which goes towards the capital expenditure. According to him, these items, therefore, qualify for deduction as a cost of improvement. 5.7 Therefore, the assessee's case as regards the remaining items of expenditure is that the same relate to permanent installations and improvements forming an integral part of the residential flat, but the nature and manner of installation of these items require factual examination. The mere description or nomenclature of an item cannot be determinative; what is material is whether the expenditure has resulted in an addition to or alteration of the capital asset and is otherwise capital in nature.

5.8 Since the aforesaid factual aspect has not been examined item-wise by the lower authorities, we consider it appropriate to restore this limited issue to the file of the Assessing Officer. The Assessing Officer shall examine the invoices, payment records, installation details and other supporting evidence furnished by the assessee and determine, item-wise, whether the expenditure satisfies the requirements of section 55(1)(b) of the Act, keeping in

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view the principles laid down by the Hon'ble Supreme Court in Paville Projects Pvt. Ltd. (supra).

5.9 Needless to say, the Assessing Officer shall afford the assessee reasonable opportunity of being heard and thereafter pass a speaking order in accordance with law. We clarify that no opinion is expressed on the ultimate allowability of the remaining items of expenditure.

Order pronounced in the open Court on 14/08/2026.

Sd/- Sd/- (ANIKESH BANERJEE) (OM PRAKASH KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 14/08/2026 Z.U., P.S. Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai

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Date Initials Original dictation pad is enclosed at Yes the end of file 1. Draft dictated on: 06.08.2026 Sr. PS/PS 2. Draft placed before author: .08.2026 Sr. PS/PS 3. Draft proposed & placed before the JM/AM second member: 4. Draft discussed/approved by Second JM/AM Member: 5. Approved Draft comes to the Sr. Sr. PS/PS PS/PS: 6. Order pronounced on: Sr. PS/PS 7. File sent to the Bench Clerk: 8. Date on which file goes to the Head Sr. PS/PS Clerk: 9. Date on which file goes to AR 10. Date of Dispatch of order