SAILAJA MOVVA REP BY L/R RAMAKRISHNA MOVVA,HYDERABAD vs. ITO, (INT. TAXATION) -1, HYDERABAD

Succinctly stated, the assessee who is a Non-Resident Indian (NRI), had filed his return of income for AY 2023-24 on 20/07/2023 declaring an income of Rs.16,35,371/-, wherein he had disclosed “capital

As is discernible from the record, the assessee, viz., Smt. Sailaja Movva, had expired on 0/08/2024, and her legal representative, viz., Sri Ramakrishna Movva had brought the said fact to the notice of the AO and placed on his record a copy of the death certificate issued by GHMC.

During the course of the assessment proceedings, the AO called upon the assessee to explain the claim for deduction under section 54 of the Act of Rs.1,28,34,530/- raised in the return of income filed by the assessee. In reply, the assessee placed on record documentary evidence to support his aforesaid claim of deduction under section 54 of the Act. The AO observed that the details filed by the assessee revealed that he had claimed, viz., (i) cost of acquisition: Rs. 3,07,03,883/- (as against Rs.1,05,00,000/- mentioned in the purchase deed); (ii) transfer expenses: Rs. 34,58,004/-; and (iii) cost of improvements: Rs.8,13,060/-. The AO based on the details filed by the assessee called upon him to explain the variation in the cost of acquisition of Rs.3,07,03,833/- as against that mentioned in the purchase deed along with supporting documentary

Ostensibly, the assessee vide his reply, dated 10/03/2025, submitted before the AO that the amount of Rs.3,07,03,833/- was the amount that was paid to M/s. Total Environment Buildings Systems (P) Limited (for short, “M/s. TEBSPL”) for purchase of the subject property, and had placed on record a copy of the receipt issued by the latter. Apropos the claim for deduction of “cost of improvement”, it was the assessee’s claim that as per the lease deed, the lessee had furnished the accommodation and therefore, the aforesaid amenities were provided, which, thus, were claimed as part of the “cost of improvement”.

The AO perused the certificate issued by M/s. TEBSPL, wherein it had stated to have received an amount of Rs.3,07,03,883/-, but observed that the same was not supported by any documentary evidence, viz., bills/vouchers, ledger account and bank account statement. As regards the assessee’s claim for deduction of Rs.8,13,060/-, the AO held a conviction that as the subject expenditure claimed to have been incurred was not for making any addition or alteration to the capital asset, thus the 6 Ramakrishna Movva vs. ITO same was not acceptable. The AO once again put the assessee to notice, wherein he was called upon to explain as to why the claim for deduction of “cost of acquisition” may not be restricted to Rs.1,05,00,000/-, as well as the claim for deduction of cost of improvement be not disallowed. In reply, the assessee submitted that he had entered into an agreement with M/s. TEBSPL on 29/11/2007 for a consideration of Rs.3,07,03,833/-, which comprised of, viz., (i) purchase consideration: Rs.2,95,68,000/-; (ii) maintenance: Rs.8,44,048/-; and (iii) membership to club: Rs.3,37,080/-. Elaborating further, it was the claim of the assessee that he had availed a housing loan of Rs.2,03,45,200/- for meeting the cost of acquisition, and to support his claim enclosed a copy of the loan closure letter issued by HDFC Bank. As regards his claim for deduction of cost of improvement, the assessee submitted that the word “cost of addition/alteration” is not defined in the Act and relied upon the Accounting Standard (AS)-10 issued by the ICAI in support of his aforesaid claim. The AO after necessary deliberation on the details/documents filed by the assessee, observed that as the assessee had availed a housing loan of Rs.2,03,45,200/-, thus the sale consideration paid by him could be accepted to the said extent.

Apropos the assessee’s claim for deduction of “cost of improvement”, the AO held a conviction that the purchase of items like TV, Refrigerator, etc., cannot be treated whole or part to the capital asset.

The AO vide his draft assessment order passed under section 144C(1) of the Act, dated 27/03/2025, proposed to make an addition of Rs.2,17,14,549/- towards long term capital gains (LTCG) disclosed by the assessee on the sale of house property, which was comprised of, viz., (i) restricting the assessee’s claim for deduction of cost of acquisition of the property (to the extent of amount of housing loan granted to him): Rs.2,03,45,200/- (as against the “cost of acquisition” claimed by the assessee in her return of income of Rs.3,07,03,833/-); and (ii) declining the assessee’s claim for deduction of cost of improvement of Rs.8,13,060/-.

Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP), Bengaluru (for short, “DRP”).

The assessee in the course of the proceedings before the DRP, submitted certain additional evidence to support his claim that an amount of Rs.3,07,03,833/- was paid to the builder/developer with respect to the 8 Ramakrishna Movva vs. ITO subject property sold during the year under consideration, i.e., bank account statement of the assessee from which payment/remittance was made to the developer. The DRP called for a “remand report” from the AO, who was not convinced with the claim of the assessee regarding the transfer/remittance of the amount from his joint bank account of the assessee with Emirates Bank International Limited to the account of the developer. However, the DRP after deliberating on the details that were filed by the assessee in the backdrop of the “remand report” of the AO and the bank account statements of the assessee, observed that the assessee had produced details of all payments except the last payment of Rs.29 lakhs purportedly claimed to have been made on 18/01/2010. Accordingly, the DRP was of the view that though the assessee had explained the source of the payments to the developer’s account to the extent of Rs.55,55,188/-, viz., (i) on 13/09/2007: Rs.10,00,000/-; (ii) on 21/12/2007: Rs.23,94,800/-; and (iii) on 31/07/2009: Rs.21,60,388/-, but had failed to substantiate the payment of Rs.29 lakhs that was stated to have been made to the developer on 18/01/2010. Accordingly, the DRP directed the AO to allow the deduction of indexed “cost of acquisition” based on the aforesaid payments aggregating to Rs.55,55,188/- (supra) for computing the long term capital gains (LTCG) on the transfer of the subject property. However, the DRP upheld the view taken by the AO who had declined to allow the assessee’s claim for deduction of “cost of improvement” of Rs.8,13,060/-.

Aggrieved, the assessee had carried the matter in appeal before us.

We have heard the Learned Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

Shri R. Raja Sekhar, CA, Learned Authorized Representative (for short, “Ld. AR”) for the assessee at the threshold of hearing of the appeal, had placed on record an application seeking admission of the (i) certificate issued by HSBC Bank, dated 22/01/2011; (ii) certificate of M/s. TEBSPL, dated 10/02/2023; and (iii) certificate of M/s. TEBSPL, dated 25/04/2025, as additional evidence. The Ld. AR submitted that as the assessee had expired on 08/08/2024, therefore, the aforementioned documents could not be filed in the course of the proceedings before the lower authorities. The Ld. AR submitted that as the aforementioned documents will have strong bearing on the adjudication of the present appeal and there are justifiable reasons as to why the same could not be placed on record before the lower authorities, the same in all fairness and in the interest of justice be admitted.

Per contra, Dr. Sachin Kumar, Learned Senior Departmental Representative (for short, “Ld. Sr-DR”) did not seriously object to the admission of the aforesaid documents as additional evidence before us.

We have given thoughtful consideration and are of the view that as the above mentioned documents prima facie will have a strong bearing on the adjudication of the issue involved in the present appeal, i.e., quantification of the long term capital gains (LTCG) on the transfer of the property, the same in all fairness and in the interest of justice be admitted.

We find that it is the assessee’s standalone contention qua the aforesaid issue that, the AO had erred in law and facts of the case in not considering the payment of Rs.29 lakhs made by the assessee to M/s. TEBSPL, i.e., the seller of the property as part of the “cost of acquisition” while recasting the amount of capital gains arising on the transfer of the subject property.

In our view, as the assessee to support his aforesaid contention, wherein he has claimed that an amount of Rs.29 lakhs was paid to M/s. TEBSPL, i.e., the seller of the aforementioned property vide TT transfer, dated 18/01/2010, vide receipt No.140000013 by way of remittance from her bank account with HSBC Premier, Branch: Dubai, UAE for purchase of Unit No.0056 in the latter’s residential project, viz., “Windmills of Your Mind”, has been filed before us for the first time and was not there before the lower authorities, therefore, the matter is set aside to the file of the AO with a direction to consider the aforesaid claim of the assessee in the backdrop of the said documentary evidence and recompute the long term capital gains arising on sale of the subject property, and his claim for deduction under section 54 of the Act. The grounds of appeal Nos.1 to 3 are allowed for statistical purposes in terms of our aforesaid observations.

Coming now to the second issue, we find that both the lower authorities, i.e., AO/DRP had erred in law and facts of the case in discarding the assessee’s claim that the cost of expenditure incurred by him towards making addition/alteration to the subject property, viz., purchase of items like TV, Refrigerator, etc., were not to be taken as cost of improvement while computing the “capital gains” on the transfer of the property.

As observed by us herein above, the AO, by referring to the meaning of “cost of improvement” under section 55 of the Act had observed that the purchase of items like TV, Refrigerator, etc., cannot be treated as addition/alteration to the property purchased by the assessee and thus, declined to allow the assessee’s claim for deduction of the same as “cost of improvement” while computing the capital gains on the transfer of the subject property. Also, we find that the DRP, vide its order dated 29/09/2025 found no infirmity in the view taken by the AO, and had upheld the same to the said extent.

We have given thoughtful consideration to the contentions advanced by the Learned Authorized Representatives of both parties regarding the aforesaid issue.

We find substance in the Ld. AR’s contention to the extent that the expenditure incurred by the assessee in furnishing the flat ought to have been allowed as “cost of improvement”, for the reason that a furnished flat would fetch significant more value than the unfurnished raw flat. In our view, the AO had erred in summarily rejecting the claim of the assessee, as he ought to have allowed the expenditure that was incurred by the assessee for not only rendering the house habitable but also for furnishing the same, which as observed by us herein in above would be dominant factor for fetching higher sale consideration on selling the same either unfurnished or semi-furnished. Our aforesaid view is supported by the order of the ITAT, Delhi in Vandana Mathur vs. ITO, Ward- 4 (5) Gurgaon, ITA No.1031/Del/2024, dated 30/04/2025. However, we are conscious of the fact that the cost incurred by the assessee only to the extent of rendering the subject house as habitable and furnishing the same would require necessary verification, based on the documentary evidence, the matter in all fairness and in the interest of justice is set aside to the file of the AO for fresh adjudication in terms of our aforesaid observations. Needless to say, the AO shall in the course the set aside proceedings afford a reasonable opportunity of being heard to the 13 Order pronounced in the open court on 29th April, 2026. S /- /- (मधुसूदन साव"डया) (रवीश सूद) (MADHUSUDAN SAWDIA) (RAVISH SOOD) लेखासद"य/ACCOUNTANT MEMBER "या"यकसद"य/JUDICIAL MEMBER d/- Hyderabad, dated 29/04/2026. OKK/sps आदेशक"""त"ल"पअ"े"षत/ Copy of the order forwarded to:-

The Principal Commissioner of Income Tax, Hyderabad.

"वभागीय""त"न"ध, आयकरअपील"यअ"धकरण /DR,ITAT, Hyderabad.

The Commissioner of Income Tax 6. गाड"फ़ाईल / Guard file