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Facts
The assessee incurred expenses for interior fit-outs of a property prior to its purchase, which were claimed as cost of improvement. The AO disallowed these expenses, arguing that improvements cannot be made before owning the property.
Held
The Tribunal held that the evidence demonstrated that the fit-out work was part of the agreement for the property and payments were made accordingly, even though the ownership was acquired later. Therefore, the cost of improvement should be allowed.
Key Issues
Whether expenses incurred for interior fit-outs prior to property ownership can be considered as cost of improvement for capital gains computation.
Sections Cited
143(3), 246A
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SUNIL KUMAR SINGH, HON’BLE
Assessee by : Shri Sukhsagar Syal, Advocate. Revenue by : Shri Bhangepatil Pushkaraj Ramesh, Sr. DR सुनवाई की तारीख/Date of Hearing : 14/01/2025 घोषणा की तारीख /Date of Pronouncement: 20/01/2025 आदेश/O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order dated 25/04/2024 by the Commissioner of Income Tax (Appeals), NFAC, Delhi [hereinafter ‘the ld. CIT(A)’], pertaining to AY 2021-22.
The grievance of the assessee reads as under:- “1. On the facts and circumstances of the case and in law, the learned Assessing Officer erred in disallowing the expenses incurred for the interior fit-outs by the Appellant as cost of improvement in computing the capital gains on the sale of the property. 2. Without prejudice to the above, once the expenses incurred for interior fit-outs were not allowed as cost of improvement, the learned Assessing Officer ought to have allowed the same as cost of acquisition of the property while computing the capital gains of the property.”
Briefly stated the facts of the case are that the assessee filed her return of income on 30.12.2021 declaring total income of Rs.2,16,40,200/-. During the year under consideration, the assessee derived income from salary, house property and capital gain. The 2 return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee.
On perusal of the submission of assessee filed during the course of assessment proceedings, the AO noticed that the assessee has sold the immovable property located at DLF City, Phase-V, Gurugram, Haryana at Rs.15.21 crores against which the assessee claimed cost of acquisition at Rs.9,59,95,053/- and cost of improvement amounting to Rs.2,46,66,340/-. The assessee was asked to submit details of cost of improvement claimed in respect of property sold along with evidences.
The assessee filed a detailed reply from which the AO noticed that the assessee had purchased a flat on 27.12.2017 which was booked in October, 2009. The AO found that the assessee had entered into an agreement on 31.05.2010 with DLF Hotels and Apartment Pvt. Ltd. to do improvement. The AO was of the opinion that since the property was purchased on 27.12.2017 and without owning the property how the assessee claims to have made improvement in the said property which according to the AO is not possible. The AO further found that the payment of consideration for improvement of property is as per an unregistered agreement.
The AO was of the firm believe that the cost of improvement claimed by the assessee is much prior to the purchase of property and therefore, the cost of improvement claimed by the assessee is not acceptable and made the addition accordingly.
The assessee carried the matter before the CIT(A) but without any success.
3 8. Before us, the counsel for the assessee vehemently stated that as per the agreement with DLF Hotels and Apartment Pvt. Ltd. dated 31.05.2010, the assessee had made payments for civil and electrical work as the flat was purchases as a “Khoka” flat. The learned counsel stated that after receiving the occupancy certificate civil and electrical work were completed on 29.03.2014 and letter of possession was given on 31.03.2014. Thereafter, the assessee leased out flat on 25.06.2014 and sold vide agreement for sale of flat dated 04.11.2020. The counsel further stated that the assumption by the AO that the assessee could not have spend cost of improvement before taking the ownership of the flat is against the facts of the case.
The learned Sr.DR strongly supported the findings of the AO and read the operative part.
We have given a thoughtful consideration to the orders of the authorities below. The entire quarrel revolves around the fact that the assessee has purchased the flat on 27.12.2017, therefore, the assessee could not have spent the cost of improvement paid to DLF Hotels and Apartments Pvt. Ltd. as per agreement dated 31.05.2010. The impugned agreement dated 31.05.2010 between DLF Hotels and Apartments Pvt. Ltd. and the assessee, the most relevant clause reads as under: “D. AND WHEREAS after examining, evaluating and discussing various lay out options suggested by the Project Management Company, the Apartment Allottee has approached the Project Management Company for arranging Fit Out Work as per layout option annexed as Annexure-II to this Agreement ("Selected Layout Option"). E. AND WHEREAS out of the options of colours, materials, etc. offered for the Selected Layout Option, the Apartment Allottee has chosen the specifications as recorded in Annexure-Ill to this Agreement ("Specifications"). F. AND WHEREAS the Apartment Allottee has approached the Project Management Company vide his letter dated Ap 31,2010 for execution of the Fit Out Work in accordance with the Selected Layout Option, theme, Specifications and the 4 Scope of the work in terms of this Agreement (hereinafter referred to as the "Fit Out Work). G. AND WHEREAS the Project Management Company has explained and the Apartment Allottee has understood and agreed that the Fit Out Work will be executed by Project Management. Company and/or one or more third party service providers (hereinafter referred to as the "Project Execution Company(s)”).”
The scope of work as per Annexure-1 read as under: “The Scope of Work as part of the interior Fit-out works to include: Marble flooring Exquisite imported marble adorns the apartment floors starting from an inviting entrance foyer, flowing un-interrupted through living and dining spaces all the way to the panoramic decks. The color selection varies from warm tones in classic theme to cool shades of modern styling.
Wooden flooring Bedroom floors are a unique blend of style and sustainability. Engineered wood floors combine warmth & beauty of natural timber finishes with durability and easy clean properties of lacquered and engineered wooden panels. You can choose from select shades to best complement your decor.
Walling and tiling The walls are finished in smooth acrylic emulsion paint on plaster of paris punning, the feature wall in each room is distinct and accentuated by either a wall covering or a specialist textured finish. The color palette choice consists of soft shades creating a perfect backdrop to complement any individual furnishing or furniture selection.
False ceiling An interplay of levels in the gypsum board false ceiling, while it intelligently hides the building services, also provides ample space for generous ceiling heights. Ceiling is finished in plastic emulsion with concealed perimeter lighting in coffers and coves complemented by designer cornices as per theme.
Doors and frames All door frames will have generous proportions and crafted from hardwood. The door shutters will be decorative panels with architraves and/or elegant wood vencers to complement the decor complete with quality architectural hardware. Fixed woodwork features like architrave, skirting, pelmet with tracks etc as per design.
Wardrobes and cabinets Built-in modular designer wardrobe with ample storage options in combination of wood and mirror to complement wooden floors and under counter toilet cabinetry, complete with top quality, high performance hardware.
Toilet fittings and fixtures World class toilet fixtures like vanity counter, elegant water closet, glass enclosed shower cubicles in all the toilets and jacuzzi bath tub in master toilet complemented by designer fittings including hot water geysers, water supply piping, drainage, insulation, etc.
Modular kitchen The high end kitchen cabinetry incorporates warm timber finishes, premium granite worktop, fully equipped with built-in quality appliances complemented by anti-skid flooring and wall finishes in combination of glass and vitrified tiles.
Built-in kitchen appliances An elegant blend of brushed stainless steel and premium designer finishes to match cabinetry Hob and exhaust hood Sink with drain board Built-in oven and microwave Dish washer Washing machine and dryer Refrigerator Other services Air-conditioning (chilled water based system), including fan-coil units, ducting, piping distribution, grills and diffusers, thermostats etc.
Electrical works inclusive of conduit and wiring, switches and sockets, distribution boards, standard concealed down lighters etc. low voltage works like telephone wiring, data wiring, satellite TV cabling.
Internal gas piping with safety valve etc.
Civil works like water-proofing, filling sunken areas, sub-floor screeding under wooden floor etc.
Scope of design related works: Space planning Full interior design of all fixed Interior works Design of internal heating, ventilation and air-conditioning, internal electrical and, low voltage works, internal plumbing works, design of internal fire safety issues Indicative furniture and fixtures layout Design of kitchen layout Scope of project management services: Design management Contract and procurement for scope of works Site management Supervision and quality assurance Exclusions from the scope of works: Loose furniture, artworks and accessories, artifacts', curtains, throw rugs/carpets equipment other than the kitchen appliances as mentioned in the scope of work decorative light fixtures, chandeliers etc. Any other item not covered in scope of work.”
Pursuant to the aforementioned agreement, the assessee made payments which are not disputed by the AO.
After the completion of the fit-out work, which are now integral part of the apartment, letter of possession was received on 31.03.2014 which is placed at page 188 of the paper book.
Immediately after receiving the possession, the assessee leased out the flat as per lease agreement dated 25.06.2014 which is exhibited at pages 212 to 218 of the paper book.
These demonstrative evidences go on to demolish the view taken by the AO that the assessee could not have incurred cost of improvement before 27.12.2017.
Considering the facts of the case, in totality, we do not find any merit in the disallowance made by the AO and confirmed by the CIT(A). We accordingly set aside the findings of the CIT(A) and direct the AO to allow the cost of improvement as claimed by the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 20th January, 2025. (SUNIL KUMAR SINGH) ACCOUNTANT MEMBER Mumbai, Dated 20/01/2025 *Prabhat Prabhat Prabhat SrPs Prabhat SrPs SrPs SrPs आदेश की "ितिलिप अ"ेिषत /Copy of the Order forwarded to : अपीलाथ" / The Appellant 1. ""थ" / The Respondent 2. संबंिधत आयकर आयु" / Concerned Pr. CIT 3. आयकर आयु" अपील 4. ( ) / The CIT(A)- िवभागीय "ितिनिध ,आयकर अपीलीय अिधकरण, मुंबई /DR,ITAT, Mumbai, 5. 7