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Facts
The revenue appealed an order by the CIT(Appeals) which allowed the assessee's claim for the cost of improvement for a property. The Assessing Officer had disallowed this claim due to various discrepancies in the agreements and lack of evidence.
Held
The Tribunal held that the assessee failed to discharge the onus of proving the authenticity of the claim for cost of improvement with irrefutable documentary evidence. The inconsistencies in agreements, timing of incorporation, and lack of substantiation led to the disallowance of the claim.
Key Issues
Whether the claim for cost of improvement is substantiated with adequate evidence, considering the discrepancies in contractual agreements and the timing of the contractor's incorporation.
Sections Cited
143(3), 144B, 143(2), 142(1), 270A
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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
करदाताका""त"न"ध"व/ : Shri M. Naga Deepak, Advocate Assessee Represented by राज"वका""त"न"ध"व/ : Mrs. U. Mini Chandran, CIT-DR Department Represented by सुनवाईसमा"तहोनेक""त"थ/ : 30/10/2025 Date of Conclusion of Hearing घोषणा क" तार"ख/ : 10/12/2025 Date of Pronouncement ORDER PER RAVISH SOOD, JM:
The present appeal filed by the revenue is directed against the order passed by the CIT(Appeals), dated 16/01/2025, which in turn arises from the order passed by the Assessing Officer (for short, “AO”) under Section 143(3) r.w.s 144B of the Income tax Act, 1961 (for short, “Act”) dated 21-03-2024 for the Assessment Year 2022-23. The revenue has assailed the impugned order of the CIT(Appeals) on the following grounds of appeal before us:
“1. The learned CIT(A) erred in allowing the cost of improvement at Rs. 11.25 crores when the assessee himself has made a contradictory claim in the ITR with reference to various financial years of improvement in cost.
2. The Ld. CIT(A) ought to have appreciated the action of the AO that there cannot be an legal sanction to an agreement made by the assessee with Gajwel Developers Pvt Ltd on 26.05.2021 when the later company did not came into existence on that date but incorporated only on 16.02.2022. \ 3. The Ld. CIT(A) failed to observe that when the assessee has sold the property to M/s Vivo Biotech Ltd on 28.02.2022 there is no scope for any separate/revised MOU dt. 28.02.2022 by the assessee with Gajwel Developers Pvt Ltd.
4. The Ld. CIT(A) ought to have appreciated that mere making TDS on the payments made to M/s Gajwel Developers Pvt Ltd is not the conclusive proof to certify the genuineness of the transactions towards costs incurred.
5. The Ld. CIT(A) erred in allowing relief to the assessee based on self-serving agreements entered into by the assessee with various concerns without insisting on actual payments made towards cost of improvement for various FYs as per ITR for AY 2022-23.
6. Any other ground that may be urged at the time of appeal hearing.”
Succinctly stated, the assessee company, which is engaged in the business of developing and operating laboratory space and research & development centres, had filed its return of income for the Assessment Year 2022-23 on 29-12-2022, declaring an income of Rs. 6,36,34,062/-. Subsequently, the case of the assessee company was selected for complete scrutiny under CASS for verifying the substantial amount that it had claimed to have incurred under the head “Cost of Improvement”, as was disclosed in “Schedule CG” of its return of income for the subject year, i.e., AY 2022-23. Notices under section 143(2) and section 142(1) were thereafter issued and served upon the assessee company.
3. During the course of the assessment proceedings, the AO observed that the assessee company in its return of income had declared sale of immovable property for a consideration of Rs. 20,56,80,640/-, and after reducing indexed cost of acquisition and cost of improvement, disclosed “Long term capital gain” (LTCG) of Rs. 4,21,57,691/-. The AO called upon the assessee company to furnish complete particulars and documentary evidence in relation to its claim for deduction of “cost of improvement”, viz. bills, labour charges, contractual receipts, bank statements evidencing payments, copies of sale deeds and purchase deed and working of capital gains. In response, the assessee company produced copies of an original work contract dated 26.05.2021 with M/s Gajwel Developers (initially climed to be a proprietorship concern) and a revised contract dated 28.02.2022 with Gajwel Developers Pvt. Ltd., along with bank statements showing payments to the contractor, ledger extracts and TDS challans.
The AO observed that the assessee company had in its return of income for the subject year initially disclosed year-wise cost of improvement during the period spread over FY 2013-14 to FY 2017-18, which, when indexed, aggregated to a specified amount. However, the AO observed that the assessee company, during the course of the assessment proceedings, had revised/claimed the cost of improvement at Rs. 15,32,65,306/- (stating payments made to M/s Gajwel Developers and supporting ledger and bank statement extracts and TDS challans).
5. On perusal of the record, the AO had certain serious reservations regarding the claim of the assessee company for deduction of “cost of improvement” for multi-facet reasons, viz. (a) though the original work contract was dated 26-05-2021 but M/s Gajwel Developers Pvt. Ltd., i.e., the contractor company which was claimed to have carried out the improvement to the subject property, as per the records of the Ministry of Corporate Affairs (MCA) was shown to have been incorporated only on 16-02-2022; (b) the assessee company had though sold the property to M/s Vivo Biotech Ltd. by way of sale deed dated 26/28-02-2022, but the revised MOU/contract dated 28-02-2022 executed between M/s Gajwel Developers Pvt. Ltd. (supra) and the assessee company appeared to have been executed after or with the sale; (c) the signatory named in the MOU/contract dated 28.02.2022 as director of the assessee company, viz. Shri. Garimella Venkat Subrahmanyam was not a director at the relevant point of time as observed by the AO; and (e) the assessee company had not filed certain documents which the AO considered necessary to corroborate the year-wise basis of the expenditure that was claimed to have been incurred towards the cost of improvement of the subject property.
6. Apart from that, the AO observed that the assessee company, when filing its return of income, had disclosed year-wise improvements for earlier years, i.e., FY 2013-14 to FY 2017-18, but had, during assessment proceedings, taken a volte-face and claimed a lump sum amount of Rs. 15,32,65,306/- as having been incurred towards construction/improvement during the subject year, i.e., FY 2021-22. The AO, based on the aforesaid facts that had unfolded in the course of the assessment proceedings, doubted the genuineness and veracity of the claim and the chronology of events as were raised by the assessee company.
The AO, observed that though the payments towards the “cost of improvement” of the subject property were shown to have been made by the assessee company during FY 2021-22 and that the original agreement provided for development work to be completed by 31-03- 2022 (with a revised cut-off date in the revised contract), but that the contractor company’s incorporation date on MCA suggested that the corporate entity did not exist on the date on which the original MOU was executed. Accordingly, the AO held a firm conviction that, in the backdrop of the aforesaid facts and the lack of corroborative approvals/permissions, as well as the absence of full documentary evidence, the claim of the assessee company of having incurred expenditure towards the cost of improvement of the subject property was not established.
The AO, based on his aforesaid deliberations, disallowed the claim of the assessee company for deduction of “cost of improvement” of Rs. 15,32,65,306/-, and computed the Long-term capital gain (LTCG) on the transfer of the subject property at Rs. 19,54,22,998/-. Accordingly, the AO vide his order passed under Section 143(3) r.w section 144B of the Act, dated 21-03-2024, recomputed the total income of the assessee company at Rs. 21,68,99,368/-.
Aggrieved, the assessee company carried the matter in appeal before the CIT(A). The assessee company in the course of the appellate proceedings assailed the disallowance of its claim for deduction of “cost of improvement” by the AO based on multi-facet grounds, viz. (a) payments were actually made to the contractor and evidenced by bank statements and tax was deducted at source on the subject payments; (b) the original work contract was entered into by the assessee company with the proprietorship concern which later became a private limited company and therefore, the AO’s reliance on incorporation date was misplaced; (c) the sale agreement expressly contemplated carry-forward of development work and the obligation to pay the development cost was cast upon the assessee company; and (d) the AO ought not to have treated the MOU as fake merely due to overlap of directors or change in corporate form.
Ostensibly, the assessee company challenged the AO’s action on facts and law before the CIT(A), and disputed the AO’s conclusion regarding the genuineness of the payments that were made by the assessee company towards the cost of improvement of the subject property. Also, the assessee company to support its claim for deduction had again filed before the CIT(A) supporting documents, viz. agreements, bank statements, ledger extracts and Form DIR-12 and other material.
We find that the CIT(A) after considering the material on record, and drawing support from the original agreement and surrounding circumstances, as well as by relying on the proposition that change of legal form of the contractor does not per se invalidate an earlier contract, and that the sale agreement contained clauses dealing with ongoing development obligations, observed that the assessee company had incurred cost of improvement and allowed its claim for deduction of “cost of improvement” of Rs.11.25 crores. Accordingly, the CIT(A) partly allowed the appeal. For the sake of clarity, we deem it apposite to cull out the observations of the CIT(A), as under:
“6.1 All the arguments and the submission made by the appellant have been duly considered. After careful perusal of the assessment order passed by the AO, it is noticed that the AO had made core allegation that the appellant claimed the cost of improvement for an amount of Rs.
15,32,65,306/- which was paid to the Contractor during the year under consideration. The AO’s contention that the appellant has claimed cost of improvement from the year 2013-14 to 2017-18 in the return filed, however, the contract work was signed in the year 2021-22 which was subsequently revised to extend the time line to complete the work assigned to contractor. 6.2 The AO’s allegation that the work contract was signed by Mr. Garimella Venkata Surya Subrahmanya who was not holding any signatory designation in the appellant company. The appellant in this regard filed the Form DIR-12 as per the company Act 2013 and Rule 17 of the Company rule in which Mr. Venkata Surya Subrahmanya was reported as director of the company. At later stage Mr. Subrahmanya had made resignation from the company as director. The copy of the notice sent by Mr. Subrahmanya has also been filed by the appellant for consideration. Therefore, this allegation made by the AO is countered by the appellant. The submission in this regard by the appellant has been found in order. 6.3 Another allegation made by the AO that the work contract was executed with the Contractor M/s. Gajwel Developers Pvt. Ltd on 26.05.2021 whereas the contractor company came into existence on 16.02.2022. The appellant has submitted during appellate proceedings, that M/s. Gajwel Developers was engaged in the business of construction and development in the capacity of Proprietorship not company at the time of execution of original work contract. Later, the proprietorship was registered as company namely M/s. Gajwel Developers Pvt. Ltd. With ROC on 16.02.2022 and thereafter the work contract was revised with the company. The necessary supporting evidence have been submitted by the appellant in support of its contention. The relevant documents submitted by the appellant have been duly perused. From the original Work Contract, it is noticed that the work contract was executed by the appellant company and M/s. Gajwel Developers not Gajwel Developers Pvt. Ltd. The appellant also relied on the judicial pronouncement in the case of CIT v Madras Auto Service (1986) in which it was held that the legal status of an entity does not affect the enforceability of contracts entered into by it before its change in structure. The undersigned find force in the argument of the appellant and found in order. It is also logical that when an agreement is revised due to a change in the structure of an entity, the original contract can be amended to reflect the change without invalidating it. This may be done through a contract amendment, which is a formal change to an existing contract. Therefore, the allegation made by the AO is not prudently established. 6.4 The instant case is having major four events, they are: i) On 26.05.2021- Original work Contract and conditional development agreement ii) On 03.12.2021 - Agreement of sale of the property with M/s. Vivo Biotech Ltd. iii) On 26.28/02.2022- The property was sold to M/s. Vivo Biotech Ltd. iv) On 28.02.2022- Revised work Contract and Conditional development agreement 6.5 It is noticed that the original work contract and conditional Development Agreement for the property in question was singed on 26.05.2021 by the appellant and the contractor. Later, an agreement of sale was executed by the appellant company with M/s. Vivo Biotech Ltdon 03.02.2021. The original work contract was revised on 28.02.2022 6.6 While going through the agreement of sale made on 03.12.2021 by the appellant company with M/s. Vivo Biotech Limited, it was inserted in the agreement that the appellant company has made a contract work of development of the property under sale, with the contractor and the work has been commenced and will be carried out by the contractor even after the sale of the property. The entire obligation of payment will lie upon the appellant company as per the contract made. The details of the scope of the work as mentioned in the original development agreement as submitted by the appellant are as under: The appellant also submitted that at later stage, the details of the scope of the work as mentioned in the revised development agreement are as under:
Sl Activity Amount in no Rs. Cr 1. Rock breaking without breaking and disposing Rs.3.50 broken rock 2. Landscaping, bore wells, pipeline, overhead tank Rs.1.50 and sumps 3. Perimeter compound wall Rs.1.40 4. Entrance arcade, security Post & Gate Rs.0.43 5. Road in the interior of the Science park Rs.1.70 6. Parking Plot Marking and sheds Rs.0.20 7. Internal Drainage lines Rs.0.60 8. Internal Power Lines Rs.0.75 9. Pest Control Rs.0.10 10. Rainwater harvesting pits Rs.0.20 11 Effluent Treatment Plant (ETP) Rs.0.35 12. Sewage Treatment Plant (STP) Rs.0.32 13. Common Office Area Rs.0.10 14. Common Canteen and Dining facility to staff Rs.0.10 Total Rs.11.25 Sl Activity Amount in no Rs. Cr 1. Rock breaking without breaking and disposing Rs.3.50 broken rock 2. Landscaping, bore wells, pipeline, overhead tank Rs.1.50 and sumps 3. Perimeter compound wall Rs.1.40 4. Entrance arcade, security Post & Gate Rs.0.43 5. Road in the interior of the Science park Rs.1.70 6. Parking Plot Marking and sheds Rs.0.20 7. Internal Drainage lines Rs.0.60 8. Internal Power Lines Rs.0.75 9. Pest Control Rs.0.10 10. Rainwater harvesting pits Rs.0.20 11 Effluent Treatment Plant (ETP) Rs.0.35 12. Sewage Treatment Plant (STP) Rs.0.32 13. Common Office Area Rs.0.10 14. Common Canteen and Dining facility to staff Rs.0.10 15. Substation and DG back-up Rs.1.25 16. Compressed Air Generator & Pipeline Rs.0.50 Total Rs.13.00 6.7 It is evident here that the cost incurred for improvement of the property was inclusive of the sale agreement made by the appellant. In the layman view, when the agreement was executed keeping in the view that the undergoing development process would be continued even after the sale of agreement and execution of sale, the consideration was finalized between the parties. Once, the appellant company was obliged to pay the development cost, it will only be eligible to claim such cost of improvement. The AO during the assessment proceedings, did not bring any material on record that the development cost paid to the contractor was not genuine or any kind of mischievous act was done to evade the tax. The applicable TDS was also deducted while making payment to the contractor. When the cost was incurred by the appellant company, it will only be eligible to claim such cost unless any circumstantial evidence prevents. The prime obligation rests with the appellant company for making such payments which was part of the sale agreement. Therefore, the cost incurred by the appellant company cannot be denied only on the basis that the property was sold. Further, the revised agreement was made with the contractor only for extension of deadline for completion of development process and such event should not be taken adversely to deny the claim of any deduction. The AO in this regard ought to have looked into the circumstantial evidence that the appellant company has made payment to the contractor as per the contract work which would be binding on the contractor even in the case of selling out of the property. It is also important to clarify that to claim the cost of improvement and indexation cost, the appellant has to furnish evidence and even in the absence of any evidence, the agreement of sale or registered sale deed can also be accepted as evidence. In the instant case, the agreement of sale also includes the provision of ongoing development work project and accordingly the terms and conditions were inserted in the clause of the agreement which justified the claim of the appellant. 6.8 There are various judicial pronouncement in which it has been held that when the payment towards cost of improvement have been paid by any person and there is substantial evidence in this regard, the claim of cost of improvement cannot be denied. The judicial pronouncements relied upon by the appellant have also been perused and taken in considering before deciding the issue. Further, In the case of S.P. Balasubramaniyam vs. Income-tax Officer [2013] 37 taxmann.com 260 (Chennai - Trib.)/[2013] 24 ITR(T) 47 (Chennai - Trib.)/[2013] 144 ITD 525 (Chennai - Trib.)[29-04-2013], the Hon’ble ITAT, Chennai Bench has held as under: “2. The brief facts of the case are that the assessee is a renowned playback singer, actor and proprietor of recording theatres filed return of income showing net taxable income at Rs. 34,80,280. The assessee also declared short-term capital gain of Rs. 35,48,200 in respect of sale of building at Hyderabad. The assessee while computing capital gains claimed cost of improvement of property at Rs. 39,69,500 which was paid to contractors for improvement and construction of the property. It was the submission of the assessee that he has purchased a semi-finished building and made alterations and additions for using it as dubbing and recording theatre. In this process, the assessee made payments to contractor for the works. It was also the submission of the assessee that the assessee has deducted TDS on payments made to these contractors. However, the Assessing Officer while completing the assessment did not accept the submission of the assessee and excluded cost of improvement for the purpose of computing capital gains. On appeal, the Commissioner of Income-tax (Appeals) directed the Assessing Officer to verify the expenditure of Rs.25,74,500 claimed by the assessee in respect of payment made to one Shri P. V. Prasad as the assessee produced bank account wherein the assessee paid the said sum to Mr. P. V. Prasad for construction purposes. In respect of the balance of Rs. 13,17,000, paid to contractors the Commissioner of Income-tax (Appeals) denied the cost of improvement stating that the assessee himself admitted that contract work was not carried out by the above persons. The assessee is in appeal before us.
Counsel for the assessee submits that the assessee made payments to various contractors for modification and alteration of the property in order to suit the property as dubbing and recording theatre. Counsel for the assessee submits that the contractors left without carrying out the work due to some differences with the assessee in carrying out the work. The counsel submits that the assessee himself carried out the work later and completed the works. Counsel submits that the assessee had in fact, deducted TDS on payments made to those contractors and remitted the TDS to government account. Therefore, he submits that there is no justification in denying the cost of improvement of Rs. 13,70,000 on the ground that the contractors have not completed the work.
4. The Departmental representative supported the orders of the lower authorities.
Heard both sides. Perused the orders of the lower authorities and materials on record. It is a fact that the assessee made payments to sub-contractors which is not in dispute. The assessee also deducted TDS on such payments to contractors is also not in dispute. It is also a fact that the assessee himself carried out the unfinished portion of the building without which he could not have used that property as dubbing and recording theatre. It is a fact that the assessee has sold the property, i.e., dubbing and recording theatre. So it is not the contention of the Assessing Officer that the cost of improvement was not at all met by the assessee. The assessee has paid amounts to contractors deducting TDS. Therefore, in our view, the assessee cannot be denied cost of improvement for the purpose of computing capital gains simply because the contractors to whom the payments were made did not carry out the work. Therefore, we direct the Assessing Officer to consider Rs. 13,70,000 in computing the capital gains as cost of improvement of the asset and recompute the capital gains.
In the result, the appeal of the assessee is allowed.” 6.9 In the case of ACIT vs. Amrutlal Babaldas Patel [2022] 145 taxmann.com 505 /[2022] 98 ITR(T) 131, the Hon’ble ITAT Bench, Surat Bench held that: “20. However, we find that the Assessing officer has not disputed the nature of work on which expenses on account of improvement was incurred. Though, the DCIT, Sabarkantha in his report submitted that some development work on the nonagricultural land was carried out 3- 4 years back from the date of his visit, however, the items of works claimed by assessee and reported by DCIT is different. Therefore, keeping in view the entire facts and circumstances of the case, instead of restoring the matter to the file of Assessing Officer, we deem it appropriate to disallow the part of cost of improvement expenses to avoid the possibility of revenue leakage. Considering the fact that neither the assessee could substantiate with documentary evidence about the genuineness of expenses nor the Assessing Officer brought comparable instances for similar improvement expenses on record, therefore, the order of ld. CIT(A) is modified and A.O. is directed to disallow 50% of improvement expenses out of total improvement expenses.” 6.10 Under these circumstances and in view of the above discussion, the undersigned is of considered view that as the appellant has incurred the cost of improvement due to which the property cost was estimated at the consideration price and there was nothing infirmity found in the deal and claiming cost of improvement as per the original agreement of work contract. Therefore, the appellant is eligible to claim cost of improvement. Further, as in the original agreement, the cost of improvement was claimed at Rs. 11.25 Crore, the same is hereby allowed. Accordingly, the grounds Nos. 1 to 12 are partly allowed.
7. Ground No. 13 Through this ground of appeal
, the appellant has contended against the initiation of penalty proceedings u/s.270A of the Act. In this context, it is pertinent to clarify that mere initiation of penalty proceedings does not constitute ground for appeal before CIT(A) unless the proceedings reach to its finality. In the instant case, as the penalty did not reach to its finality and thus ground raised by the appellant is not sustainable. Accordingly, the ground No. 13 is dismissed.
8. In the nutshell, the appeal filed by the appellant is partly allowed.”
12. The revenue, aggrieved with the CIT(A) order, has carried the matter in appeal before us.
We have heard the learned Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them.
We find on a perusal of the record that the following facts emanate from the orders of the authorities below:
(i). the assessee company had, in its original return of income, claimed indexed “cost of improvement” spread over the years, i.e., FY 2013-14 to FY 2017-18. However, the assessee company has failed to place on record any purchase bills, contractor invoices, statutory approvals, or any other corroborative documentary evidence that would substantiate its claim of having incurred the year-wise expenditure on improvement as claimed.
(ii). the primary contract relied upon by the assessee company, i.e., the “original work contract” dated 26.05.2021, on its face referred to an arrangement with “M/s Gajwel Developers”. However, the AO, on factual verification available on record, had observed that the said company, viz. M/s Gajwel Developers Pvt. Ltd., i.e., the contractor, was incorporated only on 16.02.2022 as per the