The Mumbai Income Tax Appellate Tribunal (ITAT) has ruled in favor of taxpayer Rajesh Saluja, allowing ₹1.52 crore spent on renovating a house to qualify for capital gains tax exemption under Section 86 of the Income Tax Act 2025. According to reports from Mint, this ruling expands the scope of qualifying costs when reinvesting asset-sale proceeds in residential property. The tribunal overturned the tax department's rejection of renovation expenses, establishing that such costs are legitimate when reinvesting capital gains from share sales. The ruling specifically allows expenditure on flooring, walls, painting, tiles, bathroom work, and architect fees, demonstrating that qualifying costs extend beyond the bare purchase price.
Saluja sold shares worth ₹15.4 crore on December 16, 2016, and purchased a residential property for ₹13.90 crore using the proceeds. As reported by Mint, he then spent an additional ₹1.52 crore from the share-sale proceeds on renovation and architect fees, including flooring, walls, painting, tiles, bathroom work, and architect fees totaling ₹2 lakh. The taxpayer deposited the remaining amount in the Capital Gains Account Scheme (CGAS). The tribunal allowed the disputed expenditure under Section 86, rejecting the tax department's argument that spending on a house after buying it did not qualify for exemption. The case demonstrates that even previously rented properties can qualify for renovation expenses when purchased for capital gains tax relief.
According to Mint reports, the tribunal based its decision on two key grounds. First, Section 86 talks about the cost of the new house and sets deadlines for investing, but does not prohibit using sale amount after purchase to renovate within prescribed time limits. Second, the tribunal rejected the assumption that previous occupation made further work unnecessary, noting that what makes a house suitable for living varies with buyer requirements and convenience. The tribunal observed that civil and electrical work, carpentry, painting, flooring, tiles, lights, fans and partitions could not simply be classified as luxury spending. The tribunal cited previous judgments including Nayan Kirit Parikh v. ACIT and G. Siva Rama Krishna v. DCIT, which allowed similar expenditure under Section 54F, establishing a consistent legal precedent for such claims.
Under the current Income Tax Act 2025, Section 86 allows exemption on capital gains from selling shares or mutual funds when reinvested in residential property. As reported by Mint, both Section 86 and Section 82 (Section 54 under the old Act) allow purchase within one year before or two years after asset sale, or construction within three years afterwards. However, starting 2024, there is a ₹10 crore ceiling on the cost of the new house for these exemptions. Chartered accountant Bhawna Kakkar noted that qualifying costs are not confined to bare purchase price, with even stamp duty and registration amounts counted towards the new property's cost. The tribunal's ruling clarifies that laws do not restrict claiming any expenditures towards purchase of new house property as long as conditions are met.
