The Income Tax Appellate Tribunal (ITAT), Bengaluru, has issued a significant ruling clarifying which expenses can be included in the cost of acquisition while computing capital gains tax on property sales. According to reports from Mint, ET Wealth Online, and GoCredit, the tribunal ruled that one-time maintenance deposits paid to builders, electricity and water deposits, and home loan interest that has not been claimed as a deduction earlier can form part of a property's cost of acquisition while computing long-term capital gains (LTCG). The ruling provides relief for taxpayers seeking to reduce their tax liability through proper documentation and indexation benefits.
The ruling emerged from the case of Santanu Arun Nandi, an NRI who sold a residential property in Bengaluru for about ₹2.63 crore in January 2020. As reported by Mint, ET Wealth Online, and GoCredit, Nandi declared LTCG of ₹16.33 lakh after claiming indexed cost of acquisition and several expenses connected with the property. However, the Income Tax Department disallowed most of these claims, increasing his assessed income from ₹37.09 lakh to ₹76 lakh. The tribunal condoned a delay of 737 days in filing the appeal, observing that the delay arose from pursuing a remedy before the wrong forum. According to GoCredit, Nandi's CA told the ITAT that he has not separately taken any money from the buyer for these specific maintenance expenses, which was crucial in allowing the claims.
The ITAT held that one-time maintenance deposits paid to builders were mandatory for obtaining possession of the flat and therefore constituted part of the cost of acquisition. According to Mint, ET Wealth Online, and GoCredit, since the amount had not been separately recovered from the buyer, it was eligible for indexation while computing capital gains. The tribunal reached similar conclusions for electricity and water deposits paid to builders, holding that these too formed part of the acquisition cost and qualified for indexed cost benefits. The order also provides relief on home loan interest, relying on the Karnataka High Court's ruling in CIT v. Sri Hariram Hotels Pvt. Ltd. and holding that interest paid on a housing loan can be included in the property's cost of acquisition, provided the taxpayer has not already claimed the same interest as a deduction under the head 'Income from House Property.'
Despite allowing most expense claims, the tribunal stopped short of allowing the taxpayer's claim for foreign travel expenses incurred while selling the property. As reported by Mint, ET Wealth Online, and GoCredit, the taxpayer argued that travel from the US to India was undertaken exclusively for completing the sale transaction and relied on an earlier ITAT Hyderabad ruling. However, the tribunal noted that the tax department had disallowed the claim on the ground that the expenditure was not incurred wholly and exclusively in connection with the transfer of the property. Instead of deciding the issue outright, the ITAT remanded the matter to the Assessing Officer to verify whether the travel expenses were directly linked to the sale before allowing any deduction under Section 48 of the Income-tax Act. The ITAT Bangalore said that the DRP held that these travel expenses are not incurred wholly and exclusively in connection with such property sale, and therefore, the same was disallowed.
