Expenditures on repairs, maintenance, and furniture cannot be treated as cost of improvement for capital gains computation

ITAT Jaipur denied the appellant's claim for indexed cost of acquisition while computing capital gains, ruling that expenditures on current repairs, maintenance, and furniture cannot be treated as cost of improvement to capital assets. The AO's denial was upheld as lawful. However, the tribunal remanded the matter to the AO on grounds of natural justice, directing that the assessee be given an opportunity to represent their claim with proper verification of facts and due process before final determination of taxable income.

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The appeal challenges the order passed under section 250 of the Income Tax Act relating to assessment year 2015-16, arising from an assessment order issued under sections 147 read with 144 and 144B by the National Faceless Assessment Unit. The principal issues concern the validity of reopening the assessment, the legality of notices issued, the correctness of additions/disallowances made in the assessment, and procedural compliance including limitation and natural justice.

Issues Presented and Considered:

1. Validity and jurisdiction of notices issued under sections 148 and 148A of the Income Tax Act, including whether the notices were barred by limitation.

2. Whether the assessment proceedings initiated manually under section 148A comply with the faceless assessment requirements under section 151A.

3. Whether the reopening of assessment under section 147 was based on valid reasons to believe and proper application of mind or was a mere change of opinion or suspicion.

4. Whether the additions/disallowances made, particularly disallowance of construction expenditure claimed as indexed cost of improvement and additions under section 50C, are justified on facts and law.

5. Whether the assessee was afforded adequate opportunity of hearing and compliance with mandatory procedural requirements under section 148A, including minimum notice period.

6. Whether the addition of long-term capital gains (LTCG) computed on stamp duty valuation is valid, and whether the claim for cost of construction and additional stamp duty as part of cost of acquisition/construction is allowable.

7. Whether the assessee is entitled to credit for TDS claimed but not allowed in assessment.

8. Whether the additions made are within the scope of reasons recorded for reopening and whether the AO exceeded jurisdiction by making additions beyond the reasons to believe.

Issue-wise Detailed Analysis:

1. Validity and Jurisdiction of Notices under Sections 148 and 148A and Limitation

The AO issued notice under section 148 dated 30.03.2022 on the basis that income of Rs. 1,78,23,747/- escaped assessment due to receipt of interest income, purchase and sale of immovable property, and non-filing of return. The assessee challenged the validity of the notice on grounds of lack of jurisdiction, absence of valid reasons to believe, and limitation.

The Tribunal noted that for AY 2015-16, the old provision of section 149(1)(b) applied, which allowed issuance of notice under section 148 within 6 years. The notice dated 30.03.2022 was within the 6-year period and hence valid. The Tribunal also relied on the Supreme Court decision in Union of India vs Ashish Agarwal, which validated notices issued under pre-amended provisions by treating them as deemed show cause notices under section 148A.

The assessee's contention that the notice was barred by limitation under the amended section 149 (Finance Act 2021) was rejected, as the amendment was prospective from 01.04.2021, and the old law governed the notice issuance for AY 2015-16.

Regarding the reasons to believe, the Tribunal emphasized settled law that the AO must have tangible material or information forming a proximate nexus with escapement of income, not mere suspicion or change of opinion. The AO's reasons were found to be vague, based on incorrect factual premise (alleged purchase of property not admitted by assessee), and not supported by independent material. Reliance was placed on authoritative precedents emphasizing that reopening must be based on objective reasons and application of mind.

However, since the assessee participated in reassessment proceedings without objecting to the notice validity at that stage, and the notice was issued within limitation, the reopening was held valid. The Tribunal observed that objections to notice validity raised for the first time at appellate stage are generally not entertained.

2. Compliance with Faceless Assessment Requirements under Section 151A

The assessee contended that the notice under section 148A was issued manually contrary to the mandatory faceless procedure under section 151A. The Tribunal did not explicitly elaborate on this ground but noted that the lower authorities had confirmed the validity of the notice and proceedings. This ground was effectively left open or dismissed.

3. Additions/Disallowances on Cost of Construction and Application of Section 50C

The AO disallowed the claim of indexed cost of construction amounting to Rs. 9,31,742/- on the ground that the assessee failed to provide satisfactory documentary evidence and PAN details of parties paid. The AO treated the expenditure as current repairs and maintenance or furniture and fixtures, which are not allowable as cost of improvement for capital gains computation.

The assessee submitted bills/letters totaling Rs. 6,44,603/- and claimed additional registration charges and stamp duty. The CIT(A) upheld the AO's disallowance, holding that the expenditure was not related to construction of the existing structure and hence not allowable under capital gains provisions.

The Tribunal noted that the assessee failed to justify the claim adequately before AO and CIT(A). However, considering principles of natural justice, the Tribunal remanded the matter to AO to verify facts and afford the assessee a fair opportunity to substantiate the claim. The Tribunal cautioned the assessee against seeking frivolous adjournments and directed cooperation in proceedings.

Regarding the addition of Rs. 7,43,837/- as long-term capital gains computed on stamp duty valuation under section 50C, the Tribunal upheld the addition since the sale consideration declared by the assessee was less than the stamp duty value, and the law mandates adoption of stamp duty value if higher. The assessee's silence on the show cause notice on this issue was taken as acceptance.

4. Opportunity of Hearing and Procedural Compliance under Section 148A

The assessee contended that the AO did not provide minimum 7 days' time for compliance as required under section 148A(b). The Tribunal examined the notices and found that the AO had allowed at least 7 days between notice issuance and compliance date. The assessee had not requested further time and filed return in response to the notice without objection. Hence, the Tribunal dismissed the contention of violation of natural justice on this ground.

5. Additions Beyond Reasons to Believe and Jurisdictional Limits

The assessee argued that additions made were beyond the scope of reasons recorded for reopening and hence without jurisdiction. The Tribunal referred to binding precedents that the AO cannot make additions on income not covered by reasons to believe or after concluding that the income forming basis of reopening does not escape assessment. However, in the present case, since the reassessment was held valid and the additions related to capital gains on sale of property disclosed by the assessee, the Tribunal did not find jurisdictional infirmity. The Tribunal allowed the ground partly for statistical purposes by remanding the matter to AO for factual verification and opportunity.

6. Credit for TDS

The assessee claimed credit for TDS of Rs. 85,375/- which was not allowed by AO. The Tribunal directed AO to verify and allow due credit if admissible, allowing this ground.

7. Condonation of Delay in Filing Appeal

The Tribunal condoned the delay of two days in filing the appeal, accepting the assessee's explanation of bona fide delay in physical filing despite online filing within time. The Revenue did not object.

Significant Holdings:

"The legislature has conferred the power to condone delay by enacting section 5 of the Limitation Act 1963 in order to enable the Courts to do substantial justice to parties by disposing of matters on 'merits'. The expression 'sufficient cause' employed by the legislature is adequately elastic to enable the Courts to apply the law in a meaningful manner which sub serves the ends of justice-that being the life-purpose of the existence of the institution of Courts."

"The exercise of considering the Assessee's objections raised to the reopening of the Assessment is not a mechanical ritual but a quasi-judicial function. The AO must dispose of and deal with each objection, giving proper reasons for the conclusion."

"The work carried out is not related to construction of the existing structure and hence cannot be considered as expenditure on account of 'cost of construction'. The expenditure incurred is in the nature of current repairs and maintenance and furniture and fixture which cannot be treated as cost of improvement to the capital asset sold."

"The notice under section 148 issued within limitation period as per pre-amended provisions is valid. The Supreme Court decision in Union of India vs Ashish Agarwal legalizes such notices by treating them as deemed show cause notices under section 148A."

"The AO's reasons to believe must be based on tangible material and not mere suspicion or change of opinion. However, once the assessee participates in reassessment proceedings without objection to notice validity, the objection to notice at appellate stage is generally not entertained."

"The assessee is entitled to credit of TDS after due verification."

Final Determinations:

- The delay of two days in filing the appeal is condoned.

- The notices under sections 148 and 148A are valid and within limitation.

- The reopening of assessment is valid as per law, with reasons to believe held sufficient.

- The AO complied with procedural requirements including minimum notice period under section 148A.

- The addition of long-term capital gains on stamp duty valuation under section 50C is upheld.

- The disallowance of claimed cost of construction is upheld on facts, but the matter is remanded to AO for fresh verification and opportunity to assessee to substantiate claims.

- The assessee is entitled to TDS credit subject to verification.

- Additions beyond the scope of reasons to believe are not sustained, but since reassessment was valid and additions relate to disclosed income, no jurisdictional infirmity found.

- Grounds challenging manual issuance of notices under faceless assessment provisions and technical grounds become academic or left open.

- The appeal is allowed partly for statistical purposes by remanding the matter to AO for factual verification and compliance with natural justice.

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