Assessee's appeal allowed - AO directed to permit cost of improvement for leased flat; possession dated 31.03.2014

ITAT held in favour of the assessee and allowed the appeal, directing the AO to permit the cost of improvement claimed. The tribunal found payments under the agreement were made and fit-out work completed with possession dated 31.03.2014, after which the flat was leased, rebutting the AO's contention that improvements could not have been incurred before 27.12.2017. The CIT(A)'s confirmation of disallowance was set aside as lacking merit.

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ISSUES PRESENTED AND CONSIDERED

1. Whether expenses incurred for interior fit-outs pursuant to an agreement executed prior to formal registration of purchase can be treated as "cost of improvement" for computation of capital gains on subsequent sale of the property.

2. Alternatively, whether such fit-out expenses (if not allowable as cost of improvement) ought to be allowed as part of the "cost of acquisition" for computing capital gains.

3. Whether payments made under an unregistered agreement and made prior to formal purchase registration can be disallowed on the sole basis that the assessee was not, at the time of payment, the registered owner.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Fit-out expenses as cost of improvement

Legal framework: The Court considered the concepts of "cost of improvement" and its role in computing capital gains on sale of immovable property. The analysis focused on whether expenditure on interior fit-outs that become integral to the apartment qualifies as cost of improvement when incurred and payments and work completion precede formal registration of purchase.

Precedent Treatment: No judicial precedents were cited or relied upon in the orders under consideration; the Court decided the matter on evidentiary and factual/legal principle grounds rather than by following/distinguishing prior authority.

Interpretation and reasoning: The Tribunal examined the fit-out agreement terms (scope of work, specifications, project management, and scope of services), documentary evidence of payments made under that agreement, evidence of completion of civil and electrical works, the letter of possession dated 31.03.2014 and the lease executed on 25.06.2014. These documents demonstrated that the fit-out works were executed, became an integral part of the apartment, and possession was taken well before the date of formal registration of purchase (27.12.2017). The Assessing Officer's inference that improvements could not have been incurred prior to ownership was rejected as contrary to the contemporaneous documentary record. The undisputed fact of payments made pursuant to the agreement and subsequent possession and leasing were determinative.

Ratio: Where expenditures for interior fit-out works are made pursuant to a contractual arrangement, are paid for, and the works are completed and become integral to the property with possession taken before the eventual registered purchase, such expenditures qualify as cost of improvement for computation of capital gains on sale. The AO's contrary inference based solely on timing of formal registration is not sustainable in the face of clear documentary evidence of payment, completion and possession.

Obiter: The Tribunal did not lay down broader principles about every type of pre-registration expense; its reasoning is tied to the specific evidence showing completion, possession and integration of works.

Conclusion: The disallowance of the cost of improvement was set aside and the Tribunal directed the Assessing Officer to allow the claimed cost of improvement.

Issue 2 - Alternative claim as cost of acquisition

Legal framework: The assessee raised, in the alternative, that if the fit-out expenses were not allowable as cost of improvement they should be allowed as part of the cost of acquisition. The Tribunal's analysis treated the alternative claim as rendered unnecessary by the primary determination that the expenses are allowable as cost of improvement.

Precedent Treatment: No authority treating similar alternative claims was cited; the Tribunal declined to decide the alternative point on its merits because primary relief was granted.

Interpretation and reasoning: Because the Tribunal concluded the payments properly constitute cost of improvement (see Issue 1), there was no requirement to adjudicate or reconcile the alternative contention that the same payments be treated as part of acquisition cost.

Ratio vs. Obiter: This treatment is obiter to the extent it refrains from deciding the alternative point; the operative ratio is that the expenses are allowable as cost of improvement.

Conclusion: The alternative claim as cost of acquisition was not adjudicated further after allowing the cost of improvement; the Assessing Officer was directed to allow the claimed amounts as cost of improvement.

Issue 3 - Effect of unregistered agreement and timing of payments relative to formal purchase

Legal framework: The question raised was whether payments under an unregistered agreement, and payments made before formal registration, can be disallowed solely on that basis.

Precedent Treatment: No express precedents or statutory interpretation of the invalidity or infirmity of unregistered agreements were invoked by the authorities; the Tribunal addressed the factual sufficiency of the documentation provided.

Interpretation and reasoning: The Tribunal emphasized that the Assessing Officer did not dispute that payments were made; rather, the AO's finding rested on a presumptive legal impossibility that improvements could have been incurred pre-registration. The Tribunal found this presumption rebutted by contemporaneous documentary evidence - the fit-out agreement specifying scope and payments, evidence of completion, letter of possession and lease - and therefore the mere fact of the agreement being unregistered or the payments preceding formal registration did not justify disallowance. The Tribunal treated the unregistered agreement and timing issue as evidentiary and factual, not as a legal bar where the material shows fulfillment of obligations and possession.

Ratio: Undisputed payments made and documentary proof of completion and possession can validate claims for cost of improvement notwithstanding that the underlying fit-out agreement was unregistered and the payments were made prior to formal registration of purchase; a naked inference that pre-registration payments are impossible is inadequate where evidence demonstrates the contrary.

Obiter: The Tribunal did not pronounce a categorical rule regarding all unregistered agreements; its holding is confined to circumstances where payments and completion are documented and accepted as undisputed.

Conclusion: The AO's reliance on the timing of purchase-registration and the unregistered nature of the agreement to disallow the expenditure was rejected; the Tribunal directed the AO to allow the cost of improvement claimed.

Disposition

The Tribunal set aside the disallowance made by the Assessing Officer and confirmed by the appellate authority, and allowed the appeal, directing allowance of the claimed cost of improvement in computing capital gains.

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