Home sale LTCG: indexed improvement cost for completing semi-built house accepted; disallowance based on "commensurate area" suspicion set aside.

In computing LTCG on sale of a house property, the dominant issue was whether the AO could disallow the assessee's claimed cost of improvement with indexation solely on the ground that the expenditure was not "commensurate" with the super built-up area. The ITAT held that the purchase deed showed acquisition of a semi-constructed house, whereas the sale deed showed a fully completed house with fittings and service connections, establishing substantial improvement. The assessee also produced contractor ledgers, bills, vouchers and related documents evidencing construction/improvement, and the AO's objection was based on suspicion without contrary evidence or analysis of construction type and material quality. Consequently, the disallowance/addition sustained by the CIT(A) was set aside and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessee was entitled to deduction of the claimed cost of improvement, with indexation, from the sale consideration while computing long-term capital gains on sale of an immovable property.

1.2 Whether the disallowance of the assessee's claim for cost of improvement, on the ground that (a) the purchase and sale deeds allegedly did not reflect any improvement, and (b) the expenditure was not commensurate with the built-up area, was justified on the facts and evidence on record.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Entitlement to cost of improvement with indexation and justification of disallowance by the tax authorities

(a) Legal framework (as discussed by the Court)

2.1 The Court proceeded on the accepted premise that, for computation of long-term capital gains, the assessee is entitled to deduct from the full value of consideration, inter alia, the indexed cost of acquisition and the indexed cost of improvement of the capital asset, provided such improvement and the related expenditure are established by evidence.

(b) Interpretation and reasoning

2.2 The Court noted that the assessee had purchased the property under a purchase deed dated 28.07.2014 for Rs. 7,90,00,000/-, described therein as a semi-constructed house consisting of ground plus two upper floors.

2.3 The assessee subsequently sold the property under a sale deed dated 10.08.2017 for Rs. 13,90,00,000/-, describing it as a fully completed house consisting of ground plus two upper floors with all doors, windows, fittings, electrical fittings, electrical service connections, deposits with the electricity department and GHMC for water and sewerage connections, etc.

2.4 The Court examined the purchase deed and the sale deed and held that these documents themselves evidenced a clear distinction between what was purchased and what was sold, namely: a semi-constructed house at the time of purchase and a fully completed/furnished house at the time of sale.

2.5 The Court recorded that the assessee had furnished detailed documentary evidences in support of the claimed expenditure of Rs. 3,88,87,592/- on construction and improvement, including ledger accounts and bills/vouchers from various contractors and suppliers (such as VR Associates, Mohammed Abdul Masseh, Abdul Sattar Abdul Gani, Aparna Enterprises Limited, Mohd. Abdul Habeen, Uday Heights Pvt. Ltd.), and salary payments, evidencing further construction and improvement of the house.

2.6 The Court observed that the Assessing Officer had not, in substance, disputed the fact that bills and vouchers aggregating to Rs. 3,88,87,592/- had been furnished; rather, the disallowance was mainly premised on: (i) a reading of the schedule of property in the purchase and sale deeds, and (ii) an opinion that the amount spent was not commensurate with the super built-up area of 8,000 sq. ft., together with a general remark that the invoices were not commensurate with the expenditure claimed.

2.7 The Court held that the reasoning of the Assessing Officer, as endorsed by the appellate authority, was not acceptable because: (i) the deeds themselves showed the property purchased as semi-constructed and the property sold as fully completed; (ii) there was "clear evidence" in the form of bills and vouchers for the expenditure; and (iii) there was a demonstrable difference between the state of the property at purchase and at sale.

2.8 The Court emphasised that the question whether the expenditure was "commensurate" with the built-up area could not be decided merely on a general or subjective perception based on area alone; what is relevant is the type and quality of construction and materials used. In the absence of concrete contrary material, the authority could not reject the claim solely on an impression that the amount was high for 8,000 sq. ft.

2.9 The Court characterized the Assessing Officer's observation that the cost of improvement of Rs. 3,88,87,592/- was not commensurate with the built-up area as being based only on "suspicion and surmise" and not backed by any evidence, especially in view of the bills, vouchers and the clear difference between the purchase and sale descriptions of the property.

2.10 In this factual context, the Court found the continued disallowance by the appellate authority unjustified, as it did not properly consider or rebut the documentary evidences filed by the assessee and the clear indications of improvement and completion of the property between purchase and sale.

(c) Conclusions

2.11 The Court concluded that the assessee had established, through documentary evidence, that substantial expenditure of Rs. 3,88,87,592/- was incurred on further construction and improvement of the property, converting a semi-constructed house into a fully completed house.

2.12 The Court held that the Assessing Officer's and appellate authority's refusal to allow the claimed cost of improvement with indexation, based on a perceived lack of commensurateness with the built-up area and an asserted absence of improvement in the deeds, was unsustainable and rooted in suspicion rather than evidence.

2.13 The Court therefore set aside the order of the appellate authority, directed deletion of the addition made on account of disallowance of cost of improvement with indexation of Rs. 4,05,72,447/-, and allowed the appeal of the assessee.

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