1986 (9) TMI 106 - AT - Income Tax

Summary

Issues:
1. Whether the expenditure incurred by the assessee for repairs after acquiring a property can be considered as part of the cost under s. 54(1).
2. Whether the repairs expenses can be included in the cost of the property for the purpose of exemption of long-term capital gains under s. 54(1)(i).
3. Whether the repairs expenses incurred by the assessee can be considered as part of the cost of the residential property purchased for exemption under s. 54(1)(i).

Analysis:
The appeal before the Appellate Tribunal concerned the question of whether the expenditure on repairs incurred by the assessee after acquiring a property could be deemed as part of the cost under s. 54(1). The assessee had sold a bungalow and purchased a residential flat within the stipulated period for exemption of capital gains. The repairs included civil work, plumbing, and bathroom fittings costing Rs. 40,106. The assessee claimed that both the cost of acquiring the flat and the repair expenses should be considered as the property's cost for exemption under s. 54(1)(i). However, the Commissioner (A) found that the cost of the new asset for exemption could only be the cost of the asset itself and not the additional repair expenses.

The assessee argued that all necessary expenses to put the asset in good running condition should be included in the cost under s. 54(1)(i), citing relevant case laws. Additionally, it was contended that if the vendor had incurred the repair expenses and included them in the sale price, the claim would have been valid. The Tribunal upheld the Commissioner (A)'s order, stating that the cost of the property for exemption under s. 54(1)(i) should only include expenses required to bring the asset into existence and working condition. Since the flat was already in good repair and the repairs did not indicate otherwise, the additional expenses could not be considered part of the cost.

Regarding the alternative argument, the Tribunal noted that the repairs were not part of the sale agreement but were incurred post-purchase by the assessee. Citing legal principles, the Tribunal emphasized that the legal form of the transaction determines tax liability, and the substance of the transaction cannot override its legal character. Referring to a Supreme Court case, the Tribunal highlighted that taxing authorities must consider the true legal relationship resulting from a transaction and cannot disregard the legal form. Therefore, the Tribunal dismissed the appeal, emphasizing that the repairs expenses could not be included in the cost for exemption under s. 54(1)(i) as they were not part of the original sale agreement.

In conclusion, the Tribunal's decision clarified that the cost of a property for exemption under s. 54(1)(i) should encompass expenses necessary to bring the asset into existence and working condition, and post-purchase repair expenses cannot be considered part of the cost unless they are included in the original sale agreement.