2024 (11) TMI 1091 - AT - Income Tax

Revision u/s 263 - assessment order was passed without verifying the allowability of the cost of improvement as per Section 55(1)(b)(2) and the failure to conduct this inquiry rendered the order erroneous and prejudicial to the interests of the Revenue - assessee s claim for the cost of improvement is allowable u/s 55(1)(b)(2) as the expenses incurred were of a capital nature - HELD THAT - Capital expenditure u/s 55(1)(2) must be incurred to enhance or improve the value of the property. Such expenditure must be distinguishable from revenue expenditure (e.g., repairs or maintenance), which is generally allowable as a deduction from other heads of income, such as Income from House Property or Business Income. The property in question was purchased by the assessee in FY 2002-03 and was sold in FY 2018-19. Assessee claimed a cost of improvement incurred in FY 2008-09, consisting of interior work, kitchen appliances, plywood flooring, and tiles. These items are typically considered capital in nature as they add permanent value to the property and are incurred to improve the property s condition. Assessee also submitted a valuation report from an independent valuer who personally inspected the property and provided a detailed breakdown of the improvements made. Expenditure was supported by bank statements showing payments made through the banking channel, which the AO examined. As evident from the assessment order that the AO exercised his judicial discretion and adopted a plausible view based on the material on record - AO was satisfied with the evidence submitted and did not find it necessary to call for further documentary proof, such as bills or vouchers, for expenses incurred 14 years ago. CIT, in his order u/s 263 emphasized that the AO should have conducted a more in-depth inquiry into the cost of improvement, especially by asking for bills and invoices. CIT cited Explanation 2 to Section 263 of the Act, which allows revision of an order that is passed without proper inquiry or verification. However, it must be noted that Section 263 cannot be invoked merely because the AO did not carry out the inquiry in the manner the CIT would have preferred. AO had asked for the necessary documents to substantiate the assessee s claim and, after considering the bank statements and the valuer s report, came to a reasoned conclusion. As in the case of Sourabh Sharma 2024 (2) TMI 660 - ITAT JAIPUR held that if the AO conducts adequate inquiries and adopts one of the possible views, the CIT cannot substitute his own opinion u/s 263 - In the present case, the AO's acceptance of the cost of improvement was a possible view based on the material provided by the assessee, and the CIT s revisionary jurisdiction cannot be invoked simply because the inquiry was not conducted to his satisfaction. We find that the AO conducted adequate inquiries into the assessee s claim for the cost of improvement and took a plausible view based on the documents submitted, such as the valuation report and bank statements. Assessee s claim for the cost of improvement is allowable u/s 55(1)(b)(2) of the Act, as the expenses incurred were of a capital nature. The revisionary proceedings u/s 263 of the Act were unjustified, as the AO s order was neither erroneous nor prejudicial to the interests of Revenue. Accordingly, we quash the revisionary order passed by the learned CIT u/s 263 of the Act, and the appeal of the assessee is allowed.

Summary

Issues:
1. Revisionary order under Section 263 of the Income Tax Act, 1961.
2. Allowability of cost of improvement in computation of capital gains.
3. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263.
4. Adequacy of inquiries conducted by the Assessing Officer (AO).
5. Plausible view taken by the AO in accepting the cost of improvement.

Analysis:
1. The appeal pertains to a revisionary order under Section 263 of the Income Tax Act, 1961, issued by the Commissioner of Income Tax (CIT) for the Assessment Year 2019-20. The CIT set aside the assessment order passed by the Assessing Officer (AO) under Section 143(3) of the Act, directing a de-novo assessment due to alleged errors in allowing the cost of improvement claimed by the assessee in the computation of capital gains.

2. The Assessing Officer (AO) accepted the assessee's claim for the cost of improvement in the sale of an immovable property without detailed inquiries into supporting documentary evidence. The CIT contended that the assessment order was erroneous as per Section 263 of the Act, citing lack of verification of the allowability of the cost of improvement under Section 55(1)(b)(2) of the Act.

3. The assessee challenged the CIT's jurisdiction under Section 263, arguing that the AO had made necessary inquiries and passed the order after due diligence. The assessee contended that the CIT's differing view did not warrant revisionary proceedings, citing precedents where if the AO takes a plausible view, Section 263 cannot be invoked.

4. During the appeal hearing, the Authorized Representative (AR) of the assessee emphasized that the AO had conducted adequate inquiries into the cost of improvement, supported by documentary evidence submitted earlier. The AR highlighted the Jaipur Bench's decision, stating that if the AO adopts a plausible view after inquiries, Section 263 cannot be invoked.

5. The Tribunal found that the AO had appropriately verified the documents submitted by the assessee, including the valuation report and bank statements, to allow the cost of improvement. The Tribunal emphasized that the expenses incurred were capital in nature and added value to the property, justifying the AO's decision. The Tribunal held that the revisionary proceedings under Section 263 were unwarranted, as the AO's order was not erroneous or prejudicial to Revenue's interests. Consequently, the revisionary order was quashed, and the appeal of the assessee was allowed.