2021 (9) TMI 754 - AT - Income Tax

Nature of expenditure - Disallowance of certain expenditure being not considered as capital/cost of improvement - HELD THAT - AO after having accepted initial instalment of lease rent as capital has erred in rejecting subsequent instalments not being in the nature of capital expenditure. The assessee has constructed building on lease hold land. The lease of the land was allowed to the assessee for 30 years, therefore, lease being in the nature of long term lease, the lease rentals are clearly in the nature of capital expenditure. As regards water proofing charges, the assessee has pointed that water proofing was done immediately after completion of construction, this fact is evident from invoices vide which water proofing charges were paid. OC was received by the assessee in the month of June 2007 and the water proofing charges were paid in the month of October December 2007. The water proofing definitely adds value to the asset as it improves the life of the structure/building - subsequent water proof coating may be considered in the nature of repairs and maintenance, in so far as initial water proofing is concerned it is integral part of construction activity, hence, it is to be included towards the cost of asset. 3rd component that has been disallowed by the AO/CIT(A) is vacant land tax and property tax. The payment of said taxes to the municipal authorities are perennial and does not add value to the property, hence, are not capital in nature. Payment of taxes is statutory obligation to be discharged as and when due - no merit in the submissions of assessee to include vacant land tax and property tax in the cost of acquisition. Correct date of indexation for computing LTCG - Whether the benefit of indexation should be allowed to the assessee from the date of allotment of land or from the date the document was registered in the name of assessee? - HELD THAT - Relevant date for providing the benefit of indexation is when the assessee had first acquired right in the property, execution of registered document is subsequent event to reinforce and protect legal sanctity of the ownership of property - benefit of indexation should be allowed to the assessee in the year, the assessee had acquired right in the property after payment of entire purchase consideration. In the instant case, since the assessee had paid the consideration amount in January 1997 in accordance with the terms and conditions of the tenders floated by MHADA, the benefit of indexation should be allowed to the assessee from 31.03.1997. The findings of the CIT(A) on this issue are set-aside and ground no.2 of the appeal is allowed.

Summary

Issues Involved:
1. Disallowance of certain expenditure as not capital/cost of improvement
2. Correct date of indexation for computing LTCG

Analysis:

Issue 1: Disallowance of Certain Expenditure

The appellant, in this case, sold an immovable property and offered Long Term Capital Gain (LTCG) for tax after deducting various costs. The Assessing Officer (AO) disallowed certain expenses like lease rent capitalization, water proofing charges, and property tax. The appellant argued that these expenses should be considered as capital in nature and included in the cost of purchase. The Tribunal noted that lease rental payments for a leasehold property are capital expenditure. Water proofing charges, done after construction, add value to the asset and should be included in the cost of improvement. However, vacant land tax and property tax are not capital in nature and should not be included in the cost of acquisition. Therefore, the ground was partly allowed, and the disallowance of certain expenses was overturned.

Issue 2: Correct Date of Indexation

The appellant contested the correct date for indexation of land cost for computing LTCG. The AO had chosen a later date for indexation, resulting in an addition to the LTCG. The appellant argued that indexation should be allowed from the first date when the land was held. The Tribunal analyzed the legal obligations related to the acquisition of the property and concluded that the benefit of indexation should be allowed from the date when the appellant first acquired the right in the property, which was when the payment of the entire purchase consideration was made. Therefore, the Tribunal set aside the findings of the CIT(A) and allowed the indexation benefit from the correct date. As a result, the appeal on this issue was allowed.

In conclusion, the Tribunal partially allowed the appeal of the assessee by overturning the disallowance of certain expenses as capital in nature and correcting the date for indexation of land cost for computing LTCG. The judgment provides clarity on the treatment of expenses and the correct date for indexation in such cases.