Merely for the reason of no VAT registration of the vendor, the genuineness of payment cannot be doubted – ITAT
In a recent judgment, ITAT Hyderabad has allowed expenditure towards cost of improvements to house property observing that merely for the reason of no VAT registration for the vendor, the genuineness of payment cannot be doubted.
ABCAUS Case Law Citation:
4461 (2025) (03) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the Assessing Officer (AO) pursuant to the directions of Disputes Resolution Panel (DRP) under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act).
The appellant assessee was an individual Non-Resident for the relevant assessment year and has filed return of income declaring capital gains on sale of property. The case of the assessee was selected for scrutiny under CASS and notice u/s 143(2) was issued.
In response to the said notice, the assessee furnished computation sheet. On verification, the Assessing Officer (AO) noted that the assessee had claimed cost of acquisition with indexation and cost of improvement in the nature of interiors and modifications against the long term capital gains.
Thereafter, the Assessing Officer issued statutory notice u/s 142(1) of the Act to the assessee calling for Sale deed, Purchase deed, details of expenditure incurred along with documentary evidence. In response to the notice, the assessee submitted Valuation report, bank statement and copy of bill raised by parties towards the modification of the said property.
The AO rejected the valuation report. Further, with respect to bills towards interiors and modification, the Assessing Officer noted that though the assessee had filed confirmation letter from the parties, but, not filed their ITR copy reflecting the impugned amount offered for taxation by the party. The Assessing Officer further noted that the occupation of the said party was found to be housewife, not in the field of relevant sector and also assessee could not furnish any registered document/ agreement whereby the said party was awarded with the work of modification.
Therefore, the Assessing Officer did not accept the claim of the assessee that the payment claimed were actually utilized for the purpose of modification of property and accordingly, he disallowed the impugned sum. Similar was the position in respect of various payments made by the assessee towards other expenses incurred for modification of the property. Accordingly, the Assessing Officer determined the long term capital gains by making the said disallowances vide draft assessment order passed u/s 143(3) of the Act.
Aggrieved by the draft assessment order of the Assessing Officer, the assessee filed objections before the DRP. The DRP after examining the draft assessment order and the submissions of the assessee allowed the expenses of cost of water meters, purchase of solar water heating system and electrical work expenditure. However, the DRP rejected the claim of assessee towards cost of interiors and modification of the property and passed it’s directions u/s 144C(5) of the Act. Pursuant to the above directions of the DRP, the Assessing Officer passed final impugned assessment order.
Before the Tribunal regarding disallowance of cost improvement/modifications and cost of interiors, the assessee submitted that though the assessee had made payments by way of cheque through banking channels and submitted the description of the expenses date-wise to the authorities below, but without considering the same, the DRP rejected the above claims of the assessee on the ground that cost of acquisition was not mentioned in the deed and expenses were not mentioned in the deed was bad in law as held by Hon’ble Madras High Court wherein the Hon’ble High Court observed that “for the purpose of computing capital gain, cost of acquisition has to be arrived at on the basis of actual consideration paid by assessee to vendors for purchasing property and not on basis of only apparent consideration stated in the sale deed”.
The assessee submitted that the decision of Hon’ble Madras High Court was squarely applicable to the facts of his case and, therefore, the appeal filed by the assessee be allowed on merits and legal facts to meet the ends of justice.
The Tribunal observed that all payments were made through cheques only. The seller of the property had confirmed the receipt of the amount towards additional consideration put-up in the property.
The Tribunal opined that once the assessee had furnished relevant evidences including confirmation from the seller and proved that additional amount had been paid for the purpose of purchase of the property, merely for the reason that the said sum was not referred to in the sale deed, it cannot be said that the amount paid by the assessee is not for the purpose of purchase of the property.
Similarly, the assessee had paid a sum to the party who was the original developer of the property. Although, the assessee had purchased the property from the purchaser but, the property was under the maintenance from the said developer and while transferring the property to the assessee, whatever dues payable to the developer had been cleared by the assessee by cheque and the same had been adjusted against the consideration payable to the seller. This fact had been confirmed by the developer. Therefore, once relevant evidences had been filed to prove payment for infra expenses related to the impugned property to the developer, , merely for the reason of not referring the said payment in the sale deed, it cannot be said that the payment was not for the purpose of purchase of the property.
Likewise, the Tribunal observed that assessee claimed to have paid a sum for carrying-out further interior works to the flat after purchase. To support the contention, the assessee had furnished a bill from the contractor. The Assessing Officer and the DRP disbelieved the claim of the assessee only on the ground that the bills submitted by the contractor was on a plain paper and did not contain sales tax and VAT registration.
The Tribunal opined that when the payment is made by cheque and the person who carried-out the work has confirmed the payment for the purpose of interior works, merely for the reason of no VAT registration for the vendor, the genuineness of payment cannot be doubted. Since the assessee had furnished relevant evidences to prove payment to contractor for carrying-out interior works, the said payment partakes the nature of cost of improvement to the building and the same needed to be allowed as cost of acquisition and improvement while computing long term capital gains from the sale of property.
The ttt held that the Assessing Officer and the DRP erred in not allowing the claim of additional payments for cost of acquisition, interiors and modifications.
Accordingly, the Tribunal directed the Assessing Officer to delete the additions made towards disallowance of cost of improvement while computing the long term capital gains from transfer of property.
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