Tax laws provide that the sale consideration minus the cost of acquisition and cost of improvement (both of which are adjusted by applying the cost inflation index) determines the capital gains. Higher the cost of these two components, lower is the taxable capital gains and consequently the tax outgo. On sale of a flat held for more than two years, the capital gains that arise is treated as long term and is subject to a tax at 20%.

While the cost of acquisition constitutes the purchase price of the flat and expenses such as registration cost and broker fees, the cost of improvement includes capital expenditure that increases the value of the property.
In some cases, though, the concept of the cost of improvement is stretched too far. Needless to add, in this case where the taxpayer sold her flat for a sale consideration of Rs 1.1 crore, but during the relevant financial year 2015-16 claimed a cost of improvement of Rs. 19.8 lakh, the I-T department was not amused. The stand taken by the I-T department was backed by the ITAT.

“I stand to disagree with the contention of the appellant that all the expenses incurred were necessary for making the flat habitable. If the structure of the building is strong and intact and there is proper supply of electricity and water, the building is considered habitable. Apart from laying the tiles, the expenses of which have been allowed by the I-T officer, no other improvement of a permanent nature involving usage of capital asset has been brought about to the property,” held Shamim Yahya, who constituted the single member bench of the ITAT.

Noting the long list of items that were included in the aggregate sum of the cost of improvement, the ITAT member noted that there are accessories and luxury items and totally out of the purview of a capital asset.
Further, as regards to the invoices of furniture and fixtures that were submitted as proof, the payment of such expenses were made in cash and no proof of delivery was given.