Capital gains tax on property sale: ITAT allows home loan interest as cost of acquisition
A one-time maintenance deposit paid to a builder, electricity and water deposits, and even home loan interest that has not been claimed as a deduction earlier can form part of a property’s cost of acquisition while computing long-term capital gains (LTCG), the Income Tax Appellate Tribunal (ITAT), Bengaluru, has ruled in a relief for a non-resident Indian (NRI).
The ruling came in the case of Santanu Arun Nandi, an NRI who sold a residential property in Bengaluru for about ₹2.63 crore in January 2020. In his income tax return for assessment year 2020-21, he declared LTCG of ₹16.33 lakh after claiming indexed cost of acquisition and several expenses connected with the property. However, the Income Tax Department disallowed most of these claims, increasing his assessed income from ₹37.09 lakh to ₹76 lakh.
After his objections before the Dispute Resolution Panel (DRP) were rejected, Nandi mistakenly approached the Commissioner of Income Tax (Appeals), even though the appeal lay before the ITAT. The tribunal condoned a delay of 737 days in filing the appeal, observing that the delay arose from pursuing a remedy before the wrong forum.
What expenses did ITAT allow?
One of the key issues before the tribunal was whether a one-time maintenance deposit paid to the builder could be treated as part of the property’s acquisition cost.
The ITAT held that such a payment was mandatory for obtaining possession of the flat and therefore constituted part of the cost of acquisition. Since the amount had not been separately recovered from the buyer, it was eligible for indexation while computing capital gains.
The tribunal reached a similar conclusion for electricity and water deposits paid to the builder, holding that these too formed part of the acquisition cost and qualified for indexed cost benefits.
The order also provides relief on home loan interest. The tribunal relied on the Karnataka High Court’s ruling in CIT v. Sri Hariram Hotels Pvt. Ltd. and held that interest paid on a housing loan can be included in the property’s cost of acquisition, provided the taxpayer has not already claimed the same interest as a deduction under the head “Income from House Property.” The assessee had produced copies of earlier income tax returns to demonstrate that no such deduction had been claimed.
Travel expenses sent back for verification
The tribunal, however, stopped short of allowing the taxpayer’s claim for foreign travel expenses incurred while selling the property.
The taxpayer argued that travel from the US to India was undertaken exclusively for completing the sale transaction and relied on an earlier ITAT Hyderabad ruling. The tribunal noted that the tax department had disallowed the claim on the ground that the expenditure was not incurred wholly and exclusively in connection with the transfer of the property.
Instead of deciding the issue outright, the ITAT remanded the matter to the Assessing Officer to verify whether the travel expenses were directly linked to the sale before allowing any deduction under Section 48 of the Income-tax Act.
The appeal was, therefore, partly allowed. The ruling underscores that while taxpayers may include certain acquisition-related costs in the indexed cost of a property, they must maintain adequate documentation to establish that such expenses are directly connected with acquiring or transferring the asset.
