Bangalore ITAT clarifies on allowability of ‘Cost of acquisition’ and ‘Improvement costs’ expenses in a Property sale for computing Capital Gains

 In a recent ruling, the Bangalore ITAT (“Tribunal”) examined the allowability of various capital gains related deductions claimed by a non-resident senior citizen on the sale of a residential villa, specifically addressing the evidentiary requirements for cost of acquisition, classification of personal effects, and the scope of “expenditure incurred in connection with transfer” for the purposes of capital gains taxability.

The case involved the sale of a jointly owned residential property at Bengaluru. The assessee claimed –

                                i.            ₹11.35 lakh as cost of acquisition based on builder-issued statements for civil, plumbing and electrical work,

                              ii.            ₹25.72 lakh as cost of improvement towards fixtures and installations, and

                            iii.            ₹4.99 lakh as travel and courier expenses allegedly incurred wholly and exclusively in connection with the transfer.

The Assessing Officer rejected all three claims, citing insufficient documentary evidence for the builder-related expenses, categorising improvement items as personal effects, and holding that travel costs lacked nexus with the transfer.

Before the Tribunal, the assessee produced builder-issued payment statements, receipts, revised charge memos, and the possession certificate, demonstrating that construction-related payments formed part of the original investment. The Tribunal emphasised that possession certificates are ordinarily issued only after full settlement of dues. It accordingly accepted the builder-backed amount of ₹11.35 lakh as a legitimate component of cost of acquisition. With respect to the improvement costs, the Tribunal distinguished between movable personal effects and embedded fixtures integral to habitability. While items such as air conditioners and standalone appliances were treated as non-deductible personal effects, the Tribunal held that wall-embedded and permanent fixtures—being part of the building structure—qualify as cost of improvement. Accepting the assessee’s offer to treat ₹5.49 lakh as personal effects, the Tribunal allowed the balance ₹20.23 lakh as eligible improvement expenditure.

However, the Tribunal upheld the disallowance of travel and courier expenses. Analysing section 48(i) of the Income-tax Act, it reiterated that deductions require a clear and exclusive nexus with the transfer of the capital asset. Expenses such as air tickets, meals, lodging in Mumbai, and local travel were found to have no intrinsic connection with effecting the transfer of the Bengaluru property. The Tribunal noted that the assessee had failed to establish that the visit to India was solely and exclusively for the sale, and therefore such expenditure could not be treated as transfer-related.

This ruling underscores two important principles in capital gains computation: first, that builder-issued documents and possession certificates constitute strong evidence for recognising construction-related costs as part of cost of acquisition; and second, that only those expenses with a direct and unavoidable nexus to the transfer qualify under Section 48. The decision also reiterates that permanent fixtures essential to habitability may be distinguished from personal effects for purposes of determining cost of improvement.