Cost of improvement in case of Tenancy Rights

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Jhankhana Shah

Jhankhana Shah (Querist)
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21 November 2007 Which type of expenses are includible as cost of improvement in case of tenancy rights ?

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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21 November 2007 Cost of improvement

Expenses must have actually been incurred - Only those expenses which have been actually incurred by the assessee in making additions and improvements in the property ought to be taken into consideration as ‘cost of improvement’ while computing capital gains under section 55(1)(b) of the Act - Shri Parmanand Bhai Patel & Smt. Jyotsna Devi Patel v. CIT [1984] 149 ITR 80 (MP).

Betterment charges are allowable - The expenditure in the shape of betterment charges paid under the town planning scheme for acquiring an enduring benefit are in the nature of capital expenditure and go to improve the value of the land, hence, they would fall under section 48(ii) - Mathurdas Mangaldas Parekh v. CIT [1980] 126 ITR 669 (Guj.).

Assessee must make a specific claim - It is necessary that before the provisions of section 48 can be called in aid for purposes of deduction of any costs incurred by the assessee on the improvement of the asset, the assessee must not only claim that he has made any such capital expenditure but also demonstrate that any such expenditure could possibly have been incurred by him for purposes of making an improvement to the asset in question - Emerald Valley Estates Ltd. v. CIT [1996] 88 Taxman 335 (Kar.).

Intangible assets can have no cost of improvement - In the case of intangible assets the additions cannot be physical. Therefore, it is not possible to say in every case that without any physical addition to the capital asset, there can be no improvement thereto. Whether physical addition is necessary or not will depend on the nature of the asset - Smt. S. Valliammai v. CIT [1981] 127 ITR 713 (Mad.) (FB).

Mortgage after purchase cannot constitute an improvement to asset - If subsequent to the purchase of the property by the previous owner, it was mortgaged by him and that mortgage was later discharged either by himself or by his successor-in-interest, that would not constitute an improvement to the capital asset which became originally the property of the previous owner - Ambat Echukutty Menon v. CIT [1978] 111 ITR 880 (Ker.).

Improvement must be on the asset itself and not on title to asset - The word ‘thereto’ in the expression ‘cost of any improvement thereto’ in section 55(2) would appears to cover a case where the amount is expended on the asset itself. Improving the owner’s title to the asset is different from improving the asset itself. Therefore, the amount paid as and by way of settlement of a claim to the person who disputed the title of the assessee cannot be said to be an expenditure by way of any improvement to the asset as such - CIT v. V. Indira [1979] 119 ITR 837 (Mad.).

Improvement to rubber trees - Expenses incurred by way of manuring, spraying, weeding, etc., in respect of rubber trees are really expenses incurred in connection with the cultivation and incidental thereto. They cannot be called ‘improvement’ as envisaged in section 55 - Travancore Rubbers Ltd. v. CIT [1990] 51 Taxman 355 (Ker.).

Compensation paid to tenants for vacating premises - Where the assessee sold a property to the Bombay Municipal Corporation, and paid compensation to the hutment dwellers for vacating the land, the amount so paid was allowable as ‘cost of improvement’ in the computation of capital gains, since by eviction of the hutment dwellers the value of the land increased - CIT v. Miss Piroja C. Patel [2000] 242 ITR 582 (Bom.).