ITAT Rules: Interior and Utility Costs Count as Acquisition Cost for Residential Property

The Income Tax Appellate Tribunal (ITAT) in Chennai has ruled that expenses on interior works and essential utility connections can be included in the cost of acquisition of a new residential property, qualifying for exemption under Section 54 of the Income Tax Act, 1961.

Income TaxResidential PropertySection 54ItatCapital GainsReal EstateAug 29, 2025

ITAT Rules: Interior and Utility Costs Count as Acquisition Cost for Residential Property

Real Estate:The Income Tax Appellate Tribunal (ITAT), Chennai, has made a significant ruling that expenses incurred on interior works and essential utility connections can be considered part of the cost of acquisition of a new residential property. This decision allows such expenses to qualify for exemption under Section 54 of the Income Tax Act, 1961.

The appellant, Venkatraman Jayashree Priyadharshini, filed her return of income for the assessment year 2015-16, declaring a total income of ₹1.41 crore, which included long-term capital gains of ₹1.37 crore. However, the Assessing Officer determined the capital gains at ₹2.87 crore.

On appeal, the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A)], restricted the taxable gains to ₹2.01 crore by allowing a deduction of ₹88.85 lakh under Section 54 of the Act. Dissatisfied with the sustained addition of ₹64.60 lakh, the appellant approached the Tribunal.

The appellant, represented by Y. Sridhar, F.C.A., contended that additional expenses of ₹21 lakh incurred towards interior works such as painting, wardrobe fittings, modular kitchen, and cupboard interiors ought to be allowed as they were necessary to make the residential property habitable. It was further submitted that incidental charges of ₹2 lakh, paid to the builder for electricity, water, and sewerage connections, were also essential and should qualify for exemption.

Reliance was placed on the Bangalore Bench rulings in Sapna Hemanshu Shah v. DCIT and Y. Manjula Reddy v. ITO, which held that such expenses fall within the ambit of Section 54 relief. The respondent, represented by Ms. R. Anita, Additional CIT, argued that adequate relief had already been provided by the CIT(A) based on the available records. It was submitted that no further claims should be entertained, as the appellant had already received substantial benefit under Section 54.

The Bench, comprising S.S. Viswanethra Ravi, Judicial Member, and Amitabh Shukla, Accountant Member, noted that the appellant had produced a valuation report dated March 16, 2020, from VJPS Developer. The report confirmed the expenditure on interior works and utility connections. The Tribunal observed that such expenses are integral to rendering a residential property habitable and therefore fall within the scope of Section 54.

Accordingly, it directed the Assessing Officer to grant additional deductions of ₹21 lakh towards interiors and ₹2 lakh towards utilities, thereby reducing the taxable long-term capital gains to ₹1.75 crore. The appeal was partly allowed, granting relief that reduced the taxable long-term capital gains.

This ruling is significant for property owners and investors as it clarifies that expenses necessary to make a property habitable can be considered part of the acquisition cost, potentially reducing the taxable capital gains under Section 54.

Frequently Asked Questions

What is the significance of the ITAT ruling?

The ITAT ruling is significant because it clarifies that expenses on interior works and essential utility connections can be included in the cost of acquisition of a new residential property, qualifying for exemption under Section 54 of the Income Tax Act, 1961.

What expenses were allowed in the ruling?

The ruling allowed additional deductions of ₹21 lakh for interior works such as painting, wardrobe fittings, modular kitchen, and cupboard interiors, and ₹2 lakh for utility connections like electricity, water, and sewerage.

Who was the appellant in this case?

The appellant in this case was Venkatraman Jayashree Priyadharshini, who filed her return of income for the assessment year 2015-16.

What was the final decision of the ITAT?

The ITAT directed the Assessing Officer to grant additional deductions, reducing the taxable long-term capital gains to ₹1.75 crore, thereby partly allowing the appeal.

How does this ruling affect property owners?

This ruling benefits property owners and investors by allowing them to include essential expenses in the cost of acquisition, potentially reducing their taxable capital gains under Section 54 of the Income Tax Act, 1961.

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February 13, 2025

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