I am in the process of selling a property of carpet area 584.64 sq ft in Mumbai’s Oshiwara. I want to know if I can add the following expenses to the purchase cost. These include brokerage for purchasing the flat bequeathed by my mother, charges for renovation carried out in 2001, repairs and maintenance cost, stamp duty and registration charges, probate charges paid to the court.
— Jagdish Shah
The indexed cost of acquisition of the asset would be calculated as the cost of acquisition or fair market value (FMV) as on 1 April 2001 / cost inflation index (CII) of FY 2001-02 (i.e. 100)*CII of the year of sale.
Further, if the actual sale consideration is lower than the stamp duty value by more than 10%, the stamp duty value would be regarded as the deemed sale consideration, for the purpose of calculating such long-term capital gain/ loss (LTCG/L).
As the property was bequeathed to you , the cost of acquisition for you will be the cost to the previous owner. Further, as per section 55 of the Income Tax Act, the cost of acquisition of immovable property purchased on or before 1 April 2001 shall be the actual cost of acquisition of such asset or the FMV of the property as on 1 April 2001, at the option of the taxpayer.
As per the facts provided, it appears that the property was purchased by your mother in 1993, however, it is not clear whether the property was transferred to you before 1 April 2001. Assuming that the property was transferred to you after 1 April 2001, the cost of acquisition of such asset in your hands shall be deemed to be the actual cost of acquisition in the hands of your mother as increased by the cost of improvement, incurred by you.
While computing the cost of acquisition in the hands of your mother, you need to compare the FMV (as prescribed) of the property as on 1 April 2001 vis-à-vis the actual cost of acquisition (including brokerage expenses, stamp duty charges, renovation, etc. incurred before 1 April 2001) and consider the higher amount as deemed cost of acquisition in the hands of your mother, at your option. You may further add the expenses incurred by you post 1 April 2001 towards renovation etc. (if resulting in improvement/alteration in the asset) as cost of the improvement. Since the definition of the term ‘cost of improvement’ is not free from litigation, one needs to look into the facts of the case in detail as to whether the expenses incurred for obtaining probate order were leading to any kind of improvement or not.
Also, you need to have the appropriate documentation in support of the expenses incurred for the property to consider the same as the cost of acquisition/improvement.
It is to be noted that the repair and maintenance expenses are generally considered as routine expenses for the upkeep of the property and are not considered as capital expenditure hence not includable as the cost of improvement. Separately, you are entitled to reduce the expenses incurred for the transfer of the property (including brokerage expenses) from the sale consideration to compute the taxable capital gain income.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.