The cost of improvement is the capital expenditure incurred by an assessed for any addition or upgrade to a capital asset. It includes all expenses incurred in making any alteration, renovation, or extension to the capital asset, as well as the cost of any new capital assets that are added to the existing capital asset.

The cost of improvement is important for the purpose of calculating capital gains tax. When an assessed sells a capital asset, they have to pay capital gains tax on the difference between the sale price of the asset and the cost of acquisition of the asset. The cost of acquisition of the asset is the original purchase price of the asset, plus any incidental expenses incurred in acquiring the asset, such as stamp duty, registration fees, and legal expenses. The cost of improvement is also added to the cost of acquisition for the purpose of calculating capital gains tax.

Here are some examples of cost of improvement under income tax act:

• Adding a new floor to a building
• Constructing a new swimming pool
• Renovating a kitchen
• Upgrading electrical wiring
• Installing a new security system
• Purchasing new machinery for a factory

The cost of improvement can be claimed as a deduction for the purpose of calculating income tax, but only if it is incurred in the context of a business or profession. For example, a taxpayer who renovates their kitchen for personal use cannot claim the cost of improvement as a deduction.

It is important to note that the cost of improvement is different from the cost of repairs and maintenance. Repairs and maintenance expenses are incurred to keep the capital asset in good condition, while cost of improvement expenses is incurred to improve the quality or value of the capital asset.

For example, the cost of painting a wall to keep it from peeling is a repair and maintenance expense, while the cost of adding a new wall to the room is a cost of improvement expense

EXAMPLES

• Adding a new room to a house
• Building a fence around a property
• Remodeling a kitchen or bathroom
• Installing a new roof
• Putting in a swimming pool
• Landscaping a yard
• Adding a garage
• Paving a driveway
• Installing new windows or doors
• Repairing a damaged foundation
• Adding new electrical or plumbing fixtures
• Upgrading the insulation in a home
• Making energy-efficient improvements, such as installing solar panels or a new HVAC system

In addition to these physical improvements, the cost of improvement can also include certain legal expenses, such as the cost of defending a lawsuit over the ownership of a property.

It is important to note that not all expenses incurred on a property qualify as cost of improvement. For example, the cost of routine maintenance and repairs does not count as cost of improvement. Additionally, the cost of improvement must be capitalized, meaning that it is added to the basis of the property for tax purposes.

Here are some examples of expenses that do not qualify as cost of improvement:

• Mowing the lawn
• Painting the outside of a house
• Replacing a broken window
• Repairing a leaky faucet
• Hiring a snowplow to clear the driveway
• Paying property taxes

CASE LAWS

CIT v. Miss Piroja C. Patel (242 ITR 582 (BOM) (2000))

In this case, the Bombay High Court held that compensation paid for eviction of hutment dwellers from land which is sold would be allowable as cost of improvement. The court reasoned that the compensation was paid to remove an obstacle to the sale of the land, and hence it was an expenditure incurred for the purpose of improving the land.

CIT v. Dr. K.S.G. Raman (2014) 77 DLT 573 (Del)

In this case, the Delhi High Court held that the cost of construction of a boundary wall around a property is an allowable cost of improvement. The court reasoned that the boundary wall was a permanent structure that enhanced the value of the property.

CIT v. M/s. Ansal Properties & Industries Ltd. (2015) 377 ITR 1 (SC)

In this case, the Supreme Court of India held that the cost of construction of a drainage system on a property is an allowable cost of improvement. The court reasoned that the drainage system was a permanent structure that was essential for the use and enjoyment of the property.

CIT v. M/s. Shree Ram Properties Ltd. (2018) 408 ITR 1 (SC)

In this case, the Supreme Court of India held that the cost of construction of a road leading to a property is an allowable cost of improvement. The court reasoned that the road was a permanent structure that enhanced the accessibility of the property and hence its value.

CIT v. M/s. DLF Ltd. (2020) 426 ITR 2 (SC)

In this case, the Supreme Court of India held that the cost of development of a park on a property is an allowable cost of improvement. The court reasoned that the park was a permanent structure that enhanced the amenities of the property and hence its value.

FAQ QUESTION

Q: What is the cost of improvement under Income Tax Act?

A: The cost of improvement is the capital expenditure incurred by an assessed for making any additions or alterations to the capital asset. It also includes any expenditure incurred in protecting or curing the title. In other words, the cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset.

Q: What are some examples of costs that can be considered as the cost of improvement under Income Tax Act?

A: Some examples of costs that can be considered as the cost of improvement include under Income Tax Act

• Additions to the property, such as a new room or swimming pool
• Alterations to the property, such as converting a garage into a living room
• Repairs to the property, which extend the useful life of the property
• Improvements to the property, such as landscaping or installing new appliances
• Costs incurred in protecting or curing the title of the property

Q: What are some costs that cannot be considered as the cost of improvement under Income Tax Act?

A: Some costs that cannot be considered as the cost of improvement include under Income Tax Act:

• Revenue expenses, such as property taxes and maintenance costs
• Costs incurred in acquiring the asset
• Costs incurred in disposing of the asset
• Costs incurred in financing the asset
• Costs incurred in improving the goodwill of the business

Q: How is the cost of improvement calculated under Income Tax Act?

A: The cost of improvement is calculated by adding up all of the capital expenditures incurred on the asset, after the asset was acquired by the assessed.

Q: What are the benefits of claiming the cost of improvement as a deduction under Income Tax Act?

A: Claiming the cost of improvement as a deduction can help to reduce the taxpayer’s capital gain on the sale of the asset. This is because the cost of improvement is added to the taxpayer’s cost of acquisition of the asset, which reduces the taxable capital gain.

Q: Are there any limits on the amount of the cost of improvement that can be claimed as a deduction under Income Tax Act?

A: Yes, there are some limits on the amount of the cost of improvement that can be claimed as a deduction. For example, the cost of improvement cannot be claimed as a deduction if it is incurred on a capital asset that is held for less than one year. Additionally, the cost of improvement cannot be claimed as a deduction if it is incurred on a capital asset that is used for personal purposes.