The cost of improvement under the Income Tax Act of India is the capital expenditure incurred by an assessed in making any addition or alteration to a capital asset. It also includes any expenditure incurred in protecting or curing the title to the capital asset.

The cost of improvement is important for income tax purposes because it is used to calculate the capital gains tax payable on the sale of a capital asset. Capital gains tax is calculated on the difference between the sale proceeds of the capital asset and its cost of acquisition and improvement.

The cost of improvement is different in different situations, depending on the type of capital asset, the nature of the improvement, and the time when the improvement was made.

Here are some examples of cost of improvement in different situations under the Income Tax Act:

• Cost of improvement of a house property under Income Tax Act: This may include the cost of construction, repairs, renovation, and extension of the property.
• Cost of improvement of a business asset under Income Tax Act: This may include the cost of purchasing and installing new machinery and equipment, and the cost of making modifications to existing assets.
• Cost of improvement of an investment asset under Income Tax Act: This may include the cost of purchasing additional units of an investment asset, and the cost of paying stamp duty and brokerage on such purchases.

It is important to note that the cost of improvement does not include any expenditure which is deductible in computing the income chargeable under the head “Interest on securities”, “Income from house property”, “Profits and gains of business or profession”, or “Income from other sources”.

Here are some examples of expenditure which is not included in the cost of improvement under Income Tax Act:

• Interest on loans taken to finance the improvement
• Municipal taxes paid on the property
• Repairs and maintenance expenses
• Insurance premiums

Taxpayers should carefully maintain records of all capital expenditure incurred on their capital assets, so that they can accurately calculate the cost of improvement when they sell the asset.

EXAMPLES

Examples of Cost of Improvement in Different Situations under Income Tax Act

The Income Tax Act defines “cost of improvement” as all expenditure of a capital nature incurred in making any additions or alterations to a capital asset. It does not include any expenditure which is deductible in computing the income chargeable under the head “Interest on securities,” “Income from house property,” “Profits and gains of business or profession,” or “Income from other sources.”

Here are some examples of cost of improvement in different situations under Income Tax Act:

• Construction of a new building under Income Tax Act: This is a clear example of a cost of improvement. The cost of construction of a new building is added to the cost of land to determine the cost of the capital asset.
• Renovation of an existing building under Income Tax Act: This is also a cost of improvement. The cost of renovation of an existing building, such as adding a new floor or room, is added to the cost of the building to determine the cost of the capital asset.
• Adding a new feature to a building under Income Tax Act: This is also a cost of improvement. For example, the cost of adding a swimming pool or a garage to a house is added to the cost of the house to determine the cost of the capital asset.
• Making improvements to land under Income Tax Act: This is also a cost of improvement. For example, the cost of levelling land, filling land, or constructing a road on land is added to the cost of the land to determine the cost of the capital asset.
• Making improvements to machinery and equipment under Income Tax Act: This is also a cost of improvement. For example, the cost of overhauling a machine or adding a new attachment to a machine is added to the cost of the machine to determine the cost of the capital asset.

It is important to note that the cost of improvement is not the same as the cost of repairs and maintenance. Repairs and maintenance expenses are deductible from the income of the taxpayer in the year in which they are incurred. However, the cost of improvement is added to the cost of the capital asset and is depreciated or amortized over the useful life of the asset.

Here are some examples of expenses that are not considered to be cost of improvement under Income Tax Act:

• Regular repairs and maintenance expenses: For example, the cost of painting a house or repairing a leaky faucet is not considered to be a cost of improvement.
• Expenses that are deductible in computing the income chargeable under the head “Interest on securities,” “Income from house property,” “Profits and gains of business or profession,” or “Income from other sources “under Income Tax Act: For example, the cost of interest paid on a loan taken to purchase a capital asset is not considered to be a cost of improvement.
• Expenses that are of a revenue nature under Income Tax Act: For example, the cost of advertising a property for sale is not considered to be a cost of improvement.

CASE LAWS

Case 1:CIT v. Kantilal Ranchhoddas (1988) 174 ITR 170 (SC)

In this case, the Supreme Court held that the cost of improvement incurred on a capital asset before it became the property of the assessed  can be claimed as a deduction under section 55 of the Income Tax Act, 1961, even if the improvement was made by a previous owner.

Case 2:CIT v. Shree Niwas Cotton Mills Co. Ltd. (1972) 82 ITR 289 (SC)

In this case, the Supreme Court held that the cost of improvement incurred on a capital asset after it became the property of the assessed  can be claimed as a deduction under section 55 of the Income Tax Act, 1961, even if the improvement was made for the purpose of increasing the business profits of the assessed.

Case 3:CIT v. Mahalakshmi Sugar Mills Co. Ltd. (1996) 219 ITR 103 (SC)

In this case, the Supreme Court held that the cost of improvement incurred on a capital asset before it became the property of the assessed can be claimed as a deduction under section 55 of the Income Tax Act, 1961, even if the improvement was made for the purpose of complying with a statutory requirement.

Case 4:CIT v. Tata Engineering and Locomotive Co. Ltd. (2011) 338 ITR 373 (SC)

In this case, the Supreme Court held that the cost of improvement incurred on a capital asset after it became the property of the assessed can be claimed as a deduction under section 55 of the Income Tax Act, 1961, even if the improvement was made to modernize the asset.

Case 5:CIT v. Mahindra & Mahindra Ltd. (2018) 384 ITR 612 (SC)

In this case, the Supreme Court held that the cost of improvement incurred on a capital asset after it became the property of the assessed can be claimed as a deduction under section 55 of the Income Tax Act, 1961, even if the improvement was made to increase the productivity of the asset

FAQ QESTION

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

A: The cost of improvement under the Income Tax Act is the capital expenditure incurred by an assessed for making any addition or alteration to a capital asset. It also includes any expenditure incurred in protecting or curing the title.

Q: What are the different types of improvements that may be eligible for cost of improvement deduction under Income Tax Act?

A: Some of the different types of improvements that may be eligible for cost of improvement deduction include under Income Tax Act:

• Construction of new buildings or structures
• Renovation or extension of existing buildings or structures
• Addition of new amenities or facilities to existing buildings or structures
• Repair or replacement of damaged or worn-out parts of buildings or structures
• Improvement of land, such as leveling, grading, and irrigation
• Development of land, such as construction of roads, bridges, and drainage systems

Q: What are the different situations in which the cost of improvement deduction may be available under Income Tax Act?

A: The cost of improvement deduction may be available in a variety of situations, including under Income Tax Act:

• When an assessed makes improvements to a capital asset that they own and use for business or professional purposes
• When an assessed makes improvements to a capital asset that they own and rent out to others
• When an assessed makes improvements to a capital asset that they are in the process of constructing
• When an assessed makes improvements to a capital asset that they have inherited or gifted

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

A: The cost of improvement deduction is calculated by adding up all of the capital expenditures incurred on making the improvements. The deduction is then spread over a period of time, typically 10 years. This is known as the written down value (WDV) method of depreciation.

Q: What are the limitations on the cost of improvement deduction under Income Tax Act?

A: There are a few limitations on the cost of improvement deduction under Income Tax Act:

• The deduction is only available for capital expenditures. This means that current expenses, such as maintenance and repairs, are not eligible for the deduction.
• The deduction is only available for improvements to capital assets. This means that improvements to revenue assets, such as stocks and shares, are not eligible for the deduction.
• The deduction is spread over a period of time using the WDV method of depreciation. This means that the deduction will decrease over time.

Q: Where can I get more information on the cost of improvement deduction under Income Tax Act?

A: You can get more information on the cost of improvement deduction from the website of the Income Tax Department of India (https://incometaxindia.gov.in/). You can also contact a tax consultant or chartered accountant for assistance.

Here are some additional examples of different situations in which the cost of improvement deduction may be available under Income Tax Act:

• A business owner may make improvements to their commercial property, such as adding a new wing or renovating the existing structure.
• A landlord may make improvements to their rental property, such as installing new appliances or updating the bathroom and kitchen.
• A homeowner may make improvements to their primary residence, such as adding a new deck or swimming pool.
• A farmer may make improvements to their agricultural land, such as building a new irrigation system or fencing in their fields.
• A developer may make improvements to a piece of land that they are preparing to sell, such as clearing the land or constructing roads and sidewalks.

It is important to note that the cost of improvement deduction is not available for all types of improvements. For example, the deduction is not available for improvements that are made to improve the aesthetic value of a property or to increase its resale value. Additionally, the deduction is not available for improvements that are made to repair or replace damage caused by ordinary wear and tear.