During financial year (FY) 2015-16, I sold a property bought in FY06. In the interim, I spent ₹8 lakh on renovating it. I paid tax after calculating the indexed cost of acquisition and improvement, but took a short-term capital loss (STCL) rebate by investing in listed equity shares. I bought some shares of Infosys and sold them in the same FY as Infosys announced a bonus in the ratio of 1:1. I kept the bonus shares to avail set-off of STCL against long-term capital gains (LTCG) on the property sale. However, now the income-tax office (ITO) says STCL can’t be set off against LTCG in my case as this is a trading activity liable for taxation. It is also asking for proof of renovation. I don’t have those bills. Also, does the lease amount paid to the government every year on a leasehold property qualify as cost of acquisition?
There are specific provisions under the Income-tax Act to set off of losses in the nature of capital gains, business income, and speculation income. Determining the exact nature of the transaction is a fact-specific exercise. Various judicial precedents, circulars and instructions have been issued in this respect, to delineate the criteria for evaluation and classification of a transaction as a business or capital gains transaction. Further, the exact reason of disallowance of set-off of loss in your case is unclear and, accordingly, a detailed study of the facts of the case, documents and submissions made by you, would need to be carried out separately.
With respect to proof or bills of improvement cost, note that the onus is on the assessee to provide documents to the satisfaction of the ITO, with respect to any claim made in the tax return. Hence, the said documents would likely need to be submitted with the ITO to substantiate the fact that the costs were actually incurred and to enable them to verify that they qualify as payments towards improvement of the property. In the absence of the same, the ITO may disallow the deduction towards indexed cost of improvement claimed in your tax return.
Annual lease payments made for property to the government can’t be classified as cost of acquisition or improvement, as these are revenue payments made for property leasing.