Section 55(1)(b) of the Income Tax Act provides of deduction for expenditure incurred for Improvement of Capital Asset. Section 55(1)(b) is one of the widely popular provision in the Capital Gains. Section 55(1)(b) can be interpreted in a wide number of ways and there are some landmark judgements regarding the same.In this Article, we will cover the entire Scope and applicability of Section 55(1)(b), Calculation under Section 55(1)(b) of the Income Tax Act, Certain disallowed Expenditures in Cost of Improvement under Section 55(1)(b).
Scope of Section 55(1)(b) Income Tax Act
Section 55(1)(b) provides that where the capital asset became the property of the previous owner or the assessee before 1.4.1981, the cost of any improvement means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee.
COI in Other Cases – Section 55(1)(b) Income Tax Act
In other cases, it means all capital expenditure in making any additions or alterations by the assessee after it became his property and where the capital asset became the property of the assessee by any of the modes specified in Section 49(1) by the previous owner as the case may be.
Exp Disallowed – Section 55(1)(b) Income Tax Act
If, however, any part of the expenditure 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”, such expenditure cannot be included as cost of improvement.
Example – Section 55(1)(b) Income Tax Act COI
For example, a house is bought out of borrowed money. The interest paid on the loan till the date of completion of construction has been held to be part of cost of acquisition of the house. But ground rent paid which is deductible while computing income under the head “income from house property” cannot be taken to be cost of improvement and hence cannot be added to the cost of acquisition.
Sub clause – Section 55(1)(b) Income Tax Act
However, the ‘Cost of any improvement’ at sub-clause (b) of Clause 1 of Section 55, in relation to a capital asset being goodwill of a business, shall be taken to be nil.
5.52 Capital Gains in case of damage or destruction of Capital Asset (w.e.f. Assessment year 2000-01) [Section 45(1A)]
Special Cases – Section 55(1)(b) Income Tax Act
Where any person receives at any time during the previous year any money or other asset under an insurance from an insurer on account of damage to or destruction of, any capital asset, as a result of:
- flood, typhoon, hurricane, cyclone, earthquake, or other convulsion of nature; or
- riot or civil disturbance; or
- accidental fire or explosion; or
- action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),
then, any profits or gains arising from receipt of such money or other asset shall be chargeable to tax under the head ‘Capital Gains’. The income shall be deemed to be the income for the previous year in which such money or other asset is received.
For computing capital gains, the value of any money or the fair market value of asset received on the date of receipt shall be deemed to be the full value of consideration received or accuring as a result of the transfer of damaged asset.