2023 (6) TMI 49 - HC - Income Tax

Assessment reopening order quashed as income chargeable to tax means computed capital gains under Section 48 not entire sale consideration

The Karnataka HC set aside an order passed under Section 148A(d) regarding reopening of assessment. The court held that for determining the extended time ... Reopening of assessment - validity of order passed u/s 148A(d) - Time limit for issuing notice u/s 149 - determination of the 'income chargeable to tax' - The amount of “capital gain” is to be considered or the “entire sale consideration” to be considered - HELD THAT:- The words used in Section 149(1)(b) is that the 'income chargeable to tax' which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year. The income chargeable under the head of 'capital gains' which would arise in case of sale transaction is as provided under Section 48, which provides that income chargeable under the head of 'capital gains' shall be computed by deducting from the full value of the consideration, the cost of acquisition and in the event, the property purchased has been held for a period beyond three years in terms of second proviso to Section 48, the words, 'cost of acquisition' is to be substituted by the words, 'indexed cost of acquisition'. This material is pointed out in the reply at Annexure-'F1' furnished to the show cause notice, which ought to be taken note of prior to the issuance of notice under Section 148A of I.T. Act. Clearly when the procedure is followed culminating in an order passed under Section 148(A)(d), the Authority is required to apply its mind and consider the reply of the assessee and pass a considered order. In the present case, the respondent Authority has not applied its mind to the reply filed, nor noticed the legal position while deciding as to the application of the extended period under Section 149(1)(b) of the I.T. Act. In the present case, the words found in Section 149 which is 'income chargeable to tax' must be read in terms of 'income' as arising out of the 'Capital Gains' as provided under Section 48 and this is the only manner of understanding the words, 'income chargeable to tax under Section 149(1)(b) of I.T. Act. The contention of the Revenue that under Section 149 what is required to be taken note of, is the 'income that has escaped assessment' being the entirety of sale consideration of Rs.55,77,700/- cannot be accepted, in light of the express words in the statutory provision ' income chargeable to tax which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more'. The words used under Section 149 for the purpose of extended time limit is to be interpreted in terms of the plain wordings of Section 149 and cannot be construed differently while relying on any executive instruction. Thus order passed u/s 148A(d) set aside - Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:(a) Whether the notice issued under Section 148 of the Income Tax Act, 1961 for reopening the assessment for the Assessment Year 2016-2017 is valid, having regard to the time limits prescribed under Section 149 of the Act;(b) Whether the extended period for issuance of notice beyond three years but within ten years under Section 149(1)(b) can be invoked based on the total sale consideration received on sale of immovable property or on the actual income chargeable to tax (capital gains) computed under Section 48 of the Act;(c) Whether the Assessing Officer complied with the procedural requirements under Section 148A of the Income Tax Act before issuing the notice under Section 148;(d) The correct interpretation of the phrase 'income chargeable to tax' in the context of Section 149(1)(b) and its application to the facts of the case;(e) The validity of the order passed under Section 148A(d) of the Income Tax Act, which approved issuance of the notice under Section 148.2. ISSUE-WISE DETAILED ANALYSIS(a) Validity of Notice under Section 148 and Time Limits under Section 149Relevant Legal Framework and Precedents: Section 148 empowers the Assessing Officer to issue a notice to reopen an assessment if there is information suggesting that income chargeable to tax has escaped assessment. Section 149 prescribes the time limits for issuance of such notice. Under Section 149(1)(a), the notice must be issued within three years from the end of the relevant assessment year. Section 149(1)(b) provides an extended time limit of up to ten years if the Assessing Officer possesses evidence that the escaped income amounts to or is likely to amount to Rs. 50 lakh or more.Court's Interpretation and Reasoning: The Court emphasized the statutory bar against issuance of notice beyond three years unless the extended period under Section 149(1)(b) is applicable. The Court held that the extended period can only be invoked if the 'income chargeable to tax' which escaped assessment amounts to or is likely to amount to Rs. 50 lakh or more.Key Evidence and Findings: The Assessing Officer issued the notice based on information received about sale consideration of Rs. 55,77,700 for the sale of immovable property. The petitioner responded by furnishing details of the sale deed and cost of acquisition, calculating the long-term capital gain (income chargeable to tax) as Rs. 33,85,769, which is below the Rs. 50 lakh threshold.Application of Law to Facts: The Court found that the Assessing Officer relied on the total sale consideration rather than the actual income chargeable to tax (capital gains) to justify issuance of notice beyond three years. The Court held that the extended time limit under Section 149(1)(b) applies only if the escaped income chargeable to tax is Rs. 50 lakh or more, not merely the gross sale consideration.Treatment of Competing Arguments: The Revenue argued that at the preliminary stage, the entire sale consideration should be considered as escaped income for invoking the extended period. The Court rejected this view, noting that the phrase 'income chargeable to tax' must be understood as the net taxable income after allowable deductions and not the gross amount.Conclusion: The notice issued beyond three years based on the gross sale consideration without considering the actual taxable income was invalid. The extended period under Section 149(1)(b) was not applicable.(b) Interpretation of 'Income Chargeable to Tax' under Section 149(1)(b) vis-`a-vis Section 48Relevant Legal Framework and Precedents: Section 48 of the Income Tax Act prescribes the method for computing income chargeable under the head 'Capital Gains,' which involves deducting the cost of acquisition (indexed, if applicable) and other expenses from the full value of consideration.Court's Interpretation and Reasoning: The Court held that the phrase 'income chargeable to tax' in Section 149(1)(b) must be read in conjunction with Section 48 when the escaped income arises from capital gains on sale of property. Thus, the taxable capital gain, not the gross sale consideration, is the relevant figure for determining whether the Rs. 50 lakh threshold is met.Key Evidence and Findings: The petitioner demonstrated that the indexed cost of acquisition was Rs. 21,91,931, resulting in a taxable capital gain of Rs. 33,85,769, which is below the Rs. 50 lakh limit.Application of Law to Facts: The Court applied the computation under Section 48 to the facts and concluded that the income chargeable to tax was less than Rs. 50 lakh. Therefore, the extended period for reopening the assessment could not be invoked.Treatment of Competing Arguments: The Revenue contended that the entire sale consideration should be considered as escaped income at the preliminary stage. The Court rejected this, emphasizing that the statutory language requires the escaped income to be 'income chargeable to tax,' which necessarily involves the net taxable income after deductions.Conclusion: The Court clarified that 'income chargeable to tax' under Section 149(1)(b) must be understood as the taxable capital gain computed under Section 48, not the gross sale consideration.(c) Compliance with Procedural Requirements under Section 148ARelevant Legal Framework: Section 148A mandates that before issuing a notice under Section 148, the Assessing Officer must conduct an enquiry (if required), issue a show cause notice to the assessee, consider the assessee's reply, and pass a reasoned order on whether to issue the notice, all with prior approval of the specified authority.Court's Interpretation and Reasoning: The Court noted that the Assessing Officer had issued a show cause notice under Section 148A(b) and received a reply from the petitioner. However, the order passed under Section 148A(d) did not reflect any application of mind to the reply or consideration of the legal position regarding the threshold for the extended period under Section 149(1)(b).Key Evidence and Findings: The order under Section 148A(d) was passed without discussing the petitioner's submissions or the statutory interpretation of 'income chargeable to tax.'Application of Law to Facts: The Court held that the failure to consider the reply and the relevant legal provisions amounted to non-application of mind, rendering the order under Section 148A(d) invalid.Treatment of Competing Arguments: The Revenue argued that the proceedings were at a preliminary stage and that detailed adjudication would follow. The Court rejected this as the procedural mandate requires a considered order before issuance of the Section 148 notice.Conclusion: The procedural requirements of Section 148A were not properly complied with, invalidating the order and subsequent notice under Section 148.(d) Reliance on Executive Instructions and PrecedentsRelevant Legal Framework and Precedents: The Revenue relied on the memorandum explaining the Finance Bill, 2021 and a judgment from the Rajasthan High Court to support its interpretation that the entire sale consideration can be considered as escaped income for invoking extended period.Court's Interpretation and Reasoning: The Court found that the memorandum did not alter the plain language of the statute requiring 'income chargeable to tax' to be considered. The cited Rajasthan High Court judgment was examined and found not to support the Revenue's interpretation.Conclusion: Executive instructions and precedents relied upon did not justify departing from the statutory language and established principles of income computation.3. SIGNIFICANT HOLDINGS'The words used in Section 149(1)(b) is that the 'income chargeable to tax' which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year. The income chargeable under the head of 'capital gains' which would arise in case of sale transaction is as provided under Section 48, which provides that income chargeable under the head of 'capital gains' shall be computed by deducting from the full value of the consideration, the cost of acquisition and in the event, the property purchased has been held for a period beyond three years in terms of second proviso to Section 48, the words, 'cost of acquisition' is to be substituted by the words, 'indexed cost of acquisition'. This material is pointed out in the reply at Annexure-'F1' furnished to the show cause notice, which ought to be taken note of prior to the issuance of notice under Section 148A of I.T. Act.''The contention of the Revenue that under Section 149 what is required to be taken note of, is the 'income that has escaped assessment' being the entirety of sale consideration of Rs.55,77,700/- cannot be accepted, in light of the express words in the statutory provision '..........income chargeable to tax...... which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more'. It cannot be stated that since the stage at which the notice is issued is at a premature stage, the entirety of consideration of Rs.55,77,700/- ought to be taken note of.''Clearly when the procedure is followed culminating in an order passed under Section 148(A)(d), the Authority is required to apply its mind and consider the reply of the assessee and pass a considered order. In the present case, the respondent Authority has not applied its mind to the reply filed, nor noticed the legal position while deciding as to the application of the extended period under Section 149(1)(b) of the I.T. Act.'The Court ultimately held that the order passed under Section 148A(d) and the notice issued under Section 148 for the Assessment Year 2016-2017 were invalid and set aside both.