2023 (8) TMI 1027 - HC - Income Tax

Revenue's elementary mistake treating gross sale consideration as taxable income leads to exemplary costs for frivolous litigation

MP HC ruled in favor of assessee in income tax reopening case. Revenue erroneously treated gross sale consideration of Rs. 7,205,084 from 16 scooters as ... Reopening of assessment - determination of income chargeable to tax - distinction between consideration of sale and income chargeable to tax - whether income shown in the impugned order and notice to have escaped assessment, is income chargeable to tax or not? - HELD THAT:- Admittedly, the expression ‘income chargeable to tax’ is not defined in the IT Act. Scheme of the IT Act specially the provisions which deal with computation of business income make it abundantly clear that definition of expression ‘income’ and ‘income chargeable to tax’ are at variance to each other. The expression ‘income’ is inclusively defined under Section 2(24) of IT Act whereas ‘income chargeable to tax’ obviously denotes an amount which is less than ‘income’. The ‘income chargeable to tax’ is arrived at after deducting the permissible deductions under IT Act from ‘income’. As such quantum of ‘income’ is invariably more than the income chargeable to tax. More so, all penal provisions under the scheme of income tax, emanate from the factum of evasion of tax calculated based on income chargeable to tax. Several High Courts have held that income chargeable to tax cannot be the gross receipts/consideration in any business transaction. The objection of learned counsel for Revenue that the petitioner having failed to file return for the relevant assessment year cannot seek to challenge the impugned order, is heard to be dismissed. The provisions from Section 147 to Section 151 pertaining to subject of income escaping assessment in the IT Act do not support the contention of the Revenue. There is nothing in Section 148, 148 A or Section 149 which may prevent assessee from taking advantage of said provisions merely because of his failure to file return. Neither the notice under Section 148A(b) nor order u/s 148 A(d), nor the consequential notice under section 148A give any indication that amount alleged to be income escaping assessment, includes land/buildings/shares/equities/ loans/ advances etc. as contended by the Revenue. When petitioner/assessee filed a reply to the notice u/s 148(A)(b) it was clearly revealed that the said amount is the gross receipt of sale consideration of 16 scooters. Meaning thereby that the said amount was the total sale consideration receipt of the transaction in question, and not income chargeable to tax which would obviously be less than the said amount. Along with reply the details of items sold and payment receipt, computation of total income and the computation of tax on total income was worked out and submitted to the Revenue. While considering the said reply and before passing the impugned order under Section 148A(b) of the IT Act, highly casual and perfunctory approach was adopted, turning a Nelson’s eye towards the palpable and elementary aspect of clear distinction between consideration of sale and income chargeable to tax. It may not be out of place to mention that had the Revenue arrived at the correct figure of income chargeable to tax instead of the gross receipts/consideration, the possibility of the amount of Rs.7205084/- coming down to a figure below Rs.50 lacs cannot be ruled out. From the aforesaid discussion what comes out loud and clear is that the Revenue has failed to understand the fundamental difference between sale consideration on one hand and income chargeable to tax on the other. The Revenue despite being assisted by thousands of experts in the field of finance and taxation, has committed such elementary mistake leading to harassment to the assessee who has been compelled to file the present avoidable piece of litigation. More so, this Court has been compelled to decide this frivolous matter wasting its precious time and energy which could have been utilized in more pressing matters. Revenue deserves to be saddled with exemplary cost - Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the amount of Rs.72,05,084/- alleged to have escaped assessment constitutes 'income chargeable to tax' under the Income Tax Act or is merely gross proceeds/consideration from the sale of goods (16 scooters) and thus not subject to reopening under Section 148.(b) Whether the reopening of assessment proceedings under Sections 148, 148A, and 149 of the Income Tax Act is valid and within the jurisdiction of the Revenue, particularly considering the limitation period and the threshold of Rs.50 lakhs for income escaping assessment represented as an asset.(c) Whether the petitioner's failure to file a return for the relevant assessment year affects his entitlement to challenge the reopening notice and order.(d) The interpretation and application of the provisions of Sections 2(24), 14, 28, 44AD, 148, 148A, and 149 of the Income Tax Act in the context of reopening assessments for escaped income.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Whether the amount alleged to have escaped assessment is 'income chargeable to tax' or merely gross sale considerationThe Court examined the distinction between 'income' as defined under Section 2(24) of the Income Tax Act and 'income chargeable to tax'. The former is an inclusive definition encompassing profits, gains, dividends, capital gains, and various other receipts, while the latter refers to the net taxable income after allowable deductions.The Court noted that the expression 'income chargeable to tax' is not explicitly defined in the Act but must be understood as income computed after permissible deductions, and thus is invariably less than or equal to 'income'. The gross proceeds or sale consideration cannot be equated to taxable income.The petitioner had contended that the amount of Rs.72,05,084/- represented the gross sale consideration for 16 scooters and not taxable income. The petitioner submitted detailed computations and supporting documents showing the nature of the amount as gross receipts rather than net income.The Court relied on precedents, including a recent Karnataka High Court decision, which held that the entire sale consideration cannot be treated as 'income chargeable to tax' for the purpose of invoking Section 149(1)(b). The Court observed that the Revenue's contention to treat the gross proceeds as income chargeable to tax was contrary to the statutory scheme and judicial precedents.The Court further observed that no indication was found in the impugned order or notices that the amount included assets such as land, shares, loans, or advances, which could qualify as 'income chargeable to tax' under the relevant provisions.The Court concluded that the amount in question was gross sale consideration and not income chargeable to tax, thereby invalidating the basis for reopening the assessment under Section 148.Issue (b): Validity and jurisdiction of reopening assessment under Sections 148, 148A, and 149The Court examined the procedural and substantive conditions for reopening assessments under Sections 148, 148A, and 149, including the requirement of prior approval, issuance of show-cause notice, consideration of the assessee's reply, and the limitation period.Section 149(1)(b) allows reopening beyond three years and up to ten years only if the escaped income, represented as an asset or expenditure, amounts to or is likely to amount to Rs.50 lakhs or more. The Court emphasized that the threshold applies to 'income chargeable to tax', not gross receipts.The Court noted that the Revenue failed to correctly apply the threshold test, treating gross receipts as income chargeable to tax, which is inconsistent with the statutory scheme.The Court also referred to the purpose of Section 148A, inserted w.e.f. 1.4.2021, which aims to make reopening proceedings more transparent and prevent casual or frivolous issuance of notices, thereby safeguarding the assessee from harassment.It was observed that the Revenue adopted a casual and perfunctory approach in passing the order under Section 148A(d), ignoring the petitioner's detailed reply and the fundamental distinction between gross receipts and taxable income.The Court held that the reopening was not in accordance with law and the jurisdiction was improperly exercised.Issue (c): Effect of petitioner's failure to file return for the relevant assessment yearThe Revenue contended that the petitioner's failure to file a return barred him from challenging the reopening notice and order. The Court rejected this contention, holding that the statutory provisions do not preclude an assessee from availing the protections under Sections 148, 148A, and 149 merely due to non-filing of return.The Court emphasized that the right to challenge the validity of reopening and the correctness of the Revenue's approach is independent of the filing status of the assessee.Issue (d): Interpretation and application of relevant statutory provisionsThe Court analyzed the relevant provisions in detail:Section 2(24) - Inclusive definition of 'income' covering various receipts.Section 14 - Classification of income under heads including business income and capital gains.Section 28 - Profits and gains of business or profession, including profits on sale of licenses and benefits arising from business.Section 44AD - Presumptive taxation scheme for eligible businesses, specifying deemed profits as a percentage of turnover or gross receipts.Section 148 - Conditions and procedure for issuing notice for income escaping assessment.Section 148A - Inquiry and opportunity before issuance of notice under Section 148, including show-cause notice and mandatory consideration of assessee's reply.Section 149 - Time limits for issuance of notice under Section 148, with extended period applicable only if escaped income represented as an asset exceeds Rs.50 lakhs.The Court highlighted that the Revenue's failure to distinguish between gross receipts (sale consideration) and taxable income led to an erroneous invocation of extended limitation and reopening provisions.The Court also noted that the insertion of Section 148A was intended to curb misuse of reopening powers and ensure fair and transparent procedures.3. SIGNIFICANT HOLDINGSThe Court held:'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 Revenue has failed to understand the fundamental difference between sale consideration on one hand and income chargeable to tax on the other. The Revenue despite being assisted by thousands of experts in the field of finance and taxation, has committed such elementary mistake leading to harassment to the assessee who has been compelled to file the present avoidable piece of litigation.''Insertion of Section 148A not only saves the assessee from casual commencement of proceedings under Section 147-148 but will also save the Revenue of precious time and energy which may be wasted in pursuing fruitless, frivolous and vexatious cases.'Accordingly, the Court quashed the impugned order under Section 148A(d) and the consequential notice under Section 148 issued for the assessment year 2016-2017, holding that the reopening was not in accordance with law.The Court further awarded exemplary costs of Rs.25,000/- against the Revenue, directing part payment to the High Court Employees' Association and part to the petitioner as compensation for the avoidable litigation caused by the Revenue's erroneous approach.The Court clarified that the Revenue remains at liberty to invoke Section 148A and Section 148 strictly in accordance with law and after proper application of mind to the distinction between gross receipts and income chargeable to tax.