Meaning of ‘income chargeable to tax’ for time limit under 149(1)(b) for reopening

Sanath Kumar Murali Vs ITO (Karnataka High Court)

Petitioner challenged the order  u/s 148A(d)  for AY 2016-2017 & sought for quashing  148 notice before the Karnataka High Court.

Notice u/s 148A(b)  was issued to the petitioner stating that information was received which suggested that income chargeable to tax for the AY has escaped assessment within the meaning of Section 147, . detailing the information along with the supporting documents related to sale of property for Rs55,77,700.

Petitioner   replied  to the said notice dt 16.03.2023 in which details were laid out, setting out the  computation of capital gains giving the details of the Date of transfer[ 22.12.2015], Sale consideration [Rs 55,77,700], Date of acquisition [24/09/2011] and Cost Of Acquisition [Rs15,91,735]. After indexing the cost, the Taxable Capital gain was shown as  Rs 33,85,769. Petitioner  submitted that as the income escaping assessment did not exceed Rs 50 lakh in terms of Sec 149(1)(b), notice u/s 148 could not be issued. Time limit for issuance of such notice as per Sec 149(1)(a) would be 3 years from the end of the relevant AY and if the Dept seeks to justify the issuance of notice in the extended time provided u/s 149(1)(b) beyond three years, but not more than ten years, the Dept would have to demonstrate that the ‘income chargeable to tax’ which has escaped assessment is likely to amount to Rs 50  lakh or more.

Revenue contended that  since the proceedings u/s 148 is at the initial stage and adjudication is to take place in terms of the procedure prescribed and provided u/s 148A, it would be premature to construe the contention relating to ‘income chargeable to tax’ as contended by the petitioner and that the income that has escaped assessment to be taken note of for the purpose of Section 149(1)(b) which would be the total sale consideration received as reflected in the sale deed , i.e.Rs.55,77,700/-. It is the income that has escaped assessment that has to be taken note of, which being above Rs.50 lakh, the extended period u/s 149(1)(b) would save such notice from the bar of the period prescribed to re-open provided u/s 149(1)(a). Revenue  also relied upon the memorandum explaining the provisions in the Finance Bill, 2021 to justify such interpretation

After analyzing sections 148, 149 & 48, the Court held that  the AO 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).  A plain reading of Section 48 would provide that the entirety of sale consideration does not constitute ‘income’. The words found in Sect 149 which is ‘income chargeable to tax’ must be read in terms of ‘income’ as arising out of the ‘Capital Gains’ as provided u/s 48 and this is the only manner of understanding the words, ‘income chargeable to tax u/s 149(1)(b). Memorandum explaining the provisions of Finance Act, 2021 does not in any way lead to giving a different interpretation to the words, ‘income chargeable to tax’. The words used u/s 149 for the purpose of extended time limit is to be interpreted in terms of the plain wordings of Sec. 149 and cannot be construed differently while relying on any executive instruction. High Court  allowed the Writ Petition setting aside the order u/s 148A(d) and the notice u/s 148.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner has challenged the order at Annexure-‘A’ dated 21.03.2023 passed under Section 148A(d ) of the Income Tax Act, 1961 (‘I.T. Act’ for brevity) for the Assessment Year 2016-2017 and has also sought for quashing of the impugned notice dated 21.03.2023 bearing DIN and Notice No. ITBA/AST/S/148_1/2022-23/1051076610(1 ) issued by respondent No.1 under Section 148 of the I.T. Act for the Assessment Year 2016-2017 at Annexure-‘B’.

2. On 03.03.2023, the notice under Section 148A(b) of the I.T. Act came to be issued to the petitioner stating that information was received which suggested that income chargeable to tax for the Assessment Year 2016-2017 has escaped assessment within the meaning of Section 147, detailing the information alongwith the supporting documents. The information is detailed in the Annexure in the form of a table, which is extracted below:

This was followed u p with another notice on 10.03.2023.

3. The petitioner is stated to have made out a reply to the said notice dated 16.03.2023 in which details were laid out, setting out the sale consideration relating to the sale deed of 22.11.2015 as Rs.55,77,700/- and also furnishing details of the sale deed by virtue of which the petitioner has purchased the property on 24.09.2011 for consideration of Rs.15,91,735/- (cost of acquisition). It was submitted that since the date of acquisition was in the year 2011 and the sale was in the year 2015 and therefore the long term capital gain would be as follows:

4. The ‘Capital Gain’, according to the petitioner in terms of the reply made out is Rs.33,85,769/-. It was submitted that, as the income escaping assessment did not exceed rupees fifty lakh in terms of Section 149(1)(b) of the I.T. Act, the notice under Section 148 could not be issued.

5. It is the submission of learned counsel for the petitioner that the notice under Section 148 at Annexure-‘8’ was issued on 21.03.2023 with respect to the Assessment Year 2016-2017 and the time limit for issuance of such notice in terms of Section 149(1)(a) would be three years from the end of the relevant Assessment Year and if the Department seeks to justify the issuance of notice in the extended time provided under Section 149(1)(b) beyond three years, but not more than ten years, the Department would have to demonstrate that the ‘income chargeable to tax’ which has escaped assessment is likely to amount to rupees fifty lakh or more.

6. It is further submitted that in the present case, as demonstrated in the reply since the income chargeable to tax calculated in terms of Section 48 would be less than rupees fifty lakh, the notice issued on 21.03.2023 in respect of the Assessment Year 2016-2017 would not fall within the extended time provided under Section 149(1)(b) of the I.T. Act.

7. Learned counsel appearing for the Revenue would submit that since the proceedings under Section 148 of I.T. Act is at the initial stage and adjudication is to take place in terms of the procedure prescribed and provided under Section 148A, it would be premature to construe the contention relating to ‘income chargeable to tax’ as contended by the petitioner and that the income that has escaped assessment to be taken note of for the purpose of Section 149(1)(b) which would be the total sale consideration received as reflected in the sale deed dated 22.12.2015 of Rs.55,77,700/-.

8. It is submitted that what is of relevance for the purpose of Section 148A is the information received and in terms of the information received, the consideration of sale as mentioned in the sale deed ought to be taken note of, which would reveal that an amount of Rs.55,77,700/- has escaped assessment and the same has been mentioned even in the enclosure alongwith the show cause notice dated 03.03.2023. Accordingly, it is submitted that it is the income that has escaped assessment that has to be taken note of, which being above Rs.50.00 lakh, the extended period under Section 149(1)(b) would save such notice from the bar of the period prescribed to re-open provided under Section 149(1)(a) of I.T. Act.

9. Learned counsel appearing for the Revenue has also relied upon the memorandum explaining the provisions in the Finance Bill, 2021 to justify such interpretation.

10. Heard both sides.

11. What needs to be noted in the present case is that the income stated to have escaped assessment which has been taken note of seeking to re-open the assessment for the Assessment Year 2016-2017 is the sale transaction with Sri D.V. Venkatachalapathi. The time prescribed for such reopening of assessment by virtue of proceedings under Section 148 is provided under Section 149. Relevant extract of Section 149 reads as follows:-

“149.(1) No notice under section 148 shall be issued for the relevant assessment year.-

(a) if three years have elapsed from the end of the relevant assessment year; unless the case falls under clause (b);

(b) if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of –

(i) an asset;

(ii) expenditure in respect of a transaction or in relation to an event or occasion; or

(iii) an entry or entries in the books of accounts, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more”

12. It is clear that there is a bar prohibiting the issuance of notice under Section 148 of I.T. Act if three years has elapsed from the end of the relevant Assessment Year unless the case falls under Clause-(b). Accordingly, no notice under Section 148 could be issued after three years from the end of Assessment Year 2016-2017, is subject to the exception of extended period of limitation of three years, but not more than ten years from the end of relevant Assessment Year, if the Assessing Officer has material which would reveal that “the income chargeable to tax” which has escaped the assessment amounts or is likely to amount to Rs.50.00 lakh rupees or more.

13. In the present case, the enclosure to the show cause notice in the Form at Annexure to the notice reads as follows:-

ANNEXURE

The case has been flagged by the Risk Management Strategy formulated by the Board in Insight Module under High Risk Category information/NMS cycle under RMS in your case.

As per the details available with the undersigned in this office, it is seen that

1. You have not filed the return of income for the F.Y. 2015-16 relevant to A.Y. 2016-17.

2. The following information is available:

Since, as per the records in this office, you have not filed the return of income for the aforesaid Asst. Year, you are requested to explain along with documentary evidences why a notice u/s 148 should not be issued in order to assess the income that has escaped assessment.

As per the procedure laid down under section 148A of the Income Tax Act, 1961, it mandates that show-cause notice is to be issued based on the information/explanation provided by you on the above information to this office. Please note that the information provided by you will be necessary for arriving at the final conclusion for issuance of notice u/s 148.

14. It is clear that the notice is issued in the context of sale consideration from sale of immoveable property for an amount of Rs.55,77,700/-. As noted above, the reply to the show cause notice, copy of which is enclosed at Annexure-‘F1’ would reveal the details of sale consideration and the cost of acquisition would be the indexed cost of acquisition in light of the sale leads to accrual of long term capital gain.

15. In the present case on hand, clearly, the income that has escaped assessment is the proceeds from the sale as made out from perusal of the Annexure to the show cause notice at Annexure-‘C’. In case of income arising from the sale of property which may fall within the purview of Section 48 so as to amount to capital gains, it is relevant to notice that Section 48 provides for mode of calculation of income chargeable under the head ‘Capital Gains’. Section 48 reads as follows:-

“48. The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:–

(i) expenditure incurred wholly and exclusively in connection with such transfer,

(ii) the cost of acquisition of the asset and the cost of any improvement thereto;

(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in sub-section (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner:

…

Provided further that where long­term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:….

16. 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.

17. It must be noticed that before issuance of notice under Section 148 to re-open the proceedings with respect to the Assessment Year 2016-2017. Section 148A provides:

“148A. The Assessing Officer shall, before issuing any notice under section 148, –

(a) conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;

(b) provide an opportunity of being heard to the assessee, with the prior approval of specified authority, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

(c) consider the reply of assessee furnished, if any, in response to the show–cause notice referred to in clause (b);

(d) decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148, by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires:

…”

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.

18. Accordingly, 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.

19. 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/-ou ght to be taken note of. A plain reading of Section 48 would provide that the entirety of sale consideration does not constitute ‘income’. The memorandum explaining the provisions of Finance Act, 2021 does not in any way lead to giving a different interpretation to the words, ‘income chargeable to tax’. 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.

20. Learned counsel appearing for the Revenue has relied on the judgment of Rajasthan High court in the case of Abdul Majeed v. Income Tax Officer passed in Civil Writ Petition.No.7853/2022. However, a close reading of the said judgment does not support the interpretation sought to be placed and the High Court of Rajasthan has also reiterated the same position as laid down above.

21. Accordingly, the order at Annexure-¹A dated 21.03.2023 passed under Section 148A(d) of the I.T. Act is set aside and the notice at Annexure-¹8¹ dated 21.03.2023 issued under Section 148 of the I.T. Act by the respondent No.1 for the Assessment Year 2016-2017 is set aside.

The Writ Petition is accordingly allowed.