Karnataka High Court Sets Precedent: Capital Gains Income Determines Threshold Rs.50 Lakhs, Not Sale Consideration

The Karnataka High Court recently rendered a significant decision regarding the reassessment proceedings for the Assessment year 2016-17. The case involved the invocation of the extended limitation period under Section 149(1)(b), where the sale consideration exceeded Rs. 50,00,000. However, it was determined that the taxable capital gains income was well below the threshold. After carefully considering the arguments presented by both parties and analyzing the relevant statutory framework, the High Court concluded that the exception to the three-year limitation period applied only in cases where there was an escapement of “income chargeable to tax” exceeding Rs. 50,00,000, based on the evidence before the Revenue.

The High Court further determined that the term “income chargeable to tax” in the context of capital gains must be interpreted in accordance with the provisions of Section 48. Therefore, the Revenue was obligated to consider this aspect in accordance with the mandate of Section 148A. The Court emphasized that the words “income chargeable to tax” in Section 149(1)(b) should be understood as the income arising from capital gains, as provided under Section 48. This interpretation was deemed to be the only reasonable understanding of the provision.

The Court rejected the Revenue’s argument that the entire sale consideration should be considered as income chargeable to tax. It held that such an interpretation would be premature since the notice was issued at an early stage. The Court emphasized that the words used in Section 149 should not be interpreted differently simply because the Memorandum Explaining the Finance Bill, 2021 did not lead to an alternative interpretation of the term “income chargeable to tax.”

Additionally, the Court dismissed the Revenue’s reliance on a ruling by the Rajasthan High Court in Abdul Majeed v. ITO (2022) 447 ITR 698, where the interpretation advanced by the Revenue was not supported upon closer examination of the judgment.

Consequently, the High Court allowed the writ petition filed by the Assessee, ruling in favor of the taxpayer. The Court’s decision clarified the meaning of “income chargeable to tax” under Section 149(1)(b) in the context of capital gains. This judgment, rendered in the case of Sanath Kumar Murali v. ITO [TS-286-HC-2023(KAR)], was issued on May 24, 2023, by the Karnataka High Court. The decision pertained to the Assessment year 2016-17.

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