Sale Consideration is not Income Chargeable to Tax: A Crucial Distinction

Brief: In a significant ruling, the Madhya Pradesh High Court has quashed reassessment proceedings initiated against an assessee, Mr. Nitin Nema, based on a sale consideration of Rs. 72.05 lakhs for the assessment year 2016-17. The High Court held that the actual income chargeable to tax may be lower than the threshold for reopening assessments beyond three years. This decision was influenced by a Karnataka High Court ruling, and it emphasized the distinction between sale consideration and income chargeable to tax.

Facts: The case revolved around the Revenue’s claim that Mr. Nitin Nema had failed to declare Rs. 72.05 lakhs, which he received from the sale of 16 scooters, as income. Consequently, the Revenue initiated reassessment proceedings under Section 149(1)(b) of the Income Tax Act.

Mr. Nema challenged this assessment in a writ petition, arguing that the order under Section 148A(d) pertained to gross sale consideration, not income as defined in Section 2(24). The Revenue contended that since Mr. Nema hadn’t filed a return for the relevant assessment year, he couldn’t challenge the order under Section 148A(d).

During the proceedings, Mr. Nema provided detailed information about the items sold, the amount received, the computation of total income, and the computation of tax on total income. The crux of the issue lay in whether the sale consideration should be considered income chargeable to tax.

Decision: The Madhya Pradesh High Court, in its ruling on August 16, 2023, reached several key decisions:

  1. Definition of Income Chargeable to Tax: The Court noted that the Income Tax Act does not define “income chargeable to tax” separately but distinguishes it from “income” defined under Section 2(24). It clarified that “income chargeable to tax” is arrived at by deducting permissible deductions from “income.” Thus, “income” is invariably greater than “income chargeable to tax.”
  2. Assessee’s Right to Challenge: The Court rejected the Revenue’s argument that Mr. Nema couldn’t challenge the Section 148A(d) order due to his failure to file a return. It found no provisions in Sections 148, 148A, or 149 that prevented the Assessee from availing of these provisions merely because of a failure to file a return.
  3. Revenue’s Mistake: The Court criticized the Revenue for failing to grasp the fundamental difference between sale consideration and income chargeable to tax. It pointed out that the Revenue overlooked clear evidence provided by Mr. Nema during the proceedings.
  4. Precedent Ruling: The Court referenced a co-ordinate bench ruling in Amrit Homes (P) Ltd. v. DCIT, highlighting that the insertion of Section 148A was meant to save both the assessee and the Revenue from pursuing fruitless, frivolous, and vexatious cases, thereby conserving time and resources.
  5. Exemplary Cost Awarded: Due to the Revenue’s elementary mistake, which led to unnecessary harassment for Mr. Nema, the Court imposed a cost of Rs. 25,000 on the Revenue. Of this, Rs. 15,000 is for the Madhya Pradesh High Court Employees’ Association, Jabalpur, and the remaining Rs. 10,000 is payable to Mr. Nema within 30 days.
  6. Liberty to Invoke Section 148A: The Court granted the Revenue the liberty to invoke Section 148A in accordance with the law.

Conclusion: The Madhya Pradesh High Court’s judgment in Nitin Nema v. ITO is a significant clarification of the distinction between sale consideration and income chargeable to tax. It underscores that “income chargeable to tax” is derived from “income” after permissible deductions and, therefore, might be lower. The Court’s decision to quash the reassessment proceedings and impose a cost on the Revenue highlights the importance of careful consideration and adherence to legal provisions in taxation matters. This ruling serves as a reminder to tax authorities to exercise due diligence and avoid pursuing frivolous cases, ultimately saving time and resources for all parties involved.

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