Cost of Acquisition Must Be Deducted Before Applying Section 149 Threshold: Karnataka High Court Upholds Single Judge Order in ITO Vs Sanath Kumar Murali

Overview of the Case

The Karnataka High Court, in ITO Vs Sanath Kumar Murali, delivered a significant ruling concerning the correct method of computing escaped income for the purpose of determining jurisdictional thresholds under Section 149 of the Income Tax Act, 1961. The Division Bench dismissed the Revenue's intra-court appeal challenging the order dated 24th May, 2023 passed by the learned Single Judge, which had quashed both the order dated 21.03.2023 under Section 148A(d) and the notice dated 21.03.2023 issued under Section 148 of the Income Tax Act, 1961 for Assessment Year 2016-2017.

This ruling carries meaningful implications for assessees facing reopening of assessments in property transaction cases, particularly where the Revenue mechanically adopts the sale consideration reflected in a registered conveyance deed without accounting for the cost of acquisition.

Background and Context

What Triggered the Dispute

The case arose out of a property transaction where the registered conveyance deed reflected a consideration of Rs. 55.00 lakh. The Revenue, acting on this figure, initiated proceedings for reassessment on the ground that income had escaped assessment, asserting that the escaped income crossed the Section 149 threshold of Rs. 50.00 lakh.

The Income Tax Officer issued an order under Section 148A(d) and a consequential notice under Section 148 for Assessment Year 2016-2017, treating the amount stated in the conveyance deed as the quantum of escaped income without any deduction toward cost of acquisition.

The assessee challenged these proceedings before the Karnataka High Court by filing Writ Petition No. 7647 of 2023. The learned Single Judge allowed the writ petition and set aside both the Section 148A(d) order and the Section 148 notice. Aggrieved, the Revenue filed an intra-court appeal before the Division Bench.

Revenue's Argument Before the Division Bench

The learned Senior Panel Counsel appearing on behalf of the Revenue contended that the Single Judge's order was inconsistent with the legislative scheme underlying Section 149 of the Income Tax Act, 1961. The Revenue's central argument was straightforward:

  • Once an amount of Rs. 50.00 lakh is ascertained as having escaped assessment, the Writ Court ought not to intervene in the reassessment process.
  • The value of Rs. 55.00 lakh mentioned in the registered conveyance deed clearly surpassed the statutory threshold prescribed under Section 149.
  • Accordingly, the Revenue possessed valid jurisdiction to issue notices under Section 148 and pass an order under Section 148A(d), and the Single Judge's interference was unwarranted.

The Revenue's position essentially rested on a literal reading of the sale consideration as reflected in the conveyance document, treating that figure as synonymous with "escaped income" for the purposes of Section 149.

Assessee's Counter-Submissions