Unless the matter of transfer is capital assets, there cannot be any demand under Chapter IV of the Income Tax Act: High Court of Karnataka

 : 1 : IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 15TH DAY OF JULY 2021 THE HON’BLE MRS. JUSTICE B.V.NAGARATHNA THE HON’BLE MR. JUSTICE HANCHATE SANJEEVKUMAR WRIT APPEAL No.1078 2018S o late Madappa Aged about 50 years. 2. S.Jeevan. 3. S.Pavan. Aged about 11 and 9 years S o late SiddarajuRep. by their Natural Guardian Mrs.Geetha W o late Siddaraju. All residing at Vajamangala Village Varuna Hobli Mysuru 570 010. By Smt.Vanaja M.R. Advocate) 1. Pr. Commissioner of Income Tax Mysuru 21 16 Residency Road Nazerbad Mysuru 570 010. 2. Income Tax Officer Ward 1(1) Mysuru 570 010. By Sri.Jeevan J.Neeralgi Advocate) ...APPELLANTS ... RESPONDENTS : 2 : This writ appeal is filed under Section 4 of the Karnataka High Court Act praying to set aside the order the Writ Petition Nos.54836 dated 20 02 2018 837 2017passed by the Single Judge and allow the This appeal coming on for ‘Preliminary Hearing’ this day NAGARATHNA J. delivered the following: JUDGMENT Though this appeal is listed for preliminary hearing with the consent of learned counsel for the appellants and learned standing counsel for the respondent Revenue it is heard finally. 2. The legality and correctness of the order dated 20.2.2018 passed by the learned Single Judge in Writ Petition Nos.54836 387 2017 is called in question in this intra court appeal. 3. By the impugned order learned Single Judge in appellants assessees had by passed the remedy available to them under Section 246A of the Income Tax Act 1961 hereinafter referred to as ‘the Act’ for the sake of brevity) and had availed the revisional remedy under Section 264 of the Act. Further learned Single Judge while considering : 3 : the order of the revisional Authority passed under Section 264 of the Act has extracted paragraph Nos.6 to 9 of the said order and concluded that there was no infirmity in the said order and accordingly dismissed the writ petition. Being aggrieved the assessees have preferred this appeal. 4. We have heard learned counsel Smt.Vanaja M.R. for the appellants and learned counsel Sri.Jeevan J.Neeralgi for the respondent Revenue and perused the material on record. 5. At the outset we wish to clarify that if an assessee is aggrieved by the assessment order then he could either prefer an appeal before the Commissioner Appeals) under Section 246A of the Act which is a statutory appellate remedy or in the alternative could also prefer a revision petition under Section 264 of the Act. Admittedly in the instant case the appellants assessees did not choose to file an appeal. However they filed a revision petition under Section 264 of the Act before the revisional Authority as they were aggrieved by the order of the Assessing Officer. Therefore the assessees were well within their right to have opted for the remedy by way of a revision. Hence we find that the learned Single Judge : 4 : was not right in making observations with regard to the fact that the assessees choose to file a revision under Section 264 of the Act instead of filing an appeal under Section 246A of the Act. 6. As already observed it is the option of the assessee either to file an appeal or to file a revision. Therefore all the observations made with regard to the assessees herein exercising their option to file a revision under Section 264 of the Act and not file an appeal under Section 246A of the Act cannot be sustained. 7. Coming to the merits of the case the grievance of the assessees was the lands in question bearing Sy.No.119 Part measuring 1 Acre 22½ Guntas and Sy.No.213 1 Part 3 Acres and 4½ Guntas situated at Vajamangala village Varuna Hobli Mysore Taluk which was the subject matter of a joint development agreement between the assessees and M S. Skill Tech Engineers and Contractors Pvt. Ltd. attracted tax on capital gains inasmuch as the said lands were capital assets. In this context it is necessary to observe that Chapter IV of the Act deals with computation of income from capital gains. that chapter Section 48 deals with mode of : 5 : computation. The income chargeable under the head ‘capital gains’ has to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset certain amounts namely expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto as detailed in the said provision. 8. Af course there are provisos to Section 48 of the Act which may not be applicable in the instant appeal. But what is significant to note is the expression “transfer of capital asset”. The expression ‘transfer’ and the expression ‘capital asset’ are both defined under the Act. The expression ‘capital asset’ is defined under Section 2(14) of the Act. While defining capital asset under the said provision agricultural land in India is not included. However by way of exception certain agricultural lands are included which are stated in Section 2(14)(iii)(a) orof the Act. Therefore before applying Section 48 of the Act it is necessary to ascertain whether the subject matter of transfer namely immovable property or agricultural land or not. If it is to be construed to be agricultural land then the parameters as stipulated under : 6 : Section 2(14) of the Act has to be applied. In the instant case we find that the Assessing Officer has not applied the parameters as stipulated under Section 2(14)(iii) inasmuch as either sub clauseor sub clausewould apply. Even while applying the said sub clauses there are certain criteria mentioned within the sub clauses which have been applied to the subject matter of transfer before demanding tax on capital gains on the transfer of land. 9. Further Section 2(47) defines “transfer” in relation to a capital asset. Therefore there has to be a transfer of a capital asset within the meaning of Section 2(47) of the Act also before the said tax is attracted. 10. Hence if there istransfer andof a capital asset as defined under the provisions of Section 2 of the Act then it would attract Section 48 and other related provisions of Chapter IV of the Act for the purpose of raising a demand with regard to ‘capital gains’. 11. In the instant case on perusal of the order of the Assessing Officer we find that the aforesaid provisions have not been applied to the facts of the case. Although there is a detailed discussion with regard to the nature of the transaction as to whether it is a transfer or not we : 7 : find there is no application of mind as to whether the subject lands are capital asset or not. We reiterate that unless the subject matter of transfer are capital assets there cannot be any demand under Chapter IV of the Act. Therefore the assessees herein preferred a revision under Section 264 of the Act. 12. Admittedly the revision petition was filed in time as the limitation period is one year from the date on which the order in question was communicated or the date on which the assessee otherwise came to know of it. There is no controversy with regard to the revision petition being belated in the instant case. However we find that the revisional Authority had to consider the revision in light of the observations we have made above as the Assessing Officer has not considered the case in that light. 13. Learned Single Judge has simply extracted paragraphs 6 to 9 of the revisional order and has not considered whether subject lands were indeed capital asset or not which was the subject matter of transfer in the instant case. 14. In the circumstances we set aside the order of the revisional Authority as well as the order of the : 8 : Assessing Authority dated 27.3.2017 and 21.3.2014 respectively. We remand the matter to the concerned Assessing Officer to consider the case of the assessees in light of the observations made above and in accordance with law and within the time stipulated after issuing notice to the appellants assessees. 15. In the circumstances the order of the learned Single Judge is set aside. The appeal is allowed and disposed in the aforesaid terms. Parties to bear their respective costs. Sd JUDGE Sd JUDGE 

Summary: Chapter IV of the Income Tax Act deals with all forms of income that does not form a part of the total income. For this reason unless the matter of transfer is capital assets, no demand can be made under this chapter of this Act. This was held in the judgement passed by a bench of the High Court of Karnataka consisting of Justice B.V. Nagarathna and Justice Hanchate Sanjeevkumar in the case of Nataraja v Pr. Commissioner of Income Tax, Mysuru [Writ Appeal No. 1078/2018 T-IT] pronounced on 15th of July 2021. The appellant, Nataraja filed the writ appeal under Section 4 of the Karnataka High Court Act praying for order by the single judge in WP No. 54836837/2017 (T-IT) to be set aside. The impugned order observed that the appellants had bye-passed the remedy available to them under Section 246A of the Income Tax Act 1961 and had availed the revisional remedy under Section 264 of the Act and concluded that there was no infirmity the said order and had the writ petition dismissed. For this reason the appellant decided for the present appeal. It was held that if an assessee is aggrieved by an assessment order, he has the option of either an appeal before the commissioner under Section 246A of the Income Tax Act or a revision reition under Section 264 of the Act before the revisional authority. The appellant’s grievance was that the lands in question situated in Vajamangala Village in Mysore attracted tax on capital gains in as much as the mentioned lands were capital assets. It was contended that in Chapter-IV of the Act which deals with computation of income from capital gains, it is held that such gains are to be calculated by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, certain amounts. In the immediate case, it was found that the aforesaid provisions were not applied to the facts of the case.