The Karnataka High Court has dismissed an income tax appeal filed by an assessee challenging the denial of exemption on long-term capital gains under Section 10(38) of the Income Tax Act, 1961, holding that no substantial question of law arose for consideration after the assessee failed to satisfactorily explain an inordinate delay in pursuing statutory remedies.

The Bench of Justice S.G. Pandit and Justice Dr. K. Manmadha Rao upheld the orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT), both of which had refused to condone the delay in filing the appeal.

The assessee had filed his income tax return on July 31, 2007, declaring total income of ₹2.59 crore. The return included long-term capital gains of ₹2.58 crore arising from the sale of shares. According to the assessee, the gains were exempt under Section 10(38) of the Income Tax Act and had been disclosed as exempt income in Schedule EI of the return. However, the exemption was not reflected in the computation portion of the return.

The return was processed under Section 143(1) on March 20, 2009, and the exemption was not granted, resulting in a tax demand of ₹74.10 lakh. The assessee claimed that the intimation under Section 143(1) was never served and that he became aware of the demand only after receiving a communication under Section 245 in November 2014 proposing adjustment of refund against the outstanding demand.

Following the Section 245 communication, the assessee filed a revision petition under Section 264 of the Act in July 2015 seeking cancellation of the demand. However, the revision petition was dismissed on limitation grounds in February 2017. The assessee contended that a copy of the original intimation under Section 143(1) was supplied to him only on January 20, 2017. Thereafter, he filed a rectification application under Section 154 and an appeal before the Commissioner of Income Tax (Appeals) in March 2017.

The Commissioner (Appeals) refused to condone the delay and held that the appeal was not maintainable, particularly because the assessee had already invoked the revisional jurisdiction under Section 264. The appeal was also rejected on merits. The ITAT subsequently affirmed the decision, prompting the assessee to approach the High Court.

Before the High Court, the assessee argued that the authorities had incorrectly treated the delay as extending over several years. According to him, since the intimation under Section 143(1) was supplied only on January 20, 2017, the appeal filed on March 25, 2017 was delayed by merely 34 days. He further contended that the omission to claim the exemption in the computation portion of the return was an inadvertent error and that all conditions for exemption under Section 10(38) stood fulfilled.

The assessee also sought consideration of his rectification application under Section 154 and argued that the authorities had failed to appreciate the evidence placed on record.

The department opposed the appeal, arguing that the assessee had knowledge of the tax demand much earlier. It pointed out that after receiving the Section 245 communication in 2014, the assessee himself filed a revision petition under Section 264 in July 2015 seeking cancellation of the same demand. Therefore, he could not later claim ignorance of the proceedings until January 2017.

The department contended that both the Commissioner (Appeals) and the ITAT had concurrently concluded that no sufficient cause had been shown for condoning the delay and that such findings of fact could not be interfered with under Section 260A of the Act.

The High Court agreed with the department and observed that the record clearly demonstrated that the assessee had knowledge of the outstanding demand at least by 2015 when he filed the revision petition under Section 264. Consequently, the contention that the delay should be calculated only from January 2017 was not acceptable.

The Court noted that the Commissioner (Appeals) had examined the chronology of events and found that the appeal filed in March 2017 against the 2009 intimation was delayed by nearly eight years. Even after taking into account the date on which the assessee admittedly became aware of the demand, substantial periods of delay remained unexplained.

The Bench further observed that the ITAT had independently considered the facts and found that the assessee had taken inconsistent positions while pursuing different remedies and had failed to explain the prolonged delay between various proceedings. These findings, the Court held, were purely factual and did not suffer from any perversity warranting interference.

With respect to the exemption claim under Section 10(38), the Court noted that although the long-term capital gains had been disclosed as exempt income in Schedule EI, the exemption had not been reflected in the computation part of the return. However, once the refusal to condone the delay was found to be justified, the assessee could not seek adjudication of the exemption claim on merits in the appeal under Section 260A.

The Court also held that the pendency of the Section 154 rectification application could not provide a basis for interfering with the Tribunal’s order, while leaving it open to the assessee to pursue any remedy available under law.

Dismissing the appeal, the Karnataka High Court held that the findings recorded by the Commissioner of Income Tax (Appeals) and the ITAT did not give rise to any substantial question of law. 

The Court answered all questions in favour of the department and rejected the assessee’s appeal, thereby sustaining the denial of relief and the outstanding tax demand arising from the processing of the return under Section 143(1).

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