Section 149 Threshold: Cost of Acquisition Must Be Deducted 2026

What Happened?

The Karnataka High Court recently dismissed a Revenue appeal, delivering an important ruling that protects property owners during income tax assessments. The court held that when calculating escaped income under Section 149 of the Income Tax Act 2025, the Income Tax Department cannot simply take the registered conveyance value of a property and treat it as escaped income without first deducting the cost of acquisition. This judgment is a win for taxpayers and provides much-needed clarity on how property valuations should be handled during tax assessments.

Background & Legal Context

Section 149 of the Income Tax Act 2025 deals with assessment of escaped income. It allows the Assessing Officer (AO) to assess income that was not assessed in a previous assessment year. However, the assessment must be based on actual income, not assumed values.

The controversy arises in real estate transactions where:

• A property is purchased at one price (cost of acquisition)
• It is later sold at a different price (conveyance value)
• The registered conveyance value shows the sale price
• The capital gain = Sale price MINUS Cost of acquisition

For example: If you bought a flat in 2015 for ₹20 lakh and sold it in 2024 for ₹60 lakh, your capital gain is ₹40 lakh (not ₹60 lakh). Many tax officers incorrectly treat ₹60 lakh as the entire taxable amount, ignoring the ₹20 lakh cost.

This case deals with Section 49 of the Income Tax Act 2025 (cost of acquisition for capital gains calculation) working together with Section 149 (assessment of escaped income). Under Section 49, when computing capital gains from sale of property, the cost of acquisition must always be deducted. The same principle must apply when determining if income was "escaped" in the first place.

The Karnataka High Court's ruling clarifies that the Income Tax Department cannot bypass this fundamental principle simply because it is conducting a Section 149 assessment. The registered conveyance value is merely evidence of the sale price—it does NOT represent the taxable income or the capital gain.

What Does This Mean for You?

For Property Owners (Residential & Commercial):

• If the tax department conducts a Section 149 assessment on your property sale, they must deduct the cost of acquisition before calculating escaped income
• You are protected from paying tax on the full sale price; tax is only on the gain (profit)
• The department cannot use the high registered conveyance value as an excuse to assume higher income
• This judgment applies to Assessment Year 2025-26, 2026-27 and onwards

For Real Estate Dealers & Investors:

• If you deal in properties or have multiple transactions, maintain proper documentation of purchase cost
• When filing Income Tax returns, always clearly show both sale value and cost of acquisition separately
• Keep all original purchase deeds, payment receipts, and conveyance documents
• If any past assessment was done incorrectly, you may have grounds to file a rectification application

Practical Impact on Assessments:

Before this judgment, tax officers in some circles were:

• Taking the registered conveyance value directly from property registration documents
• Assuming this entire amount as "escaped income"
• Issuing demand notices without allowing proper deduction of purchase cost
• Creating unnecessary litigation and hardship for taxpayers

After this judgment, the correct procedure must be:

• Identify the sale price (from conveyance deed)
• Identify the cost of acquisition (from purchase deed and indexed cost)
• Calculate capital gain = Sale price - Indexed cost of acquisition
• Apply applicable exemptions (Section 54, Section 54F, etc., under IT Act 2025)
• Only then determine if income escaped assessment

What Should You Do Now?

Immediate Actions:

• Review Past Assessments: If you received a Section 149 assessment notice for property transactions, check whether the AO deducted your cost of acquisition. If not, you have grounds to file a rectification application under Section 154 of the Income Tax Act 2025
• Gather Documentation: Compile all original property purchase deeds, payment proofs, transfer documents, and sale conveyance deeds. Organize them year-wise
• File ITR Correctly: When filing Income Tax returns for property sales, always separately show:
  • Cost of acquisition (with indexed value for pre-2001 properties)
  • Sale consideration
  • Capital gain calculation
• Respond to Notice:** If you receive a fresh Section 149 notice, immediately engage a CA and submit a detailed reply with proof of cost of acquisition. Reference this Karnataka HC judgment
• Appeal Previous Orders:** If a Section 149 assessment was passed against you in previous years without deducting cost of acquisition, file an appeal to the ITAT citing this judgment. You may succeed in getting relief
• Maintain Proper Records:** Going forward, maintain a digital copy of all property transaction documents. This protects you during any future assessment