The Commissioner of Income Tax 7 Versus M/s. Paville Projects Pvt. Ltd.

The Commissioner of Income Tax 7  Versus M/s. Paville Projects Pvt. Ltd.  

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6126 OF 2021

(@ SLP (C) NO. 13380 OF 2018)

The Commissioner of Income Tax 7 …Appellant(s)

Versus

M/s. Paville Projects Pvt. Ltd. …Respondent(s)

J U D G M E N T

M.R. SHAH, J.

1. Feeling aggrieved and dissatisfied with the

impugned judgment and order dated 18.09.2017

passed by the High Court of Judicature, at Bombay

in ITA No.78 of 2015 by which the High Court has

dismissed the said appeal preferred by the

Revenue, the Revenue has preferred the present

Appeal.

Civil Appeal No. 6126 of 2021 Page 1 of 20

2. The relevant assessment order concerning the

present appeal is Assessment Year 2007-08.

3. The respondent assessee was engaged in

manufacture and export of garments, shoes etc. It

filed its income tax return for the AY 2007-08

wherein it showed sale of the property / building

“Paville House” for an amount of Rs.33 Crores.

That, the building “Paville House” was constructed

by the assessee on the piece of land which was

purchased in the year 1972. The said house of the

company was duly reflected in the balance sheet of

the company.

3.1 It appears that there had been litigation between

shareholders of the Company being family

members. Litigations in the Company Law Board

and the High Court culminated in arbitration. In the

arbitration proceedings, an interim award was

passed whereby an amicable settlement termed as

“family settlement” was recorded between the

parties. As per the interim award, three shareholders

viz. (1) Asha, (2) Nandita and (3) Nikhil were paid

Rs.10.35 Crores each. According to the assessee,

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“Paville House” was sold to discharge

encumbrances from the sale proceeds to pay off the

shareholders and therefore, the said discharge of

encumbrances was “cost of improvement”. As

observed hereinabove, “Paville House” was sold for

an amount of Rs.33 Crores. The assessee showed

gains arising therefrom amounting to

Rs.1,21,16,695/- as “long term capital gains” in the

computation of their income for AY 2007-08. The

working computation of capital gains was accepted

by the AO, whereby the cost of removing

encumbrances claimed (Rs.10.33 Crores paid to

three shareholders pursuant to the interim award)

was taken as “cost of improvement” and the

deduction was claimed to remove encumbrances on

computation of capital gains. On the balance

amount capital gain tax was offered and paid. The

assessment was completed on 15.12.2019 by the

AO under Section 143(3) of the Income Tax Act (for

short “IT Act”) accepting the “long term capital gains”

as per sheet attached in computation of income.

3.2 However, a notice dated 24.10.2011 was issued by

the Commissioner of Income Tax-7 under Section

Civil Appeal No. 6126 of 2021 Page 3 of 20

263 of the IT Act to show cause as to why the

assessment order should not be set aside under

Section 263 of the IT Act. The Commissioner vide its

order dated 24.11.2011 held that the assessment

order passed under Section 143(3) of the IT Act was

erroneous and prejudicial to the interest of the

revenue on the issue relating to deduction of

Rs.31.05 Crores claimed by the assessee as cost of

improvement while computing long term capital

gains. The claim of the assessee that the said

payment was made by them towards settlement of

litigation, which according to the assessee

amounted to discharge of encumbrances and

required to be considered as cost of improvement,

was not accepted by the Commissioner as

according to him it did not fall under the definition of

“cost of improvement” contained in Section 55(1)(b)

of the IT Act. According to the Commissioner, the

expenses claimed by the assessee neither

constituted expenditure that is capital in nature nor

resulted in any additions or alterations that provide

an enhanced value of an enduring nature to the

capital asset. The Commissioner also held that the

payment as contended, was not made by the

Civil Appeal No. 6126 of 2021 Page 4 of 20

assessee to remove encumbrances.

3.3 The Commissioner also held that provisions of

sections 50A and 55(1)(b) of the IT Act have not

been complied with and the assessment order is not

framed in consonance with the provisions of the IT

Act and thus the assessment order was erroneous

and prejudicial to the interest of the revenue.

Consequently, the Commissioner set aside the

assessment order passed by the AO with a direction

to the AO to recompute the capital gains of the

assessee in consonance with the provisions of the

IT Act as discussed in the order.

3.4 The assessee approached the Income Tax Appellate

Tribunal (for short “ITAT”) by way of filing ITA

No.16/MUM/2012 against the order passed by the

Commissioner, passed under Section 263 of the IT

Act. The ITAT relying upon the decision of this Court

in the case of Malabar Industrial Co. Ltd. Vs. CIT

[(2000) 2 SCC 718 : (2000) 243 ITR 83 (SC)]

concluded that the Commissioner wrongly invoked

the jurisdiction under Section 263 of the IT Act. The

ITAT also observed that there was no error on facts

Civil Appeal No. 6126 of 2021 Page 5 of 20

declared. The ITAT held that every loss of revenue

as a consequence of AO’s order cannot be treated

as prejudicial to the interest of the revenue, when

two views were possible and AO took a view which

CIT did not agree with. The ITAT also upheld the

allowability of the assessee’s claim of deduction of

payment made to the shareholders relying upon the

decision of the Bombay High Court in CIT Vs. Smt.

Shakuntala Kantilal [(1991) 190 ITR 56

(Bombay)]. The ITAT relying on the Tribunal’s order

(Bombay Bench) in Chemosyn Ltd. Vs. ACIT [2012

(25) Taxxman.com 325 (Bombay)] held that the

CIT’s observation of expenditure incurred for

payment of shareholders not being deductible as

incorrect.

3.5 The Department’s appeal against the ITAT’s order

has been dismissed by the High Court by the

impugned judgment and order wherein the High

Court has confirmed the ITAT’s findings. The High

Court agreed with the findings recorded by the ITAT

that the claim for deduction of Rs.31.05 Crores was

for ending the litigation and the litigation ended only

when the building was sold and the payment was

Civil Appeal No. 6126 of 2021 Page 6 of 20

made as per the direction of the Company Law

Board as well as the interim arbitral award and

therefore, the same was deductible under Section

55(1)(b) of the IT Act, as allowed by the AO.

3.6 Feeling aggrieved and dissatisfied with the

impugned judgment and order passed by the High

Court dismissing the appeal preferred by the

Revenue and confirming the order passed by the

ITAT by which the ITAT set aside the order passed

by the Commissioner passed under Section 263 of

the IT Act, the Revenue has filed the present

appeal.

4. Shri Balbir Singh, learned ASG appearing on behalf

of the Revenue has vehemently submitted that the

High Court has materially erred in dismissing the

appeal preferred by the Revenue and confirming the

order passed by the ITAT by which the ITAT set

aside the order passed by the Commissioner

passed in exercise of powers under Section 263 of

the IT Act.

4.1 It is submitted that the High Court has not at all

Civil Appeal No. 6126 of 2021 Page 7 of 20

appreciated the fact that the view taken by the AO in

allowing the expenses of Rs.31.05 Crores while

computing the capital gain from sale of the land was

erroneous and not as per the law as payments

made to shareholders are neither expenses nor the

said payments have any relation to the asset under

consideration. It is further submitted that the High

Court has also not properly appreciated that the

claim of the assessee that amount of Rs.31.05

Crores paid by it in lieu of settlement of litigation

would amount to discharge of encumbrances and

therefore, requires to be considered as cost of

improvement on the said property is bad in law. It is

submitted that payment of Rs.31.05 Crores paid to

the shareholders did not lead to acquisition of any

interest in the asset already acquired by the

assessee. It is submitted that the rights already

enjoyed by the assessee on the said property were

absolute. It is submitted that therefore the

assessment order passed by the AO was erroneous,

bad in law and prejudicial to the interest of the

revenue and therefore, the same was rightly set

aside by the Commissioner under Section 263 of the

IT Act, which ought not to have been set aside by

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the ITAT.

4.2 It is further submitted that Commissioner rightly

observed that the assessee company was the clear

owner of the property and that there was no

encumbrance preventing the sale of the said

property. The family dispute among the three

shareholders brother and two sisters, which resulted

in a settlement by way of arbitration award, as per

which the three shareholders became entitled to

Rs.10.35 Crores each for transfer of shares as well

as relinquishment of any right or claim to additional

shares in the company had nothing to do with the

improvement in the property. It is submitted that

shareholders only concern was that the sale

proceeds should first be utilized for making

payments to them as per the arbitration award. It is

submitted that therefore both, the Tribunal as well as

the High Court have erred in concluding that the

payment of Rs.10.35 Crores were admissible as

deduction.

4.3 It is submitted that both, the ITAT as well as the High

Court have committed error in setting aside the

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order of the Commissioner on the basis of the ratio

laid down in the cases of Chemosyn Ltd. (supra)

and Smt. Shakuntala Kantilal (supra), without

appreciating that the facts of the present case are

not identical to the facts involved in the relied upon

judgments.

4.4 It is further submitted that even otherwise as part of

the asset sold was used in the business of the

assessee and hence, capital gains on that part of

the asset sold is required to be taxed as per the

provisions of Section 50A of the IT Act and hence,

the entire order of Commissioner of Income Tax

could not have been set aside.

Making above submissions it is requested to

allow the present Appeal.

5. Present appeal is vehemently opposed by Shri

Firoze Andhyarujina, learned Senior Advocate

appearing on behalf of the assessee.

5.1 It is vehemently submitted by learned Counsel

appearing on behalf of the assessee that in the facts

and circumstances of the case, no error has been

Civil Appeal No. 6126 of 2021 Page 10 of 20

committed by the High Court in upholding the order

passed by the ITAT setting aside the order passed

by the Commissioner holding that the Commissioner

wrongly exercised the revisional powers under

Section 263 of the IT Act.

5.2 It is submitted that the High Court relying upon the

law laid down by this Court in the case of Malabar

Industrial Co. Ltd. (supra) has specifically held

that the Appellate Tribunal rightly considered the

orders of assessment and the order of the

Commissioner and thereafter concluded that

Commissioner wrongly assumed the power under

Section 263 of the IT Act.

5.3 It is submitted that the order passed by the AO was

a well-reasoned order passed after scrutiny of the

return of income and the view taken by the AO was

plausible view and therefore, the assessment order

cannot be considered to be erroneous and

prejudicial to the interest of the Revenue, which was

required to be taken in revision by the

Commissioner under Section 263 of the IT Act.

5.4 It is submitted that view taken by the AO on

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allowability of the claim of deduction as cost of

improvement was duly supported by a judicial

decision of the Bombay High Court in the case of

Smt. Shakuntala Kantilal (supra). It is submitted

that as such the Commissioner failed to appreciate

that unless the shareholders’ claims were satisfied

there would not have been a sale of the entire

portion of the property. It was only to derive the

benefit by sale of the encumbrance asset that the

parties resorted to settlement through arbitration.

The dispute being settled, payments having been

made, the AO committed no error in allowing the

claim of deduction as cost of improvement.

5.5 It is further submitted by learned Counsel appearing

on behalf of the assessee that in the case of

Malabar Industrial Co. Ltd. (supra), this Court has

held that if the order is erroneous but is not

prejudicial to the interest of the Revenue, the

Commissioner cannot exercise the revisional

jurisdiction under Section 263 of the IT Act. It is

submitted that it is further observed and held that

every loss of revenue as a consequence of an order

of AO cannot be treated as prejudicial to the interest

of revenue. As observed and held, if the AO has

Civil Appeal No. 6126 of 2021 Page 12 of 20

adopted one of the courses permissible in law and it

has resulted in loss of revenue or where two views

are possible and the AO has taken one view with

which CIT does not agree, it cannot be treated as

erroneous order prejudicial to the interest of

revenue.

5.6 It is further submitted by the learned Counsel

appearing on behalf of the assessee on

encumbrances that in the present case there was

arbitration proceeding between the shareholders of

the company whereof all the litigations came to an

end and an interim arbitration award was entered

into whereby the entire matter was amicably settled

and the settlement which is “Family Settlement”

partook the character of an interim award and later

on achieved its finality on fulfillment of commitment.

It is submitted that in the present case the

shareholders have been paid Rs.10.35 Crores each.

It is submitted that the said payment was made by

the Company for (i) smooth running and functioning

of the business; (ii) to put an end to litigation

amongst the shareholders; (iii) to preserve the

assets of the company; (iv) to ensure that there is

continuity and safeguard and, amicable settlement

Civil Appeal No. 6126 of 2021 Page 13 of 20

amongst the brother and two sisters, who are the

shareholders of the company and (v) to remove

encumbrances on the property. It is submitted that

therefore the payment was necessitated and

sanctioned and approved as per the orders of the

High Court and the arbitration award as well as

shareholders themselves. It is submitted that infact

in the interim award there was a specific clause

which entitles the Company to sell the assets to

discharge the liabilities. It is submitted that as per

the arbitration award, the claims have to be paid off

of the shareholders. This was an encumbrance

which has to be discharged pursuant to the orders

of the Court and arbitration award. “Paville House”

was therefore required to be sold to discharge the

encumbrances and from sale proceeds to pay off

the shareholders and therefore, the discharge of

encumbrances was the cost improvement. It is

submitted that therefore the amount paid to the

shareholders which was rightly held to be to remove

encumbrance, was rightly held to be deduction as

claimed to remove encumbrance on computation of

capital gains.

Civil Appeal No. 6126 of 2021 Page 14 of 20

5.7 It is submitted that therefore the Commissioner

wrongly assumed the jurisdiction under Section 263

of the IT Act on the ground that the order passed by

the AO was an erroneous and prejudicial to the

interest of the Revenue.

Making above submissions and relying upon

the decision of this Court in the case of Malabar

Industrial Co. Ltd. (supra), it is prayed to dismiss

the present appeal.

6. Heard.

7. In the present case, the Commissioner, in exercise

of the powers under Section 263 of the Income Tax

Act and in exercise of the revisional jurisdiction, set

aside the assessment order by specifically

observing that the assessment order was erroneous

as well as prejudicial to the interest of the Revenue.

However, the High Court by the impugned judgment

and order has set aside the order passed by the

Commissioner by observing that the Commissioner

wrongly invoked the powers under Section 263 of

the Act.

7.1 Learned counsel appearing on behalf of the

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assessee has heavily relied upon the decision of

this Court in the case of Malabar Industrial Co.

Ltd. (supra). It is true that in the said decision and

on interpretation of Section 263 of the Income Tax

Act, it is observed and held that in order to exercise

the jurisdiction under Section 263(1) of the Income

tax Act, the Commissioner has to be satisfied of twin

conditions, namely, (i) the order of the Assessing

Officer sought to be revised is erroneous; and (ii) it

is prejudicial to the interests of the Revenue. It is

further observed that if one of them is absent,

recourse cannot be had to Section 263(1) of the Act.

“What can be said to be prejudicial to the interest of

the Revenue” has been dealt with and considered in

paragraphs 8 to 10 in the case of Malabar

Industrial Co. Ltd. (supra), which are as under:-

“8. The phrase “prejudicial to the

interests of the Revenue” is not an

expression of art and is not defined in the

Act. Understood in its ordinary meaning it

is of wide import and is not confined to

loss of tax. The High Court of Calcutta

in Dawjee Dadabhoy & Co. v. S.P.

Jain [(1957) 31 ITR 872 (Cal)] , the High

Court of Karnataka in CIT v. T. Narayana

Pai [(1975) 98 ITR 422 (Kant)] , the High

Court of Bombay in CIT v. Gabriel India

Ltd. [(1993) 203 ITR 108 (Bom)] and the

Civil Appeal No. 6126 of 2021 Page 16 of 20

High Court of Gujarat in CIT v. Minalben

S. Parikh [(1995) 215 ITR 81 (Guj)]

treated loss of tax as prejudicial to the

interests of the Revenue.

9. Mr Abraham relied on the judgment

of the Division Bench of the High Court of

Madras in Venkatakrishna Rice

Co. v. CIT [(1987) 163 ITR 129 (Mad)]

interpreting “prejudicial to the interests of

the Revenue”. The High Court held:

“In this context, (it must) be regarded

as involving a conception of acts or

orders which are subversive of the

administration of revenue. There must be

some grievous error in the order passed

by the Income Tax Officer, which might

set a bad trend or pattern for similar

assessments, which on a broad

reckoning, the Commissioner might think

to be prejudicial to the interests of

Revenue Administration.”

In our view this interpretation is too

narrow to merit acceptance. The scheme

of the Act is to levy and collect tax in

accordance with the provisions of the Act

and this task is entrusted to the Revenue.

If due to an erroneous order of the

Income Tax Officer, the Revenue is losing

tax lawfully payable by a person, it will

certainly be prejudicial to the interests of

the Revenue.

Civil Appeal No. 6126 of 2021 Page 17 of 20

10. The phrase “prejudicial to the

interests of the Revenue” has to be read

in conjunction with an erroneous order

passed by the Assessing Officer. Every

loss of revenue as a consequence of an

order of the Assessing Officer cannot be

treated as prejudicial to the interests of

the Revenue, for example, when an

Income Tax Officer adopted one of the

courses permissible in law and it has

resulted in loss of revenue; or where two

views are possible and the Income Tax

Officer has taken one view with which the

Commissioner does not agree, it cannot

be treated as an erroneous order

prejudicial to the interests of the Revenue

unless the view taken by the Income Tax

Officer is unsustainable in law. It has

been held by this Court that where a sum

not earned by a person is assessed as

income in his hands on his so offering,

the order passed by the Assessing Officer

accepting the same as such will be

erroneous and prejudicial to the interests

of the Revenue. (See Rampyari Devi

Saraogi v. CIT [(1968) 67 ITR 84 (SC)]

and in Tara Devi Aggarwal v. CIT [(1973)

3 SCC 482 : 1973 SCC (Tax) 318 : (1973)

88 ITR 323] .)”

7.2 Thus, even as observed in paragraph 9 by this

Court in the case of Malabar Industrial Co. Ltd.

(supra) that the scheme of the Act is to levy and

collect tax in accordance with the provisions of the

Civil Appeal No. 6126 of 2021 Page 18 of 20

Act and this task is entrusted to the Revenue. It is

further observed that if due to an erroneous order of

the Income Tax Officer, the Revenue is losing tax

lawfully payable by a person, it will certainly be

prejudicial to the interests of the Revenue.

However, only in a case where two views are

possible and the Assessing Officer has adopted one

view, such a decision, which might be plausible and

it has resulted in loss of Revenue, such an order is

not revisable under Section 263.

7.3 Applying the law laid down by this Court in the case

of Malabar Industrial Co. Ltd. (supra) to the facts

of the case on hand and even as observed by the

Commissioner, the order passed by the Assessing

Officer is erroneous as well as prejudicial to the

interest of the Revenue. Having gone through the

assessment order as well as the order passed by

the Commissioner of Income Tax, we are also of the

opinion that the assessment order was not only

erroneous but prejudicial to the interest of the

Revenue also. In the facts and circumstances of the

case, it cannot be said that the Commissioner

exercised the jurisdiction under Section 263 not

vested in it. The erroneous assessment order has

Civil Appeal No. 6126 of 2021 Page 19 of 20

resulted into loss of the Revenue in the form of tax.

Under the Circumstances and in the facts and

circumstances of the case narrated hereinabove,

the High Court has committed a very serious error in

setting aside the order passed by the Commissioner

passed in exercise of powers under Section 263 of

the Income Tax Act.

8. In view of the above and for the reasons stated

above, present appeal succeeds. The impugned

judgment and order passed by the High Court is

hereby quashed and set aside and that the order

passed by the Commissioner passed in exercise of

powers under Section 263 of the Income Tax Act is

hereby restored.

In result, present appeal is allowed. However, in the

facts and circumstances of the case, there shall be

no order as to costs.

………………………………….J.

 [M.R. SHAH]

NEW DELHI; ………………………………….J.

APRIL 06, 2023. [A.S. BOPANNA]

Civil Appeal No. 6126 of 2021 Page 20 of 20