Section 263 Income Tax Act | Erroneous Order Of Assessing Officer Causing Prejudice To Revenue Is Revisable By CIT : Supreme Court

The Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act had set aside the assessment order passed by the Assessing Officer (AO) where the latter had allowed the deduction claimed by the assessee.

While holding that the erroneous assessment order passed by the AO had resulted into loss of the Revenue in form of tax, the bench of Justices M.R. Shah and A.S. Bopanna remarked that the Bombay High Court had committed a “very serious error” in setting aside the order passed by the CIT in exercise of its revisionary powers under Section 263 of the Income Tax Act.

The bench concluded that the order passed by the AO was erroneous as well as prejudicial to the interest of the Revenue. The Court thus restored the order passed by the CIT.

The litigation between shareholders of the assessee Company, M/s. Paville Projects Pvt. Ltd, who are also family members, culminated in arbitration proceedings, where an interim award was passed in terms of a “family settlement” recorded between the parties. In terms of the arbitral award, the shareholders were to be paid a certain sum. As per the assessee, the property / building owned by it was sold to discharge the said encumbrances, i.e., the amount payable to its shareholders.

In its income tax return filed for the relevant assessment year, the respondent/assessee showed the sale proceeds of the property as “long term capital gains”, after deducting the amount paid to its shareholders towards settlement of litigation. The assessee claimed that the said amount was deductible as “cost of improvement” under the Income Tax Act.

The same was accepted by the AO in the assessment order passed under Section 143(3) of the Income Tax Act.

Subsequently, the CIT passed an order under Section 263 of the Income Tax Act setting aside the assessment order passed by the AO.

The CIT, in its order, held that the assessment order was erroneous and prejudicial to the interest of the Revenue on the issue relating to the deduction claimed by the assessee. It opined that the said deduction claimed by the assessee did not fall under the definition of “cost of improvement” under Section 55(1)(b) of the Income Tax Act.

In an appeal filed before the Income Tax Appellate Tribunal (ITAT) against the order of the CIT, the Tribunal concluded that the CIT had wrongly invoked the jurisdiction under Section 263 of the Income Tax Act. The ITAT upheld the assessee’s claim of deduction and set aside the order of the CIT.

The revenue department’s appeal against the ITAT’s order was dismissed by the Bombay High Court, who confirmed the findings of the ITAT. The High Court ruled that the amount paid towards settlement was deductible by the assessee under Section 55(1)(b) of the Income Tax Act.

Against the decision of the Bombay High Court, the revenue department filed an appeal before the Supreme Court.

The revenue department argued that since the rights enjoyed by the assessee in the property were already absolute, the payment made by the assessee to its shareholders towards settlement of litigation did not lead to acquisition of any interest in the said asset. Therefore, the assessment order passed by the AO was erroneous, bad in law, and prejudicial to the interest of the revenue. Thus, the same was rightly set aside by the CIT under Section 263 of the Income Tax Act, the department pleaded.

The department added that the CIT had rightly observed that the assessee company was the owner of the property and that there was no encumbrance preventing the sale of the said property.

Referring to the facts of the case, the Supreme Court concluded that the order passed by the AO was erroneous as well as prejudicial to the interest of the Revenue.

The Court observed that, as laid down in the decision of the Apex Court in Malabar Industrial Co. Ltd. vs. CIT (2000), the scheme of the Income Tax 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, the Court reckoned.

It is only in a case where two views are possible and the AO has adopted one view, such a decision- which might be plausible and which has resulted into loss of Revenue- is not revisable under Section 263, the Court observed.

The bench thus concluded: “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 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.”

The Supreme Court thus allowed the appeal, set aside the judgment and order passed by the High Court, and restored the order passed by the CIT under Section 263.

Case Title: The Commissioner of Income Tax vs. M/s. Paville Projects Pvt Ltd

Citation : 2023 LiveLaw (SC) 282

Income Tax Act 1961- Section 263- Commissioner of Income Tax can exercise revision powers under Section 263 of the Income Tax Act over the erroneous orders of the Assessing Officer which cause prejudice to the interest of 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- Followed Malabar Industrial Co. Ltd. vs. CIT (2000)

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