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2023 (4) TMI 295 - SC - Income TaxRevision u/s 263 by CIT - deduction claimed by the assessee as cost of improvement while computing long term capital gains - What can be said to be prejudicial to the interest of the Revenue? - 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 - Whether order passed by the AO is erroneous as well as prejudicial to the interest of the Revenue? - HELD THAT - As decided in the case of Malabar Industrial Co. Ltd 2000 (2) TMI 10 - SUPREME COURT that 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 - also observed that if due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. 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 u/s 263. 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. 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 u/s 263 not vested in it. The erroneous assessment order has resulted into loss of the Revenue in the form of tax. 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. Thus 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.
Issues Involved:
1. Validity of the Assessment Order under Section 143(3) of the IT Act. 2. Invocation of Revisional Jurisdiction under Section 263 of the IT Act by the Commissioner. 3. Deductibility of Payments to Shareholders as Cost of Improvement under Section 55(1)(b) of the IT Act. 4. Applicability of Section 50A of the IT Act. Summary: 1. Validity of the Assessment Order under Section 143(3) of the IT Act: The respondent assessee, engaged in the manufacture and export of garments and shoes, sold a property named "Paville House" for Rs.33 Crores in AY 2007-08. The assessee claimed Rs.31.05 Crores paid to three shareholders as "cost of improvement" to discharge encumbrances, which was accepted by the AO under Section 143(3) of the IT Act. 2. Invocation of Revisional Jurisdiction under Section 263 of the IT Act by the Commissioner: The Commissioner issued a notice under Section 263 of the IT Act, setting aside the AO's assessment order, deeming it erroneous and prejudicial to the interest of the revenue. The Commissioner contended that the payment to shareholders did not qualify as "cost of improvement" under Section 55(1)(b) and did not result in any enduring value to the capital asset. 3. Deductibility of Payments to Shareholders as Cost of Improvement under Section 55(1)(b) of the IT Act: The ITAT set aside the Commissioner's order, relying on the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT and the Bombay High Court's decision in CIT v. Smt. Shakuntala Kantilal, concluding that the Commissioner wrongly invoked Section 263. The High Court upheld the ITAT's decision, agreeing that the payment to shareholders to end litigation and enable the sale of the property was deductible as "cost of improvement." 4. Applicability of Section 50A of the IT Act: The Revenue argued that part of the asset sold was used in the business of the assessee, and hence, capital gains should be taxed under Section 50A of the IT Act. The High Court and ITAT were criticized for not properly addressing this aspect. Supreme Court's Decision: The Supreme Court held that the assessment order by the AO was erroneous and prejudicial to the interest of the Revenue. It quashed the High Court's judgment, restoring the Commissioner's order under Section 263 of the IT Act. The Court emphasized that the erroneous assessment order resulted in a loss of revenue, validating the Commissioner's invocation of Section 263. Conclusion: The appeal by the Revenue was allowed, and the High Court's judgment was set aside, reinstating the Commissioner's order under Section 263 of the IT Act. The payments to shareholders were not considered deductible as "cost of improvement," and the assessment order was deemed erroneous and prejudicial to the interest of the Revenue.
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