COMMISSIONER OF INCOME TAX 7versusM/S PAVILLE PROJECTS PVT. LTD.

310                      [2023]REPORTS
               SUPREME COURT    3 S.C.R. 310               [2023] 3 S.C.R.


A                   COMMISSIONER OF INCOME TAX 7
                                        v.
                    M/S PAVILLE PROJECTS PVT. LTD.
                         (Civil Appeal No. 6126 of 2021)
B                               APRIL 06, 2023
                  [M. R. SHAH AND A. S. BOPANNA JJ.]
             Income Tax Act, 1961 – s.263 – Exercise of jurisdiction under
      – Respondent filed its income tax return for the AY 2007-08, wherein
      it showed sale of the property / building for an amount of Rs.33
C
      Crores – According to the assessee, property 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” – Assessment accepted by AO u/s. 143(3) – However,
      the Commissioner invoked jurisdiction u/s. 263 of the IT Act and
D     held that the assessment order passed u/s.143(3) of the IT Act was
      erroneous and prejudicial to the interest of the revenue –
      Commissioner set aside the assessment order passed by the AO –
      ITAT concluded that the Commissioner wrongly invoked the
      jurisdiction u/s. 263 of the IT Act and upheld the allowability of the
      Assessee’s claim – Appeal against the ITAT’s order was dismissed by
E
      the High Court – On appeal, held: Applying the law laid down in
      the case of Malabar Industrial Co. Ltd. and on perusal of the the
      assessment order as well as the order passed by the Commissioner
      of Income Tax, the Court is of the opinion that the assessment order
      was not only erroneous but prejudicial to the interest of the Revenue
F     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 – High Court committed a serious error – Impugned Judgment
      and order passed by the High Court set aside and that the order
      passed by the Commissioner passed in exercise of powers u/s. 263
      of the Income Tax Act is restored.
G
            Allowing the appeal, the Court
            HELD: 1. It is true that in Malabar Industrial Co. Ltd., on
      interpretation of Section 263 of the Income Tax Act, it is observed
      and held that in order to exercise the jurisdiction under Section
H     263(1) of the Income tax Act, the Commissioner has to be satisfied
                                       310
     COMMISSIONER OF INCOME TAX 7 v. M/S PAVILLE                         311
                PROJECTS PVT. LTD.

of twin conditions, namely, (i) the order of the Assessing Officer       A
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. [Para 7.1][318-E-F]
      2. Even as observed in the case of Malabar Industrial Co.          B
Ltd. 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. 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              C
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 [Para
7.2][320-A-C]
      3. Having gone through the assessment order as well as             D
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            E
vested in it. [Para 7.3][320-D-E]
      Malabar Industrial Co. Ltd. Vs. CIT (2000) 2 SCC 718
      : [2000] 1 SCR 744 : (2000) 243 ITR 83 (SC) – relied
      on.
      CIT Vs. Smt. Shakuntala Kantilal (1991) 190 ITR 56                 F
      (Bombay); Chemosyn Ltd. Vs. ACIT (2012) (25)
      Taxxman.com 325 (Bombay) – referred to.
                       Case Law Reference
[2000] 1 SCR 744             relied on            Paras 3.4, 7.2, 7.3
                                                                         G
      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6126
of 2021.
      From the Judgment and Order dated 18.09.2017 of the High Court
of Judicature at Bombay in ITA No.78 of 2015.
                                                                         H
312            SUPREME COURT REPORTS                          [2023] 3 S.C.R.


A           Balbir Singh, ASG, Piyush Beriwal, Ms. Chinmayee Chandra,
      Shyam Gopal, Shyam, Manish, Raj Bahadur Yadav, Advs. for the
      Appellant.
           Firoze Andhyarujina, Sr. Adv., Maneck Andhyarujina, Neerav B.
      Merchant, Rajesh Kumar, Vinod Kumar, Advs. for the Respondent.
B           The Judgment of the Court was delivered by
            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
C     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.
            2. The relevant assessment order concerning the present appeal
      is Assessment Year 2007-08.
D            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
E
      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
F
      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, “Paville House” was sold to discharge encumbrances from
      the sale proceeds to pay off the shareholders and therefore, the said
G     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
H
     COMMISSIONER OF INCOME TAX 7 v. M/S PAVILLE                              313
         PROJECTS PVT. LTD. [M. R. SHAH, J.]

claimed (Rs.10.33 Crores paid to three shareholders pursuant to the           A
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
                                                                              B
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 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)         C
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    D
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   E
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 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                F
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            G
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          H
314            SUPREME COURT REPORTS                         [2023] 3 S.C.R.


A     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 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
B
      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)
C     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
D     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 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)
E     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
F     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
G     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 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
H     was erroneous and not as per the law as payments made to shareholders
     COMMISSIONER OF INCOME TAX 7 v. M/S PAVILLE                                315
         PROJECTS PVT. LTD. [M. R. SHAH, J.]

are neither expenses nor the said payments have any relation to the             A
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
                                                                                B
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          C
rightly set aside by the Commissioner under Section 263 of the IT Act,
which ought not to have been set aside by 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          D
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        E
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        F
have committed error in setting aside the 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.                                                          G
       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.                                    H
316            SUPREME COURT REPORTS                          [2023] 3 S.C.R.


A          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.
B           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 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
C     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
D     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
E     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 allowability of
      the claim of deduction as cost of improvement was duly supported by a
F     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
G     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
H
     COMMISSIONER OF INCOME TAX 7 v. M/S PAVILLE                                 317
         PROJECTS PVT. LTD. [M. R. SHAH, J.]

prejudicial to the interest of the Revenue, the Commissioner cannot              A
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 adopted
one of the courses permissible in law and it has resulted in loss of revenue
                                                                                 B
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               C
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            D
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 amongst the brother
and two sisters, who are the shareholders of the company and (v) to              E
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       F
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.           G
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.
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318             SUPREME COURT REPORTS                           [2023] 3 S.C.R.


A            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
B     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
C     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
D     of the Act.
             7.1 Learned counsel appearing on behalf of the 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
E     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
F     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
G           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 High Court of Gujarat in CIT v.
H
COMMISSIONER OF INCOME TAX 7 v. M/S PAVILLE                             319
    PROJECTS PVT. LTD. [M. R. SHAH, J.]

Minalben S. Parikh [(1995) 215 ITR 81 (Guj)] treated loss of            A
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:                         B
   “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                C
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        D
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.
    10. The phrase “prejudicial to the interests of the Revenue”
has to be read in conjunction with an erroneous order passed by         E
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            F
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        G
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] .)”
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320              SUPREME COURT REPORTS                          [2023] 3 S.C.R.


A            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
      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
B
      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
C     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
D     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 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
E     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
F     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.
G

      Ankit Gyan                                                    Appeal allowed.
      (Assisted by : Abhishek Pratap Singh, LCRA)




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