Summary
A company sold its building for Rs. 33 crores and, in computing long term capital gains for assessment year 2007-08, deducted about Rs. 31 crores paid to three shareholders under an interim arbitral award recording a family settlement, treating it as cost of improvement for removing encumbrances. The Assessing Officer accepted this, but the Commissioner revised the assessment under Section 263 as erroneous and prejudicial to the Revenue, holding the payment was not cost of improvement under Section 55(1)(b). The Tribunal and the Bombay High Court set the revision aside relying on Malabar Industrial. The Supreme Court restored the Commissioner's order, holding that loss of tax lawfully payable due to an erroneous order is prejudicial to the Revenue and that the two-views exception applies only where the Assessing Officer's view is plausible.
Issues
- Whether the Commissioner validly exercised revisional jurisdiction under Section 263 of the Income Tax Act, 1961 over an assessment order allowing payments to shareholders under a family settlement as cost of improvement in computing long term capital gains.
Provisions considered
- Section 263, Income Tax Act, 1961Revision requires the twin conditions that the assessment order is erroneous and prejudicial to the interests of the Revenue; loss of tax lawfully payable due to an erroneous order is prejudicial, and only a plausible view of the Assessing Officer where two views are possible is beyond revision. (¶¶ 7, 7.1, 7.2, 7.3)
- Section 55(1)(b), Income Tax Act, 1961The Commissioner held that payments to shareholders to settle litigation were neither capital expenditure nor additions enhancing the asset and so were not cost of improvement; the Supreme Court found the assessment allowing them erroneous and prejudicial. (¶¶ 3.2, 7.3)
- Section 50A, Income Tax Act, 1961The Commissioner found that the assessment had not applied this provision to the part of the asset used in business, a further ground on which the assessment was not in consonance with the Act. (¶¶ 3.3, 4.4)
Held
- Under Malabar Industrial the Commissioner may revise under Section 263 only where the assessment order is both erroneous and prejudicial to the Revenue; the scheme of the Act is to levy and collect tax in accordance with its provisions, and if an erroneous order causes the Revenue to lose tax lawfully payable it is certainly prejudicial. The exception for a view adopted by the Assessing Officer where two views are possible applies only where that view is plausible. (¶¶ 7.1, 7.2)
- On the assessment order and the Commissioner's order, the assessment allowing deduction of payments made to shareholders as cost of improvement was not only erroneous but prejudicial to the Revenue, having resulted in loss of tax; the Commissioner therefore acted within Section 263 and the High Court committed a very serious error in setting his order aside. (¶ 7.3)
Result
Appeal allowed; Bombay High Court judgment dated 18.09.2017 in ITA No. 78 of 2015 quashed and set aside; the Commissioner's order under Section 263 of the Income Tax Act, 1961 restored; no costs.