SC judgement on revision of assessment orders U/S 263: CIT Vs Paville Projects Pvt. Ltd. (CA No. 6126 of 2021)
- A property “Paville House” was sold by the assessee company to discharge encumbrances from the sale proceeds to pay off the shareholders and therefore, the assessee claimed in the ITR that the said discharge of encumbrances was “cost of improvement”. The AO accepted the long term capital gains computed.
- However the Commissioner revised 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 ITAT and the Hon Bombay High Court agreed with the findings recorded by the ITAT that the claim for deduction 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) of the IT Act, as allowed by the AO.
Note: 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
Hon SC held as below:
- The shareholders only concern was that the sale proceeds should first be utilized for making payments to them as per the arbitration award. The assessee company was the clear owner of the property and that there was no encumbrance preventing the sale of the said property.
- 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. We are also of the opinion that the assessment order was not only erroneous but prejudicial to the interest of the Revenue also.
- The order passed by the Commissioner passed in exercise of powers under Section 263 of the Income Tax Act is hereby restored.