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

CIVIL APPEAL No. 6126/2021Supreme Court[2023] 3 S.C.R. 31006 April 2023Bench: 2 JudgesAuthor: M.R. SHAH, A.S. BOPANNA SUPREME COURT REPORTS11 pages
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What did the Supreme Court hold?

The Supreme Court held that the assessment order was indeed erroneous and prejudicial to the interest of the Revenue. Applying the law laid down in Malabar Industrial Co. Ltd., the Court found that the twin conditions for exercising jurisdiction under Section 263(1) – namely, the order being erroneous and prejudicial to the Revenue – were satisfied. The Court observed that the scheme of the Act mandates the levy and collection of tax, and if an erroneous order leads to the Revenue losing tax lawfully payable, it is prejudicial. The Court distinguished situations where two plausible views are possible and the AO adopts one, stating that such orders are not revisable under Section 263 unless the view taken is unsustainable in law. In this case, the Court found the AO's acceptance of the payment as 'cost of improvement' to be erroneous, leading to a loss of revenue. Therefore, the Commissioner's exercise of jurisdiction under Section 263 was justified. The Supreme Court set aside the High Court's judgment and restored the order passed by the Commissioner.

What were the facts?

The assessee, M/s Paville Projects Pvt. Ltd., filed its income tax return for Assessment Year 2007-08, reporting the sale of a property, 'Paville House', for Rs. 33 Crores. The assessee claimed payments of Rs. 31.05 Crores to three shareholders, pursuant to an arbitration award stemming from shareholder litigation, as 'cost of improvement' to reduce capital gains. The Assessing Officer (AO) accepted this claim and completed the assessment under Section 143(3). Subsequently, the Commissioner of Income Tax (CIT) invoked Section 263, holding the assessment order erroneous and prejudicial to the revenue. The CIT set aside the AO's order, directing recomputation of capital gains. The Income Tax Appellate Tribunal (ITAT) upheld the assessee's claim and ruled the CIT wrongly invoked Section 263. The High Court dismissed the Revenue's appeal. The Revenue appealed to the Supreme Court.

What were the issues?

1. Whether the assessment order passed by the Assessing Officer under Section 143(3) of the Income Tax Act, 1961, was erroneous and prejudicial to the interest of the Revenue, thereby justifying the invocation of revisional powers under Section 263 of the Act? Assessee's Contentions: The assessee argued that the payment of Rs. 31.05 Crores to shareholders was to discharge encumbrances on the property, thus qualifying as 'cost of improvement'. They relied on the ITAT's finding that the Commissioner wrongly invoked Section 263 and upheld the allowability of their claim. Revenue's Contentions: The Revenue contended that the Commissioner correctly invoked Section 263, as the assessment order was erroneous and prejudicial to the interest of the Revenue. The Commissioner argued that the payments did not fall under the definition of 'cost of improvement' as per Section 55(1)(b) and did not result in any capital additions or alterations providing enduring value. The Revenue also argued that the High Court committed a serious error in dismissing their appeal.

Which sections of the Income-tax Act were involved?

Section 263,Section 143(3),Section 55(1)(b),Section 50A

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A B C D E F G H 310 SUPREME COURT REPORTS [2023] 3 S.C.R. COMMISSIONER OF INCOME TAX 7 v. M/S PAVILLE PROJECTS PVT. LTD. (Civil Appeal No. 6126 of 2021) APRIL 06, 2023 [M. R. SHAH AND A. S. BOPANNA JJ.] Income Tax Act, 1961 – s.263 – Exercise of juri iction 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 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 juri iction u/s. 263 of the IT Act and 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 juri iction 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 the High Court – On appeal, held: Applying the law laid down in the case of Malabar Industria

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