Case Number: [Civil Appeal No. 6126 of 2021 @ SLP (C) No. 13380 of 2018]
Judges Name: Hon’ble Judges M.R. Shah, J, A.S. Bopanna J
Order dated: 06.04.2023

Facts of the Case:

1. The Respondent assessee was engaged in manufacture and export of garments, shoes etc. The building “Paville House” was constructed by the assessee which was sold for the amount of Rs. 33 crores. The said house of the company was duly reflected in the balance sheet of the company. It appears that there had been litigation between shareholders of the Company being family members. They further approach the arbitration and an interim award was passed whereby an amicable settlement termed as “family settlement”. As per the interim award, three shareholders viz. (1) Asha, (2) Nandita and (3) Nikhil were paid Rs.10.35 Crores each. 
2. According to the assessee, “Paville House” was sold to discharge encumbrances was “cost of improvement” from the sale proceeds to pay off the shareholders. The assessee showed gains of Rs.1,21,16,695/- as “long term capital gains”. The working computation of capital gains was accepted by the AO under section 143(3) of IT Act. The Commissioner set aside the order passed by the AO and held that the assessment order passed under Section 143(3) of the IT Act was erroneous and prejudicial to the interest of the revenue. 
3. The assessee approached the ITAT against the order of the Commissioner that wrongly invoked the jurisdiction under section 263 of IT Act. The ITAT observed that no error was declared and cannot be treated as prejudicial to the interest of the revenue. The ITAT relying on Tribunal’s order (Bombay Bench) held that CIT’s observation of expenditure is not deductible as incorrect. 
4. The Department’s appeal against the ITAT’s order has been dismissed by the High Court by the impugned judgment and order wherein the High Court has confirmed the ITAT’s findings. Feeling dissatisfied with the impugned judgment and order passed by the High Court, the Revenue has filed the present appeal. They contended that HC dismissed the appeal preferred by them and set aside the order passed by the Commissioner. They submitted that HC has not at all appreciated the fact taken by the AO.  It is further submitted that  the assessment order passed by the AO was erroneous, bad in law and prejudicial to the interest of the revenue was same rightly set aside by the Commissioner under Section 263 of the IT Act, which ought not to have been set aside by the ITAT. 
5. It is submitted that both, the ITAT as well as the High Court have committed error in setting aside the order of the Commissioner without appreciating that the facts of the present case. The present appeal was allowed and opposed that no error has been committed by the HC 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 under Section 263 of the IT Act. The Appellate Tribunal concluded that Commissioner has wrongly assumed the power under section 263 of IT Act and AO’s order cannot be treated as erroneous and prejudicial to the interest of the revenue. 
6. It is further submitted by the learned counsel Commissioner wrongly assumed the jurisdiction under section 263 of IT Act on the ground that order passed by the AO was an erroneous and prejudicial to interest of the revenue. The present appeal was heard.

Hon’ble Supreme Court observed/held as follows:

1. The Court observed that the phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by 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 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. 
2. The Hon’ble Court applied the law laid down by this Court in the case of Malabar Industrial Co. Ltd. Vs. CIT [(2000) 2 SCC 718: (2000) 243 ITR 83 (SC) 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. 
3. Having gone through the assessment order as well as the order passed by the Commissioner of Income Tax, the Hon’ble Court 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 vested in it. 
4. The appeal succeeds.  The impugned judgment and order passed by the High Court was 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. 
5. In result, the appeal was allowed. However, in the facts and circumstances of the case, there shall be no order as to costs.