2000 JTR(SC) 335
2000 AIR(SC) 1855 ; 2000 AIR(SCW) 428 ; 2000 159 CTR 1 ; 2000 243 ITR 83 ; 2000 2 JT 15 ; 2002 2 KLT 38 ; 2000 1 Scale 495 ; 2000 2 SCC 718 ; 2000 1 SCR 744 ; 2000 TaxLR 243 ; 2000 109 Taxman 66 ; 2000 1 Supreme 425
2000(1) Supreme 425
SUPREME COURT OF INDIA
(From Kerala High Court)
D.P. Wadhwa and S.S. Mohammed Quadri, JJ.
M/s. The Malabar Industrial Co. Ltd. -Appellant
versus
Commissioner of Income-Tax, Kerala State -Respondent
Civil Appeal No. 3646 of 1993
Decided on 10-2-2000
Counsel for the Parties :
For the Appellant : H.N. Salve, Sr. Advocate, Sudhir Gopi, Roy Abrahim, M.M. Kashyap, Dilip Pillai, Advocates.
For the Respondent : Annop G. Choudhary, Sr. Advocate, A.V. Rangam, B.A. Ranganathan, Shail Kumar Dwivedi, Advocates.
IMPORTANT POINTS
1. In order to invoke Section 263 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. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-recourse cannot be had to Section 263(1) of the Act.
2. Compensation/damages received alleged towards loss of agricultural income, under a sale agreement, for delayed payment of sale price was held to be assessable as income from other source in absence of material to show that damages/compensation receipt was towards loss of agricultural income.
Act Referred :INCOME TAX ACT : S.2(1)(a), S.263, S.56, S.263(1)
(A) The Income-tax Act, 1961, sections referenced govern the assessment and revision of income-tax orders. Section 2(1)(a) provides the interpretative framework, while Section 263(1) confers appellate or revisional jurisdiction on the Commissioner to examine records and correct orders that are erroneous and prejudicial to revenue. Section 56 addresses unspecified miscellaneous provisions, and Section 263(1) is the specific substantive provision empowering the Commissioner to set aside or modify assessments where legal or factual errors adversely affect revenue. In this appeal, the Commissioner invoked Section 263(1) to revise an order of nil assessment passed by an Income-tax Officer in respect of compensation received for the disruption of agricultural operations, contending that the order was erroneous and prejudicial to the revenue.
(B) Key legal principles include that Section 263(1) jurisdiction requires a two-fold satisfaction: the impugned order must be erroneous, and it must be prejudicial to the interests of revenue, with the latter interpreted as the loss of tax lawfully payable due to an erroneous assessment. The phrase 'prejudicial to the interests of the revenue' is not technical and encompasses situations where an order reflects an incorrect assumption of facts or law, or proceeds without applying the mind. An order passed without considering relevant material or on an incorrect legal basis is erroneous, and if it results in non-assessment of income legally taxable, it prejudices revenue. The head of income from other sources captures receipts not falling under agricultural, capital, or other specific heads.
Facts of the case:
The appellant, a public limited company, entered into an agreement to sell a rubber plantation for Rs. 210 lakhs, with consideration payable in instalments. Due to the purchasers default, the parties agreed to extend time for payment, with the purchaser paying Rs. 3,66,649 as compensation for loss of agricultural income. The appellant treated this as compensation for lost agricultural income and claimed nil assessment for the relevant year. The Income-tax Officer accepted this and passed a nil assessment order. The Commissioner held that the order was passed without applying the mind and that the amount was not connected with agricultural operations, thus taxable as income from other sources. The Tribunal and High Court affirmed the Commissioners findings.
Findings of Court:
The High Court found that the Income-tax Officer failed to apply his mind and that the order was erroneous and prejudicial to revenue. The Court held that the amount did not relate to any agricultural operation carried on by the appellant and was not legally attributable to agricultural income. It concluded that the Commissioner was justified in exercising jurisdiction under Section 263(1) and in treating the sum as taxable under income from other sources.
Issues:
(i) Whether the Commissioner was justified in exercising jurisdiction under Section 263(1) to revise the assessment order on the ground that it was erroneous and prejudicial to revenue. (ii) Whether the receipt of Rs. 3,66,649 was agricultural income and therefore exempt from tax under the relevant provisions.
Ratio Decidendi:
The exercise of jurisdiction under Section 263(1) is sustainable where an assessment order is erroneous, including where it results from failure to apply the mind, and is prejudicial to revenue through the loss of tax legally payable. The term 'prejudicial to the interests of revenue' encompasses errors that lead to non-assessment of income which is legally taxable, and such error is not negated by the absence of fraudulent intent. The nature of the receipt as compensation for loss of agricultural income did not convert it into agricultural income within the meaning of the statute, and the finding that the income fell under income from other sources was correct.
Result:
The appeal is dismissed with costs.
(A) The Income-tax Act, 1961, sections referenced govern the assessment and revision of income-tax orders. Section 2(1)(a) provides the interpretative framework, while Section 263(1) confers appellate or revisional jurisdiction on the Commissioner to examine records and correct orders that are erroneous and prejudicial to revenue. Section 56 addresses unspecified miscellaneous provisions, and Section 263(1) is the specific substantive provision empowering the Commissioner to set aside or modify assessments where legal or factual errors adversely affect revenue. In this appeal, the Commissioner invoked Section 263(1) to revise an order of nil assessment passed by an Income-tax Officer in respect of compensation received for the disruption of agricultural operations, contending that the order was erroneous and prejudicial to the revenue.
(B) Key legal principles include that Section 263(1) jurisdiction requires a two-fold satisfaction: the impugned order must be erroneous, and it must be prejudicial to the interests of revenue, with the latter interpreted as the loss of tax lawfully payable due to an erroneous assessment. The phrase 'prejudicial to the interests of the revenue' is not technical and encompasses situations where an order reflects an incorrect assumption of facts or law, or proceeds without applying the mind. An order passed without considering relevant material or on an incorrect legal basis is erroneous, and if it results in non-assessment of income legally taxable, it prejudices revenue. The head of income from other sources captures receipts not falling under agricultural, capital, or other specific heads.
Facts of the case:
The appellant, a public limited company, entered into an agreement to sell a rubber plantation for Rs. 210 lakhs, with consideration payable in instalments. Due to the purchasers default, the parties agreed to extend time for payment, with the purchaser paying Rs. 3,66,649 as compensation for loss of agricultural income. The appellant treated this as compensation for lost agricultural income and claimed nil assessment for the relevant year. The Income-tax Officer accepted this and passed a nil assessment order. The Commissioner held that the order was passed without applying the mind and that the amount was not connected with agricultural operations, thus taxable as income from other sources. The Tribunal and High Court affirmed the Commissioners findings.
Findings of Court:
The High Court found that the Income-tax Officer failed to apply his mind and that the order was erroneous and prejudicial to revenue. The Court held that the amount did not relate to any agricultural operation carried on by the appellant and was not legally attributable to agricultural income. It concluded that the Commissioner was justified in exercising jurisdiction under Section 263(1) and in treating the sum as taxable under income from other sources.
Issues:
(i) Whether the Commissioner was justified in exercising jurisdiction under Section 263(1) to revise the assessment order on the ground that it was erroneous and prejudicial to revenue. (ii) Whether the receipt of Rs. 3,66,649 was agricultural income and therefore exempt from tax under the relevant provisions.
Ratio Decidendi:
The exercise of jurisdiction under Section 263(1) is sustainable where an assessment order is erroneous, including where it results from failure to apply the mind, and is prejudicial to revenue through the loss of tax legally payable. The term 'prejudicial to the interests of revenue' encompasses errors that lead to non-assessment of income which is legally taxable, and such error is not negated by the absence of fraudulent intent. The nature of the receipt as compensation for loss of agricultural income did not convert it into agricultural income within the meaning of the statute, and the finding that the income fell under income from other sources was correct.
Result:
The appeal is dismissed with costs.
JUDGMENT
Syed Shah Mohammed Quadri, J.-The unsuccessful assessee is the appellant in this appeal, by special leave, which arises from the Judgment and Order of the Division Bench of the High Court of Kerala in I.T.R. No. 15 of 1990 passed on October 22, 1991. By the impugned order the High Court answered the following two questions, referred to it at the instance of the appellant, in the affirmative that is against the appellant and in favour of the Revenue :-
"(1) Whether, on the facts and in the circumstances of the case, that Tribunal was justified in holding that there was evidence before the Commissioner of Income-tax that the assessment order was erroneous and prejudicial to revenue?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Rs. 3,66,649 was a taxable receipt for the assessment year 1983-84?"
2. The facts giving rise to these questions may be noticed here. The case relates to the assessment year 1983-84 for which the accounting period of the appellant ended on February 28, 1983. The appellant is a public limited company. It entered into an agreement for sale of the estate of rubber plantation measuring acres 699 of land for consideration of Rs. 210 lakhs with M/s. Supriya Enterprises (for short the purchaser ) on July 18, 1982. The Agreement provided, inter alia, for payment of the consideration in instalments as scheduled therein. However, the purchaser could not adhere to the schedule and on his request the parties agreed to extension of time for payment of the instalments on condition of his paying compensation/damages for loss of agricultural income and other liabilities in a sum of Rs. 3,66,649. Accordingly, the appellant passed a resolution also to that effect on September 25, 1983 and the purchaser paid the said amount. In the annexure to the return filed by it for the assessment in question the amount was noted as compensation and damages for loss of agricultural income. By Order dated October 31, 1985, the Income-tax Officer accepted the same and endorsed nil assessment for that year. The Commissioner of Income-tax having examined the records of the assessment found that the nil assessment order passed by the income-tax Officer was erroneous and it was prejudicial to the interests of the revenue. He issued notice to the appellant, under Section 263 of the Income Tax Act (for short the Act ), to show cause why the order of assessment should not be set aside and Rs. 3,66,649 should not be assessed under the head income from other sources . After the appellant filed its reply the Commissioner, by order dated February 8.9.1988, concluded that the said amount was unconnected with any agricultural operation activity and was liable to be taxed under the head income from other sources . Dissatisfied with the Order of the Commissioner, the appellant filed an appeal before the Income-tax Appellate Tribunal, which was dismissed on August 5, 1988. On the application of the appellant under Section 256(1) of the Act, the aforementioned questions were referred to the High Court of Kerala at Ernakulam.
3. Mr. Roy Abaraham, learned counsel for the appellant, urged the very same two contentions which were argued before the High Court, namely, (i) that the exercise of jurisdiction by the Commissioner under Section 263(1) of the Act was not only unwarranted but also illegal; he contended that mere loss of tax could not be treated as prejudicial to the interests of the revenue and that only when the order of the Assessing Officer would affect the administration of the revenue that it could be treated as prejudicial to the revenue; (ii) that the amount of Rs. 3,66,649 was in reality agricultural income and, therefore, ought not to have been brought to tax.
4. Mr. Anoop G. Choudhary, learned senior counsel for the respondent, asserted that the Income-tax Officer passed the order without application of mind and inasmuch as it resulted in loss of tax it was also prejudicial to the interests of the revenue, therefore, the exercise of jurisdiction under Section 263(1) of the Act by the Commissioner was justified and legal. He further submitted that the second contention was not open to the appellant as the basic facts found by the Appellate Tribunal were not questioned before the High Court.
5. To consider the first contention, it will be apt to quote Section 263(1) which is relevant for our purpose :-
"263. Revision of orders prejudicial to revenue-(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation-x x x"
6. A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. 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. If one of them is absent - if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to Section 263(1) of the Act.
7. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
8. The phrase prejudicial to the interests of the revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not conferred to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain & Anr.1, the High Court of Karnataka in Commissioner of Income-tax, Mysore v. T. Narayana Pai2, the High Court of Bombay in Commissioner of Income-tax v. Gabriel India Ltd.3 and the High Court of Gujarat in Commissioner of Income-tax v. Smt. Minalben4 treated loss of tax as prejudicial to the interests of the revenue.
9. Mr. Abaraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company v. Commissioner of Income-tax5 interpreting "prejudicial to the interests of the revenue". The High Court held, "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 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 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 the Assessing Officer. Every loss of revenue as a consequence of an order of 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. 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 passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi v. Commissioner of Income tax6 and in Smt. Tara Devi Aggarwal v. Commissioner of Income-tax, West Bengal7.
11. In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income-tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under Section 263(1) was justified.
12. The second contention has to be rejected in view of the finding of fact recorded by the High Court. It was not shown at any stage of the proceedings, the amount in question was fixed or quantified as loss of agricultural income and admittedly it is not so found by the Tribunal. The further question whether it will be agricultural income within the meaning of Section 2(1A) of the Act as elucidated by this Court in Commissioner of Income-tax, West Bengal, Calcutta v. Raja Benoy Kumar Sahas Roy8 does not arise for consideration. It is evident from the Order of the High Court that findings recorded by the Tribunal that the appellant stopped agricultural operation in November 1982 and the receipt under consideration did not relate to any agricultural operation carried on by the appellant, were not questioned before it. Though, we do not agree with the High Court that the said amount was paid for breach of contract as indeed it was paid in modification/relaxation of the terms of the contract, we hold that the High Court is justified in concluding that the said amount was a taxable receipt under the head income from other sources .
13. We find no merit in the appeal and dismiss the same with costs.
(C.R.) Appeal dismissed
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