Quashes Bombay HC decision as incorrect; SC maintains principles regulating CIT’s revisionary powers

Fact and issue of the case

Feeling aggrieved and dissatisfied with the impugned judgment and order dated 18.09.2017 passed by the High Court of Judicature, at Bombay in ITA No.78 of 2015 by which the High Court has dismissed the said appeal preferred by the Revenue, the Revenue has preferred the present Appeal.

The relevant assessment order concerning the present appeal is Assessment Year 2007-08.

The respondent assessee was engaged in manufacture and export of garments, shoes etc. It filed its income tax return for the AY 2007-08 wherein it showed sale of the property / building “Paville House” for an amount of Rs.33 Crores. That, the building “Paville House” was constructed by the assessee on the piece of land which was purchased in the year 1972. 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. Litigations in the Company Law Board and the High Court culminated in arbitration. In the arbitration proceedings, an interim award was passed whereby an amicable settlement termed as “family settlement” was recorded between the parties. As per the interim award, three shareholders viz. (1) Asha, (2) Nandita and (3) Nikhil were paid Rs.10.35 Crores each. According to the assessee,

Observation of the court

“Paville House” 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”. As observed hereinabove, “Paville House” was sold for an amount of Rs.33 Crores. The assessee showed gains arising therefrom amounting to Rs.1,21,16,695/- as “long term capital gains” in the computation of their income for AY 2007-08. The working computation of capital gains was accepted by the AO, whereby the cost of removing encumbrances claimed (Rs.10.33 Crores paid to three shareholders pursuant to the interim award) was taken as “cost of improvement” and the deduction was claimed to remove encumbrances on computation of capital gains. On the balance amount capital gain tax was offered and paid. The assessment was completed on 15.12.2019 by the AO under Section 143(3) of the Income Tax Act (for short “IT Act”) accepting the “long term capital gains” as per sheet attached in computation of income.

In view of the above and for the reasons stated above, present appeal succeeds. The impugned judgment and order passed by the High Court is hereby 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.

In result, present appeal is allowed. However, in the facts and circumstances of the case, there shall be no order as to costs.