Under Section 263 of the Income Tax Act, the Supreme Court ruled that the Commissioner of Income Tax can exercise revision powers over Assessing Officer orders that harm revenue interests.
The Bombay High Court’s ruling that the assessee’s payment to its shareholders in lieu of settlement of litigation in accordance with an arbitral award was deductible from the proceeds of the property it sold when calculating “long term capital gains” under the Income Tax Act of 1961 was overturned by the Top Court.
In accordance with Section 263 of the Income Tax Act, the Commissioner of Income Tax (CIT) overturned the assessment order made by the Assessing Officer (AO), which had granted the assessee’s request for a deduction.
The bench of Justices M.R. Shah and A.S. Bopanna noted that the Bombay High Court had committed a “very serious error” in setting aside the order passed by the CIT in exercise of its revisionary powers under Section 263 of the Income Tax Act, despite holding that the AO’s erroneous assessment order had resulted in a loss of revenue in the form of tax.
The bench came to the conclusion that the AO’s decision was incorrect and detrimental to the Revenue’s interests. Thus, the Court reinstated the CIT’s decision.
The dispute that is taking place between shareholders of the assessee Company, M/s. Pvt. Paville Projects Ltd, who are also members of the same family, came to a conclusion in arbitration, with the parties recording a “family settlement” as an interim award. The arbitral decision stipulated that the shareholders would receive a specific sum. The assessee claims that the property or building it owned was sold to pay off the aforementioned debts, or the amount owed to shareholders. The respondent/assessee claimed the property’s sale proceeds as “long term capital gains” on its income tax return for the relevant assessment year, after deducting the amount paid to shareholders for litigation settlement. The assessee guaranteed that the said sum was deductible as “cost of progress” under the Annual Duty Act.
The equivalent was acknowledged by the AO in the appraisal request passed under Area 143(3) of the Personal Duty Act.
HARDIK SHARMA, BCOM LLB 8TH SEM
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