The Assessing Officer allowed a deduction. Does the fact that a view was taken protect the assessment from section 263?
Only if the view taken is one of two views genuinely open on the law. Where the Supreme Court is satisfied the assessment is both erroneous and prejudicial, the Commissioner's revision stands and the Tribunal and High Court orders setting it aside go.
Decided by the Supreme Court (M.R. Shah J and A.S. Bopanna J) on 2023-04-06, reported as Civil Appeal No. 6126 of 2021 (arising out of SLP (C) No. 13380 of 2018). It bears on section 263, section 55, section 50A of the Income Tax Act 1961, in Revision & Rectification and Capital Gains matters.
This is the most recent Supreme Court authority applying Malabar Industrial, and it is a revenue win. Practitioners who quote 'two views are possible' as a reflex need this case in front of them, because it shows the Court applying the same test and reaching the opposite result on the facts.
Binding on every court and authority in India.
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The assessment year in issue was 2007-08. The assessee company, engaged in the manufacture of garments and shoes, sold a property known as Paville House for Rs. 33 crores. The property stood on land purchased in 1972 and was carried in the balance sheets. Disputes among the shareholders led to arbitration and a family settlement award under which three shareholders were each paid Rs. 10.35 crores, Rs. 31.05 crores in total. The assessee claimed that sum as cost of improvement in computing capital gains, on the footing that the payments discharged encumbrances on the property. The Commissioner invoked section 263 and held that the payments to the shareholders were neither deductible capital expenditure nor payments that enhanced the value of the asset, that sections 50A and 55(1)(b) had not been complied with, set aside the assessment and directed the Assessing Officer to recompute the capital gains in accordance with the Act. The Tribunal set aside the Commissioner's order. The Bombay High Court, by its judgment in ITA No. 78 of 2015 dated 18 September 2017, dismissed the Revenue's appeal and confirmed the Tribunal. The Revenue appealed to the Supreme Court.
The Revenue's appeal was allowed. The judgment of the High Court was quashed and set aside and the Commissioner's order under section 263 was restored. Applying Malabar Industrial Co. Ltd., the Court held that the assessment order was not only erroneous but prejudicial to the interests of the Revenue, and that the protection for a plausible view applies only where two views are genuinely possible on the law (paras 7.2, 7.3 and 8).
The Court recorded at para 7 that the Commissioner, exercising revisional jurisdiction, had set aside the assessment order by specifically observing that it was erroneous as well as prejudicial to the interests of the Revenue, and then set out the law in Malabar Industrial Co. Ltd. at length. At para 7.1 it noted that the assessee had relied heavily on Malabar. At para 7.2 it reiterated the observation in paragraph 9 of Malabar that the scheme of the Act is to levy and collect tax in accordance with its provisions and that this task is entrusted to the Revenue, and then stated the limit of the plausible-view protection: only where two views are possible and the Assessing Officer has adopted one of them is a decision which is plausible, though it has resulted in loss of revenue, outside section 263. At para 7.3 the Court applied Malabar to the facts, agreed with the Commissioner, and said in terms that having gone through the assessment order and the Commissioner's order it too was of the opinion that the assessment order was not only erroneous but prejudicial to the interest of the Revenue. Para 8 records that the appeal succeeds, the High Court's judgment is quashed and set aside, and the Commissioner's order under section 263 is restored.
Having gone through the assessment order as well as the order passed by the Commissioner of Income Tax, we are also of the opinion that the assessment order was not only erroneous but prejudicial to the interest of the Revenue also.
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Handle my notice → Ask a CA on WhatsAppOnly if the view taken is one of two views genuinely open on the law. Where the Supreme Court is satisfied the assessment is both erroneous and prejudicial, the Commissioner's revision stands and the Tribunal and High Court orders setting it aside go. This was decided by the Supreme Court (M.R. Shah J and A.S. Bopanna J) and bears on section 263, section 55, section 50A of the Income Tax Act 1961. It is reported as Civil Appeal No. 6126 of 2021 (arising out of SLP (C) No. 13380 of 2018). This is the most recent Supreme Court authority applying Malabar Industrial, and it is a revenue win. Practitioners who quote 'two views are possible' as a reflex need this case in front of them, because it shows the Court applying the same test and reaching the opposite result on the facts. If it applies to you, the first step is this: Do not argue 'two views' in the abstract. Identify the second view, name the provision it rests on, and show it was legally available to the Assessing Officer.
The assessment year in issue was 2007-08. The assessee company, engaged in the manufacture of garments and shoes, sold a property known as Paville House for Rs. 33 crores. The property stood on land purchased in 1972 and was carried in the balance sheets. Disputes among the shareholders led to arbitration and a family settlement award under which three shareholders were each paid Rs. 10.35 crores, Rs. 31.05 crores in total. The assessee claimed that sum as cost of improvement in computing capital gains, on the footing that the payments discharged encumbrances on the property. The Commissioner invoked section 263 and held that the payments to the shareholders were neither deductible capital expenditure nor payments that enhanced the value of the asset, that sections 50A and 55(1)(b) had not been complied with, set aside the assessment and directed the Assessing Officer to recompute the capital gains in accordance with the Act. The Tribunal set aside the Commissioner's order. The Bombay High Court, by its judgment in ITA No. 78 of 2015 dated 18 September 2017, dismissed the Revenue's appeal and confirmed the Tribunal. The Revenue appealed to the Supreme Court. The matter was decided on 2023-04-06 by the Supreme Court (M.R. Shah J and A.S. Bopanna J). On those facts the Supreme Court held as follows. The Revenue's appeal was allowed. The judgment of the High Court was quashed and set aside and the Commissioner's order under section 263 was restored. Applying Malabar Industrial Co. Ltd., the Court held that the assessment order was not only erroneous but prejudicial to the interests of the Revenue, and that the protection for a plausible view applies only where two views are genuinely possible on the law (paras 7.2, 7.3 and 8).
The Court recorded at para 7 that the Commissioner, exercising revisional jurisdiction, had set aside the assessment order by specifically observing that it was erroneous as well as prejudicial to the interests of the Revenue, and then set out the law in Malabar Industrial Co. Ltd. at length. At para 7.1 it noted that the assessee had relied heavily on Malabar. At para 7.2 it reiterated the observation in paragraph 9 of Malabar that the scheme of the Act is to levy and collect tax in accordance with its provisions and that this task is entrusted to the Revenue, and then stated the limit of the plausible-view protection: only where two views are possible and the Assessing Officer has adopted one of them is a decision which is plausible, though it has resulted in loss of revenue, outside section 263. At para 7.3 the Court applied Malabar to the facts, agreed with the Commissioner, and said in terms that having gone through the assessment order and the Commissioner's order it too was of the opinion that the assessment order was not only erroneous but prejudicial to the interest of the Revenue. Para 8 records that the appeal succeeds, the High Court's judgment is quashed and set aside, and the Commissioner's order under section 263 is restored. In the words reproduced by the source cited on this page: "Having gone through the assessment order as well as the order passed by the Commissioner of Income Tax, we are also of the opinion that the assessment order was not only erroneous but prejudicial to the interest of the Revenue also." The decision followed or applied Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) — applied.
It was decided by the Supreme Court on 2023-04-06 and is reported as Civil Appeal No. 6126 of 2021 (arising out of SLP (C) No. 13380 of 2018). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 263, section 55, section 50A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Revenue's appeal was allowed. The judgment of the High Court was quashed and set aside and the Commissioner's order under section 263 was restored. Applying Malabar Industrial Co. Ltd., the Court held that the assessment order was not only erroneous but prejudicial to the interests of the Revenue, and that the protection for a plausible view applies only where two views are genuinely possible on the law (paras 7.2, 7.3 and 8). It arises in Revision & Rectification and Capital Gains matters, on section 263, section 55, section 50A of the Income Tax Act 1961, and was decided by M.R. Shah J and A.S. Bopanna J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the Commissioner has recorded a specific finding that the assessment is both erroneous and prejudicial, meet that finding head on rather than arguing only that the officer applied his mind. Read this alongside Malabar Industrial rather than instead of it — the Court applies Malabar, it does not depart from it.
Validity check could not be completed. No search for later treatment was carried out. As a 2023 Supreme Court judgment applying Malabar Industrial it is unlikely to have been doubted, but that has not been verified against any subsequent decision. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Some secondary write-ups of this decision described it as overruling Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC). The judgment text does not do that. It expressly applies Malabar and quotes from it; the difference is in the application to the facts, not in the test. Treat any source that says Malabar has been overruled as wrong. Paragraphs 4 and 5 (counsel's arguments) and their sub-paragraphs were not retrieved in full, so the summary of the arguments here is deliberately thin. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was allowed. The judgment of the High Court was quashed and set aside and the Commissioner's order under section 263 was restored. Applying Malabar Industrial Co. Ltd., the Court held that the assessment order was not only erroneous but prejudicial to the interests of the Revenue, and that the protection for a plausible view applies only where two views are genuinely possible on the law (paras 7.2, 7.3 and 8).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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