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.

Headnote:(i) Income Tax Act, 1961-Section 263-Suo motu revision by Commissioner-Erroneous and prejudicial order-Conditions precedent to invoke section-Two conditions, viz., order of assessing officer is erroneous and it is prejudicial must be satisfied-Absence of any one of conditions cannot empower Commissioner to invoke Section 263.
       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. (Para 6)
       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. (Para 7)
       (ii) Income Tax Act, 1961-Section 263-Suo motu revision by Commissioner-Erroneous and prejudicial order- Prejudicial to interest of revenue -Connotation of-Loss to tax due to an erroneous order of ITO, would amount to prejudicial to interest of revenue.
       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 confined to loss of tax. 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. (Paras 8 and 9)
       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. (Para 10)
       (iii) Income Tax Act, 1961-Section 263-Suo motu revision by Commissioner-Erroneous and prejudicial order-Assessee showing in return compensation received for loss of agricultural income under sale agreement of plantation as agricultural income-ITO accepting returning without making enquiry-No material to support that compensation amount represented agricultural income-ITO accepting entry in statement of account filed by assessee without making enquiry-Commissioner invoking Section 263 bringing to take amount of compensation as income from other sources-Held : order of ITO erroneous and prejudicial -Commissioner justified in invoking Section 263.
       The appellant assessee 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 . (Para 2)
       Held : 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. (Para 11)
       (iv) Income Tax Act, 1961-Section 56 r/w Section 2(1A)-Income from other sources-Assessable as-Sale of agricultural land by assessee-Vendee to pay sale price in instalment -Failure to comply with payment schedule-Extention of time for payment on condition of vendee paying compensation/damages for loss of agricultural income-No evidence to show that compensation amount represented compensation for agricultural income-Compensation amount rightly assessed as income from other sources. (Paras 11 and 12)

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

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