IMPORTANT POINT
If due to an erroneous order of Income Tax Officer, Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to interests of Revenue.

JUDGMENT

M.R. Shah, J.

1. 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.

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

3. 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.

3.1 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, “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.

3.2 However, a notice dated 24.10.2011 was issued by the Commissioner of Income Tax-7 under Section 263 of the IT Act to show cause as to why the assessment order should not be set aside under Section 263 of the IT Act. The Commissioner vide its order dated 24.11.2011 held that the assessment order passed under Section 143(3) of the IT Act was erroneous and prejudicial to the interest of the revenue on the issue relating to deduction of Rs.31.05 Crores claimed by the assessee as cost of improvement while computing long term capital gains. The claim of the assessee that the said payment was made by them towards settlement of litigation, which according to the assessee amounted to discharge of encumbrances and required to be considered as cost of improvement, was not accepted by the Commissioner as according to him it did not fall under the definition of “cost of improvement” contained in Section 55(1)(b) of the IT Act. According to the Commissioner, the expenses claimed by the assessee neither constituted expenditure that is capital in nature nor resulted in any additions or alterations that provide an enhanced value of an enduring nature to the capital asset. The Commissioner also held that the payment as contended, was not made by the assessee to remove encumbrances.

3.3 The Commissioner also held that provisions of sections 50A and 55(1)(b) of the IT Act have not been complied with and the assessment order is not framed in consonance with the provisions of the IT Act and thus the assessment order was erroneous and prejudicial to the interest of the revenue. Consequently, the Commissioner set aside the assessment order passed by the AO with a directi