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PETITIONER: M/S.  THE MALABAR INDUSTRIAL CO.  LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, KERALA STATE

DATE OF JUDGMENT:       10/02/2000

BENCH: Syed Shah Mohammed Quadri

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?

     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

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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.   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.   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 was also  prejudicial  to  the interests  of  the  revenue,   therefore,  the  exercise  of jurisdiction  under  Section  263(1)  of   the  Act  by  the Commissioner  was justified and legal.  He further submitted that  the second contention was not open to the appellant as the  basic  facts found by the Appellate Tribunal  were  not questioned  before  the High Court.  To consider  the  first contention,  it will be apt to quote Section 263(1) which is relevant  for  our  purpose:-   263.   Revision  of  orders prejudicial  to revenue - (1) The Commissioner may call  for and examine the record of any proceeding under this Act, and if  he  considers  that  any order  passed  therein  by  the Assessing  Officer is erroneous insofar as it is prejudicial to  the  interests of the revenue, he may, after giving  the assessee  an opportunity of being heard and after making  or causing  to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

     Explanation - x x x

     A  bare reading of this provision makes it clear  that 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. There  can be no doubt that the provision cannot be  invoked to correct each and every type of mistake or error committed

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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.   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 High  Court of  Calcutta  in Dawjee Dadabhoy & Co.  Vs.  S.P.  Jain  and Another  [31  ITR  872],  the High  Court  of  Karnataka  in Commissioner  of  Income- tax, Mysore Vs.  T.  Narayana  Pai [98  ITR  422], the High Court of Bombay in Commissioner  of Income-tax  Vs.   Gabriel India Ltd.  [203 ITR 108] and  the High  Court  of  Gujarat in Commissioner of  Income-tax  Vs. Smt.   Minalben S.  Parikh [215 ITR 81] treated loss of  tax as  prejudicial  to  the  interests  of  the  revenue.   Mr. Abaraham relied on the judgment of the Division Bench of the High  Court  of  Madras in Venkatakrishna Rice  Company  Vs. Commissioner  of  Income-tax  [163   ITR  129]  interpreting prejudicial  to  the interests of the revenue.   The  High Court  held,  In  this  context, it  must  be  regarded  as involving  a  conception  of  acts   or  orders  which   are subversive  of the administration of revenue.  There must be some  grievous  error in the Order passed by the  Income-tax Officer,  which might set a bad trend or pattern for similar assessments,  which  on a broad reckoning, the  Commissioner might  think  to be prejudicial to the interests of  Revenue Administration.   In  our view this interpretation  is  too narrow  to  merit acceptance.  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. 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.  It has been held by this Court that where a sum not earned by a person  is  assessed  as  income  in his  hands  on  his  so offering,   the  order  passed  by  the  Assessing   Officer accepting the same as such will be erroneous and prejudicial to  the interests of the revenue.  Rampyari Devi Saraogi Vs. Commissioner  of  Income-tax [67 ITR 84] and in  Smt.   Tara Devi  Aggarwal Vs.  Commissioner of Income-tax, West  Bengal [88  ITR 323].  In the instant case, 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

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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.  The second contention has to be  rejected in view of the finding of fact recorded by  the High  Court.   It  was  not  shown   at  any  stage  of  the proceedings,  the amount in question was fixed or quantified as  loss of agricultural income and admittedly it is not  so found by the Tribunal.  The further question whether it will be  agricultural income within the meaning of Section  2(1A) of  the  Act as elucidated by this Court in Commissioner  of Income-tax,  West  Bengal,  Calcutta Vs.  Raja  Benoy  Kumar Sahas Roy [32 ITR 466] does not arise for consideration.  It is  evident  from the Order of the High Court that  findings recorded   by  the  Tribunal   that  the  appellant  stopped agricultural  operation  in  November 1982 and  the  receipt under  consideration  did  not relate  to  any  agricultural operation  carried on by the appellant, were not  questioned before it.  Though, we do not agree with the High Court that the said amount was paid for breach of contract as indeed it was  paid  in  modification/relaxation of the terms  of  the contract,  we  hold  that  the High Court  is  justified  in concluding  that the said amount was a taxable receipt under the  head income from other sources.  We find no merit  in the appeal and dismiss the same with costs.