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The Commissioner of Income Tax 7 vs M/S Paville Projects Pvt Ltd.

Civil Appeal · 2023 INSC 325Decided 6 Apr 2023
Civil Appeal No. 6126 of 2021

Background

The assessee company sold its building "Paville House" for Rs. 33 crores and, in computing its capital gains, deducted Rs. 31.05 crore paid to three shareholders (siblings who were embroiled in a family/company dispute) as a "cost of improvement," treating the payment as removing an "encumbrance" on the property under a family settlement/arbitration award. The Assessing Officer accepted this. The Commissioner of Income Tax later used his revisional power under Section 263 to set this aside, holding the payment was not a genuine cost of improvement and the original assessment was erroneous and cost the exchequer tax revenue. The Income Tax Appellate Tribunal and the Bombay High Court both sided with the assessee and restored the original assessment.

Decision Breakdown

The Supreme Court disagreed with the Tribunal and High Court. Applying the settled two-part test from Malabar Industrial Co. (an order must be both erroneous and prejudicial to the interest of revenue for the Commissioner to use Section 263), the Court held that the payment to shareholders to settle their personal/company dispute had nothing to do with improving the property itself and did not qualify as "cost of improvement" under Section 55(1)(b). Since the Assessing Officer's acceptance of this claim was legally unsustainable, it was indeed erroneous and caused a genuine loss of tax revenue, justifying the Commissioner's revision. The High Court's judgment was set aside, and the Commissioner's order was restored.

Lesson Learnt

Not every payment a company makes to resolve a shareholder or internal dispute qualifies as a deductible "cost of improvement" for capital gains tax purposes: the expense must be genuinely connected to enhancing the asset itself, and tax authorities can revisit an assessment that wrongly allows such deductions.

Official source (sci.gov.in)View Judgment (PDF)

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