M/S. MALABAR INDUSTRIAL CO. LTD. versus COMMISSIONER OF INCOME-TAX, KERALA STATE

Citation: [2000] 1 S.C.R. 744 · Decided: 10-02-2000 · Supreme Court of India · Bench: D.P. WADHWA · Disposal: Dismissed

Cited by 2 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

A 
M;S. MALABAR lNDVSTRlAL CO. LTD. 
v. 
COMMISSIO:-."ER OF INCOME-TAX, KERALA STATE 
FEBRUARY 10, 2r:oo 
B 
ID.P. WADHWA AND S.S. MOHA'vlMBD QCADRI, JJ.I 
Income Tax Act. 1961: Section 26.r--Damages;compensation nceived 
by the appellallt in lieu of late payment of the sale cumideration against sale 
of rnbber plantation Accepted by the Income·-tax Officer a.1 damages for loss 
C of agricultural incom< and nil assessment order passed-Commissioner uj 
Income· tax held the said order to be prejudicial tu che interests of 
Revenue--Ordered that it should be taxed undi:r the head 'income from other 
sources'-Appeal before the Tribunal and subsequently, reference to the High 
Court dismissed-On appeal, Held : Section 263 of the Act can be invoked 
D 011(v when the order uf the Assessi11g Officer is emmeuus and is prejudicial 
to the illterest of Reve11u~ -Camwt be i11voked to co1Tect each and every type 
of e1Tor committtd by rhe Assessing Officer- ·The said additio11al amount paid 
by purchaser of the plantatio11 did not relate to any agricultural operation 
carried on by the appellant-Rightly taxed as 'income from other sources'. 
E 
Words & Phrases: 
'Pri.:judicial ro tl1e i11te1nt< of the Revenue '-Meaning uf in !hi: conuxt 
of Income Tax Act, NM. 
The appellant company elltered into an agreement with one 'S' for 
F sale of the estate of rubber plantation. According to the agreement the sale 
consideration was to be paid in instalments as per schedule. On S's failure 
to adhere to the schedule of payments, both the parties agreed for exten-
sion of time for payment in instalments. This extension was made subject 
to the payment of compensation/damages for loss of agricultural income. 
Accordingly, the appellant passed a resolution to that effect and S also 
G paid such amount. In the Income tax assessment of the appellant for the 
relevant year the said amount was noted as compensation and damages 
for loss of agricultural income. The Income Tax Officer accepted the same 
and endorsed nil assessment for that year. The Commissioner of Income 
Tax, on examination of records, found the said nil assessment order to be 
H erroneous and prejudicial to the interests of Revenue. After a show cause 
744 
> 
'!'---
' 
MALABAR INDCSTRIAL CO.LTD. v. C.l.T. 
745 
notice to the appellant under Section 263 of the Income Tax Act, 1961 and A 
receiving reply of the appellant, the Commissioner concluded that the said 
amount was unconnected with any agricultural operation activity ~nd was 
liable to be taxed under the head 'income from other sources'. Appeal 
preferred before the Income Tax Appellate Tribunal was dismissed. Ref-
erence to the High Court under Section 256 of the Act was also dismissed. 
Hence the present appeal. 
B 
The appellant contended that the exercise of jurisdiction by the 
Commissioner was unwarranted and illegal and mere loss of tax could not 
be treated as prejudicial to the interests of Revenue. It was also contended 
that the amount received as damages was in reality agriculturdl income. 
C 
Dismissing the appeal, this Court 
HELD : 1.1. Section 263 (1) of the Income Tax Act, 1961 clearly 
stipulates that exercise of jurisdiction by the Commhsioner ~uo motu D 
under it requires that the order of the Income-tax Officer should be 
erroneous insofar as it is prejudicial to be interests of Revenue. TI1e 
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 Revenue. If one of them is absent-if the order 
of the Income-tax Officer is erroneous but is not prejudicial to Revenue or E 
if it is not erroneous but is prejudicial to Revenue-Recourse cannot be had 
to Section 263(1) of the Act. The said provision cannot be invo!ted 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 
attrdcted. An incorrect assumption of facts or an incorrect application of F 
law will satisfy the requirement of the order being erroneous. In the same 
category falls orders passed without applying the principles of natural 
justice or without application of mind. [749-A-D] 
1.2. The phrase 'prejudicial to the interests of the Revenue' is not an 
expression of art and is not defined in the Act. Lnderstood in its ordinary G 
meaning it is of wide import and is not confined to loss of tax. The said 
phrdse has to be

Excerpt shown. Read the full judgment & AI analysis in Lexace.