Essar Investments Ltd. vs DCIT 
 
Validity of revision by CIT - AO passing order after application of mind
The assessee had sold share warrants to its 100 percent subsidiary. Its claim that capital gains were not assessable since it was a case of no transfer under s.47(iv) was accepted by the AO after considering asseessee's explanation as per enclosures found with the returns. The claim was accepted after due consideration. It was not a blind acceptance. Therefore, there was no not application of mind. The order was not erroneous. It could not be set aside under s.263.

ITAT, Mumbai

Essar Investments Ltd. vs DCIT

IT Appeal No. 799 (Mad.) of 1999 Assessment Year 1994-95

G.E. Veerabhadrappa, Vice President and Rajpal Yadav, Judicial Member

22 May 2007

S.E. Dastur for the Appellant
V.S. Singh for the Respondent

ORDER

G.E. Veerabhadrappa, Vice President. - This appeal filed by the assessee arises out of the order under section 263 dated 19-3-1999 of the Commissioner of Income-tax, Central-II, Chennai for the assessment year 1994-95.

2. The facts governing the appeal before us are that the assessee has sold 4 crores warrants of Essar Shipping Ltd. to its wholly owned subsidiary, Shubhangi Investments Trading Ltd. at Rs. 60 per warrant and realised Rs. 240 crores. The assessee claimed that the gain arising out of this transaction was not liable to tax as it is a transfer covered by provisions of section 47(iv) of the Act and as per the judgment of the Apex Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 2941 the cost of acquisition of the warrants is 'Nil' and therefore there will be no capital gains computable on the warrants sold. The Assessing Officer accepted the contention of the assessee and completed the assessment under section 143(3) of the Act. Subsequently, exercising his powers conferred on him under section 263 of the Act, the Commissioner of Income-tax framed an opinion that the order framed by the Assessing Officer under section 143(3) was erroneous and prejudicial to the interest of Revenue for the following reasons :

(i) That the rights of the persons holding it to subscribe in the shares as and when issued and called at any time between third and fifth year and thus the purpose of the warrants was to get share at a future date at an agreed price and hence cannot be treated as assets falling under the provisions of section 47(iv) of the Act as it conferred only a contingent right and therefore, it could only be termed as a speculative transaction and the profit arose on such transaction should be brought to tax as speculation profit;

(ii) The Assessing Officer failed to take note of that fact that while in the balance-sheet the subject warrants were shown as assets, no value was ascribed to it and also he did not examine as to how and from which stock the transfer was effected and as to when the warrants were actually issued; and

(iii) Whether the transaction fell in the category of capital gains or speculation business had to be examined by the Assessing Officer for the purpose of making a proper assessment;

(iv) Deduction under section 80M was computed at Rs. 3.2 crores. However, no dividend has been assessed under the head "Income from other sources". If the dividend shares held as stock-in-trade, no deduction under section 80M would be available. Further as the dividend declared by the assessee for the assessment year under consideration was only Rs. 1.14 crores, the maximum deduction entitled would be restricted to only Rs. 1.44 crores. Thus excess deduction of Rs. 2.04 crores was allowed.

3. The learned Commissioner accordingly issued a show-cause notice to the assessee seeking his explanations. The assessee, vide letter dated 5-12-1998, explained -

(i) As per the terms of the warrant, the holder of each warrant could subscribe to one share of Essar Shipping Ltd. and this option could be exercised at any time between the second and fifth year.

(ii) The observation that the warrants represent future rights to subscribe in the shares and therefore, the sale of these warrants was in the nature of speculative transaction was not borne out of the facts. The assessee sold the warrants which were existing with it and had not sold assets of which it had no delivery. The fact that these warrants allowed the holder to subscribe to the shares after a period of 2 to 5 years does not make the transaction speculative in nature.

(iii) Since the holder of the warrant had a right to subscribe to the shares of Essar Shipping Ltd., the said warrants constituted an asset. The fact that these warrants were otherwise non-transferable except the wholly owned subsidiary clearly indicated that it was a capital asset. The sale of these warrants would therefore result in capital gain and since there was no cost involved in acquisition of these warrants in view the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra). Even otherwise as the sale has been made to a subsidiary, profits if any determinable would not be chargeable to tax in terms of section 47(iv). Therefore to hold the sale of warrants to the subsidiary company as speculative transaction is not based on correct interpretation of facts of law.

(iv) Warrant has given right to purchase shares at specified price. The right is definite and the warrant holder has a definite right. It is not a future right and the warrant was a document like licence which has authority to get shares at a particular price and this was recognised under the law of the land as valuable right means the property means the asset.

(v) The warrants had a right to get shares at pre-determined price. All terms are fixed; these warrants were not tradable and therefore they cannot be traded in the market and treated as business. These were only investments and therefore capital assets.

In a further letter dated 4-3-1999 it contended that a 'capital asset' includes every kind of property as generally understood. Property included every conceivable thing, right or interest or liability. For this proposition the assessee relied on the decision in the case of Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 6811. A right to obtain conveyance of immovable property is a property as contemplated by section 2(14) of Income-tax Act and speculation is a transaction when no certainty is there and transactions are made without delivery. The assessee further relied on M. Venkatesan v. CIT [1983] 144 ITR 8861 (Mad.); CIT v. Tata Services Ltd. [1980] 122 ITR 5942 (Bom.); CIT v. Trustees of Anupam Charitable Trust [1987] 167 ITR 1293 (Raj.)

4. With regard to the deduction under section 80M, the assessee maintained that as this matter was before the CIT(A) the same should not be considered under section 263. The dividend paid was Rs. 1.20 crores plus Rs. 1.44 crores plus 0.72 crore before the due date and not Rs. 1.20 crores as pointed out by the learned Commissioner.

5. The learned Commissioner, however, observed that all the three parties to the subject transaction constituted a group, though companies, and the transaction cannot be called at arm's length between any two or even among all the three. The assessee is a promoter of Essar Shipping Ltd. and had at the relevant point of time, controlling interest. As a part of an arrangement between the assessee and Essar Shipping Ltd. for the purposes of ensuring the continued maintenance of controlling interest of the former in the latter, Essar Shipping Ltd. resolved to issue 4,50,00,000 non-transferable warrants to the assessee-company for a refundable advance of Rs. 4.5 crores. It was, evidently, all a matter of in-house-arrangement and clearly by way of very deliberate tax planning, the assessee company also contrived or arranged to have these very non-transferable warrants by its wholly owned subsidiary company, viz. M/s. Shubhangi Investments and Trading Co. Ltd. which, in its turn, purportedly purchased 4,00,00,000 warrants from the assessee-company for an amount of Rs. 240 crores. It was inexplicable that while the subject warrants purportedly became the "assets" of the assessee company, its balance-sheet indicated Nil value thereof for the stated reason that there was no cost of acquisition thereof. The assessee was a promoter of the warrant-issuing sister company itself would go to prove that certain expenditure must have been incurred by way of 'promotional activities' of the assessee company and, therefore, there certainty was a cost element embedded in the warrants. This apart, even the interest-free refundable advance of Rs. 4.5 crores would go to add to the cost of the warrants, by way of the interest forgone by the assessee company.

6. On the basis of the above observations, the learned Commissioner held that while the commercial expediency of the hurry in "selling" the warrants to the wholly owned subsidiary and the existence of the urgent need for such a huge sum as Rs. 240 crores and that too at the cost of a wholly owned subsidiary as well as the source of this amount in the hands of the latter, all remained unexplored and therefore, unexplained, the assessee company was claiming that the value-less warrants formed part of its assets and therefore, there would be no capital gains on the transfer thereof for two reasons, viz. (a) there was no cost of acquisition as aforesaid; and (b) the surplus over zero value (i.e. 240 crores) was covered by the exclusive provisions of sub-sections 45 and 47(iv) of the Act, the transfer being to a wholly owned subsidiary. In other words, the assessee's stand was that there was no commercial venture of trading involved in the tripartite transactions all within the group comprising of the promoter holding controlling interest in one, the promoted (i.e. the controller) company and the wholly owned subsidiary of the promoter of the promoted company and the "value-less" warrants were not trading articles i.e., stock-in-trade. Despite the short span within which all these transactions have been shown to have taken place and the minimal period during which the warrants (4 crores out of 4.5 crores) were held by the assessee company, its contention is that the decision inter alia in 431 ITR 6875 (SC) (sic) (which are indeed not enough to decide the issue conclusively) would not apply to the facts of the case. With regard to the contention of the assessee that the subject warrants of Essar Shipping Ltd. are of the nature of shares and debenture, the learned Commissioner opined that in the Companies' Act the type of instruments called warrants does not find a place and it requires to be examined if the subject warrants could at all be likened to and equated with shares and debentures. Moreover, the hurry in which the assessee company go itself rid off 4 crores warrants itself would give those "value-less" items a colour of a very fact-moving article notwithstanding their purported lack of transferability.

7. In view of the above the learned Commissioner finally concluded that -

"11. From what is discussed here-in-above, it would clearly show that the Assessing Officer made no attempt at examining all the aspects of this issue having regard, inter alia, to the aforesaid decisions. It is also not known if the other promoters of ESL were also able to similarly get warrants issued and have the same transferred to others in the same manner as is seen in this case. In this context, it may not be out of place to mention that in CIT v. Simpson General Finance Co. Ltd., 230 ITR 222 (Mad.), the assessee was found to have held the transferred assets for more than a decade and that is briefly why it has been held that the resulting capital gains (arising out of transfer to allied companies) fell within the exceptions provided in section 47(v) read with section 45. In other words, the decision in 180 ITR 208 (Cal.) would appear to be clearly applicable to the instant case even if it is assumed that the subject warrants are nothing other than shares and debentures.

12. The Assessing Officer for a proper understanding of the true nature of the transactions ought to have examined the actual accounting entries passed in the respective books of the warrant issuing company (ESL), the assessee company and the hundred per cent subsidiary of the assessee company (Subhangi Investments and Trading Co Ltd.). It is not known if a warrant in original was called for by him and/or produced and filed by the assessee company so as to enable him (the Assessing Officer) to examine the nature thereof and the terms and conditions contained therein. Whether the amount of Rs. 4.5 Crores "advanced" by the assessee company to ESL has since been repaid by the latter and whether the said amount is depicted as the consideration for the issue of the warrants, also need to be looked into. As already mentioned, similar instances of warrants being issued to other (promoter) companies of ESL will also have to be seen, if such issues have taken place ever.

13. In other words, the Assessing Officer should not have accepted the claim without examining all the relevant aspects of the case as well as the evidence available in the records of the connected parties to the transactions. The Assessing Officer clearly failed to make the requisite investigation and enquiries resulting an erroneous assessment which clearly is prejudicial to the interests of revenue.

14. From the records it appears that the maximum entitlement to assessee under section 80M would be Rs. 1.44 crores only. The Assessing Officer should also consider withdrawing the excess deduction allowed after verification."

8. In the above premises the learned CIT refused to accept the submissions of the assessee and held that the order of the Assessing Officer was erroneous and prejudicial to the interests of revenue. Accordingly the order of the Assessing Officer was set aside and a direction was issued to the Assessing Officer to complete the de novo assessment after affording opportunity to the assessee.

9. The learned counsel for the assessee reiterated the stand that was taken before the Commissioner of Income-tax and argued that the order of the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue. It was also argued that the assumption of jurisdiction under section 263 by the Commissioner is beyond the scope of the provisions contained in section 263 of the Act. Therefore the order of the Commissioner should be quashed. The order of the CIT is based on suspicion and surmises and not based on any errors committed by the Assessing Officer. The learned CIT, it was contended, failed to appreciate that warrants were not transferable in the market and even for transfer to a subsidiary it required sanction from the appropriate authority. In view of this it was clearly erroneous to hold that the transfer is a deliberate attempt of tax planning or avoidance. The learned Commissioner has failed to appreciate that warrants issued was a certificate containing rights and the cost thereof was Nil. The amounts paid for acquisition of shares can by no stretch of imagination be termed as cost of the warrant. The warrant was a right to subscribe the shares at fixed rate within a period of 2 to 5 years. They were not freely transferable in the market. Even warrants were not transferred to outsider as restrictions were put by SEBI so that unscrupulous persons should not make any profit by selling warrants to public. The transfer was made to its wholly owned subsidiary company for which SEBI permitted as a special case. The Assessing Officer had examined the claim from all angles at the time of assessment with relevant papers and documents and the order of the CIT is itself erroneous in directing the Assessing Officer to redo the assessment de novo. According to the learned counsel this is an arbitrary exercise of power and clearly beyond the scope of section 263 of the Act. The revision order is based on the audit objections and therefore liable to be cancelled even on that account. The learned counsel for the assessee has filed a paper book containing 157 pages. In pages 1 to 5 the assessee has enclosed the computation of income which was filed along with the return of income. Drawing our attention to page 3 of the aforesaid paper book it was pointed out that the assessee has disclosed the realisation amount of Rs. 240 crores on sale of the warrants of Essar Shipping Ltd. and it was also disclosed that it was to its wholly owned subsidiary Subhangi Investments Trading Ltd. and the transfer is clearly covered under section 47(iv) of the Act. The Assessing Officer has examined the entire issue relating to the assessment of capital gains in the hands of the assessee in page 4 of the order. Admittedly the Assessing Officer has accepted the claims of the assessee that the cost of acquisition of the warrant was Nil and the transfer is one which is covered under section 47(iv) of the Act. Therefore the question of computing capital gains on the sale of warrants of Essar Shipping Ltd. to its wholly owned subsidiary Subhangi Investments Trading Ltd. does not arise. Drawing our attention to pages 18 to 20 it was pointed out that the Assessing Officer issued a detailed questionnaire as per item No. 24 of the questionnaire he enquired into the issue. The said question reads as under:-

"24. You have claimed deduction under section 47(iv) under capital gains arising out of transfer of your shares and investments to your wholly owned subsidiary. In this connection, you are requested to state whether these shares are held by you as capital asset or stock-in-trade and whether the subsidiary company is treating these transferred assets as stock-in-trade or investments. Please also furnish the complete working of the "profit on Sale of Investments". Please state whether the Company which purchased these shares continues to be wholly owned subsidiary of the assessee company."

The learned counsel contended that the above question would sufficiently exhibit that the Assessing Officer called for the information from the assessee and applied the mind on the disputed issue. Again the assessee has replied even in the pre-assessment stage vide his letter dated 30-12-1996 to the Assessing Officer wherein the claims for deduction under section 47(iv) vis-a-vis the Assessing Officer's query No. 24 was elaborately explained by the assessee. The assessee, in the paper book, filed the balance-sheet of the assessee as at 31-3-1994. The Memorandum of Understanding of the assessee, letter issued by Government of Karnataka, copies of the prospectus of the rights issue of partly convertible debentures issued by Essar Shipping Ltd., the true copy of the resolution passed in the board meeting of Essar Shipping Ltd., for issue of warrants to promoters have been filed. The assessee has also filed the details of purchase of tradable warrants and entitlements and has given a history of shares held by the assessee in Essar Shipping Ltd., as investment and he has also filed the copies of the submissions made before CIT(A) for the impugned assessment year. The learned counsel for the assessee pointed out that right to obtain the warrants was absolute and not contingent and it is a capital asset under section 2(14) of the Income-tax Act.

10. The learned counsel further pointed out that the presumption that it is not an asset is patently wrong for which reliance was placed to the decision of the Punjab High Court (Delhi Bench) in the case of Hari Bros. (P.) Ltd. v. ITO [1964] 52 ITR 399, wherein the High Court has clearly held that the right to subscribe for shares was property and, therefore, a capital asset within the meaning of section 2(4A) of the Indian Income-tax Act, 1922 and the amount realised by the assessee by sale of the right to subscribe for shares in the managed company amounted to a relinquishment of a capital asset for the purposes of section 12B of the Indian Income-tax Act, 1922. Drawing our attention further to the definition of the speculative transaction under section 43(5) the learned counsel for the assessee pointed out that a speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Therefore, the treatment given to these transactions as speculative transaction by the learned Commissioner in his order under section 263 is illegal and unwarranted and totally strange to the facts of the case. The learned counsel for the assessee further pointed out that the transfer has taken place with the wholly owned subsidiary so as not to disturb the existing sharing patterns. Therefore, provisions of section 47(iv) are clearly attracted and the learned Commissioner cannot say that the provisions of section 47(iv) does not apply to the transactions. The Assessing Officer, it was explained by the learned counsel for the assessee, has applied his mind conscientiously to the facts of the case and to the provisions of section 47(iv) of the Act.

11. The learned counsel further argued that as held by the Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 831 that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. If one of them is absent, recourse cannot be had to section 263(1) of the Act. The provisions 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. 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 learned counsel for the assessee emphasised that these principles laid down by the Apex Court clearly show that the order in question cannot be considered as erroneous or prejudicial to the interest of the revenue when the Assessing Officer has applied his mind to the facts of the case as he has called for all the details and examined the correctness of those claims and then correctly applied the provisions of section 47(iv) of the Act. He was also conscious of the provisions of section 47A of the Act.

12. The learned counsel further drawn our attention to the decision of the Punjab and Haryana High Court in the case of CIT v. Jagadhri Electric Supply and Industrial Co. [1983] 140 ITR 4901 and that of the Karnataka High Court in CIT v. L.F. D'Silva [1991] 192 ITR 5472.

13. The learned departmental representative, on the other hand, strongly justified the impugned order to the learned Commissioner of Income-tax. He pointed out that the Assessing Officer has not asked a single question on the disputed issue and therefore, such an order, according to the learned departmental representative, is clearly erroneous and is also prejudicial to the interests of revenue. The prejudice caused to the interests of revenue has been well explained by the Commissioner both in the show-cause notice issued under section 263 as also in the order passed by him under section 263. He relied upon these discussions to justify the impugned order. The Assessing Officer, according to the learned departmental representative has made no attempts to examine all the facts of the issue. Right to subscribe a share, according to him, is mere contingent and is not a property. He relied upon the decision Arvee International v. Addl. CIT [2006] 101 ITD 495 (Mum.) and strongly justified the impugned order.

14. We have carefully considered the rival contentions and have gone through the records including the voluminous paper book filed by the assessee wherein he has enclosed all the details which were filed before the Assessing Officer and have a bearing upon the issue under consideration. The main issue is that the assessee has sold 4 crores warrants of Essar Shipping Ltd. to one of its wholly owned subsidiary company, viz. M/s. Shubhangi Investments and Trading Ltd. and realised Rs. 240 crores and claimed the same to be exempt on two counts, (i) it was a transfer to subsidiary company; and (ii) the cost of acquisition of the warrant is Nil. These have been the claims of the assessee at all levels. Therefore it cannot be said that the assessee has not explained the transaction having regard to the voluminous paper book filed. In fact in the return of income filed the assessee has explained the transaction in the following manner :

"(3) Sale of Investment, Profit on Investments includes :

(a) Rs. 240 crores realised by the company on sale of 400,00,000 warrants of Essar Shipping Ltd. to its wholly owned subsidiary, Subhangi Investments Trading Ltd. at Rs. 60 per warrant. The company has advised that the gain is not liable to be taxed as :-

(a) It is a transfer covered under section 47(iv)

(b) The cost of acquisition of the warrants is 'Nil' and there will be no Capital Gains on amounts realised when warrants are sold as per the decision in CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC)."

It is also a fact that the entire issue relating to capital gain has also been explained by the assessee in page 5 which is part of the enclosures to the return of income. It is not that the Assessing Officer has blindly accepted the claim. In fact he issued a big questionnaire on 17-6-1996 copy of which is placed by the assessee at pages 18 to 20 of the paper book. The Assessing Officer wanted various details running into 28 items. Item No. 24, which has been reproduced above, is relevant to the issue in dispute. The assessee apart from filing several details appeared before the Assessing Officer from time to time explained, as per page 21 of the paper book, that the claim has no impact in any manner in the following way :

"1. Deduction under section 47(iv) Capital Gains (Query No. 24 in letter dated 17-6-1976).-(a) The shares sold to the subsidiary companies, namely, Shubhangi Investments and Trading Limited and Essar World Trade Limited were held by us as "Investments" and not as "Stock-in-Trade".

(b) The subsidiary companies continue to be wholly owned subsidiary companies till date.

(c) Shares sold to Shubhangi Investments and Trading Limited were shown as "Investments" in their books, whereas the shares sold to Essar World Trade Limited were treated as "Stock-in-trade" by them."

The Assessing Officer also wanted certain computation of the capital gains in respect of the shares sold to another wholly owned subsidiary company, viz. M/s. Essar World Trade Ltd. which has been furnished by the assessee as per paper book page 24. Again on 17-1-1997 the assessee reiterated the exemption claimed before the Assessing Officer. The assessee also appears to have filed all the papers relating to the issue of warrants which entitled the assessee the right to subscribe the shares in 2 to 5 years. Copies of resolutions passed at the Board Meeting of Essar Shipping Ltd., held on 14-10-1993 for issue of warrants to promoters are also been filed before the Assessing Officer, which are placed at paper book pages 19-22. Further copies of investment schedules and purchase details and the tradable warrants as also the history of the shares held in Essar Shipping Ltd. have all been filed before the Assessing Officer. All these voluminous details which are on record cannot be just ignored and the assessee taken in isolation for not discussing the impugned issue elaborately in the assessment order. The contemporaneous material those are brought on record clearly show that the matter has been adequately explained to the satisfaction of the Assessing Officer and the Assessing Officer chose not to elaborate upon the issue. It does not mean that the Assessing Officer was unaware of the fact of the case. The claim of the assessee is that it was a transfer to a subsidiary company cannot be found fault with, at all. The fact that M/s. Shubhangi Investments and Trading Ltd. is a wholly owned subsidiary company of the assessee cannot be said to be incorrect. Moreover the cost of acquisition of the warrant was Nil as could be seen from the balance-sheet which are part of the assessment records and in the light of the judgment of the Hon'ble Apex Court in the case of B.C. Srinivasa Setty (supra) it was difficult for the Assessing Officer to have arrived any other conclusion than the one he reached in the assessment proceedings. Therefore, the order of the Assessing Officer cannot be considered as erroneous and prejudicial to the interest of the revenue on any of the reasons on account of the alleged failure of the Assessing Officer to make any enquiries. In our opinion in view of the facts of the case as presenting the issue of notice under section 263 is clearly a result of change of opinion which the learned Commissioner has taken in substitution of the opinion of the Assessing Officer on the issue. Unless it is shown that the Assessing Officer has committed an error it is not be open to the learned Commissioner to sit in the reappraisal of the whole issue to arrive at a different conclusion. The entire gamut of case laws cited by the learned counsel for the assessee, especially the decision of the Apex Court in the case of Malabar Industrial Co. Ltd. (supra) is squarely applicable to the case before us. The Hon'ble Apex Court has explained the provisions of section 263 in the following manner :-

"A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo motu 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 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 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 apply 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 and Co. v. S.P. Jain [1957] 31 ITR 872, the High Court of Karnataka in CIT v. T. Narayana Pai [1975] 98 ITR 422, the High Court of Bombay in CIT v. Gabriel India Ltd. [1993] 205 ITR 108 and the High Court of Gujarat in CIT v. Smt. Minalben S. Parikh [1995] 215 ITR 81 treated loss of tax as prejudicial to the interests of the revenue.

Mr. Abraham replied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company v. CIT [1987] 163 ITR 129 interpreting "prejudicial to the interests of the revenue". The High Court held (page 138). "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 the 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 in law and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated 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 v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).

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 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, that 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 CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466, does not arise for consideration. It is evident from the order of the High Court that the 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'."

In the light of the guidelines emerging out of the above decision and in the light of the factual details available on the assessment records it cannot be said that the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue as far as the issue relating to the sale of warrants to Essar Shipping Ltd. is concerned. The learned Commissioner seems to have made an observation that the Assessing Officer failed to verify whether the transaction in question fell in the category of speculative transaction for making a proper assessment. We do not agree with the learned Commissioner that the transactions in question can result in a speculative transaction within the meaning of section 43(5) of the Act. The Assessing Officer has clearly examined the transaction within the realm of capital gain in the light of the provisions of law applicable in both provisions of section 47(iv) as well as having regard to the fact that the acquisition of the warrant was at no cost and the principle of B.C. Srinivasa Setty (supra) will conclude the issue in favour of the assessee. We do not subscribe to the view of the Commissioner that the Assessing Officer failed to notice that the subject warrants were shown in the balance-sheet as assets and no value was ascribed thereto. The fact that the warrants were acquired at no cost is manifest in the manner in which the assets stand disclosed in the balance-sheet. No amount of examination would have led the Assessing Officer to another conclusion than the one he reached having regard to the facts of the case.

15. In view of the above we agree with the contention of the assessee that the order of the Commissioner to hold the sale of warrants to the subsidiary company as part of the speculative transaction is not based on correct interpretation of the provisions of section 43(5) of the Act and we have no doubt in our mind that the right to apply for the share is a right conferred on him and itself can constitute a capital asset as held by the Punjab High Court in Hari Bros. (P.) Ltd.'s case (supra).

16. As regards the other issue relating to certain errors recorded by the Commissioner in relation to deduction under section 80M the learned counsel did not seriously make any submissions. Any how it is a matter which needs some verification. If there is an incorrect allowance the same can be corrected by the Assessing Officer upon verification. To enable this we sustain that part of the order of the Commissioner of Income-tax in relation to deduction under section 80M of the Act.

17. In the result, appeal is to be treated as partly allowed.