Income Tax Officer must recalculate capital gains excluding escrow withdrawals, refund excess tax with interest

The Bombay HC allowed a revision petition challenging rejection of an application under Section 264. The court held that intimation under Section 143(1) is amenable to revisional jurisdiction under Section 264, contrary to the revenue's position. The matter was remanded to recalculate capital gains by excluding the proportionate amount withdrawn from escrow account from sale consideration. The court directed refund of additional tax paid with interest within two weeks of assessment order, unless revenue has other legal claims for adjustment. Fresh order to be passed within six weeks with personal hearing.

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Issues Involved:
1. Validity of the order under Section 264 of the Income Tax Act, 1961.
2. Computation of capital gains considering the escrow amount.
3. Applicability of Section 143(1) and Section 264 for revisional jurisdiction.

Summary:

1. Validity of the order under Section 264 of the Income Tax Act, 1961:
The petitioner challenged the order dated 23rd March 2016 passed by Respondent No. 1 under Section 264 of the Income Tax Act, 1961. The petitioner argued that the amount of Rs. 9,17,04,240/- withdrawn from the escrow account should be deducted from the capital gains computation. The court found that Respondent No. 1 erred in rejecting the petitioner's application and held that the impugned order was incorrect and had to be quashed and set aside.

2. Computation of capital gains considering the escrow amount:
The petitioner had sold shares and initially included the escrow amount in the capital gains computation. However, certain liabilities led to the withdrawal of Rs. 9,17,04,240/- from the escrow account, which the petitioner argued should reduce the capital gains. The court agreed, stating that the real income (capital gain) should be computed by considering the actual sale consideration received, which excludes the escrow amount withdrawn. The court emphasized that the full value of consideration for computing capital gains should be the net amount received after adjustments for liabilities as per the agreement.

3. Applicability of Section 143(1) and Section 264 for revisional jurisdiction:
The court addressed the issue that the petitioner's Return of Income (RoI) was processed under Section 143(1) of the Act, while in a similar case, the assessment was completed under Section 143(3). The court referred to its previous decision in Diwaker Tripathi v. Principal Commissioner of Income Tax, holding that intimation under Section 143(1) is amenable to revisional jurisdiction under Section 264. Consequently, the court quashed the impugned order and remanded the matter to Respondent No. 1 to pass a fresh order computing capital gains after reducing the escrow amount and allowing the refund of additional tax paid with interest.

Conclusion:
The court concluded that the petitioner should be entitled to a refund of excess tax paid due to the incorrect computation of capital gains. The Assessing Officer was directed to pass a fresh assessment order within six weeks, considering the reduced capital gains and allowing the refund with interest. The petition was disposed of with no order as to costs.

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