The Judgment of the Court was delivered by

K.S Paripoornan, J.:— At the instance of an assessee to income-tax, the Income-tax Appellate Tribunal (in short,” the Tribunal”), has referred the following two questions of law for the decision of this court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was evidence before the Commissioner of Income-Tax that the assessment order was erroneous and prejudicial to the interests of the 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?”

2. The respondent is the Revenue. The assessee is a public limited company. We are concerned with the assessment year 1983–84, for which the accounting period ended on February 28, 1983. The assessee-company was owning a rubber estate called” Skinnerpuram Estate”. During the relevant accounting period, on July 18, 1982, the assessee-company entered into an agreement with a firm by name “Supriya Enterprises” for the sale of the estate for a consideration of Rs. 210 lakhs. It was agreed that 699 acres of rubber plantation would be transferred to the purchaser either in portions or as a whole. As per clause 2 of the agreement, the buyer paid Rs. 5 lakhs on March 19, 1982, as advance and this amount is to be forfeited in case of default. The balance of the sale consideration should be paid in instalments—on or before September 22, 1982, Rs. 90 lakhs, on or before December 31, 1982, Rs. 70 lakhs and the balance of Rs. 45 lakhs on or before April 30, 1983. In proportion to the payment of instalments, the release of the estate was also contemplated in portions at three stages—191 acres in the first instance, next 200 acres, and 306 acres last. The buyer was required to settle all the benefits due to the employees. The agreement is annexure A, dated July 18, 1982. The buyer (purchaser) could not adhere to the terms of the agreement. By letter dated August 13, 1983, the purchaser prayed for extension of time for payment of the consideration. The time of payment of the instalments was requested to be extended as November 15, 1983, for the first instalment, December 15, 1983, for the second, and January 15, 1984, for the last. The purchaser undertook to pay the damages for loss of agricultural income and other liabilities which they had undertaken to pay as per the company's letters. The assessee-company agreed to extend the time, but stipulated that the purchaser shall pay the company the amount required for payment of salary to estate department, visiting manager, two additional conductors, supervisors, field workers and security personnel, etc., from May 1, 1983, till the entire sale consideration was paid. This can be seen from the resolution of the board dated September 25, 1983, annexure B. The assessee which was conducting rubber tapping had to stop the same in view of the above agreement and they suffered loss on account of the stopping of tapping. The purchasers, as per the modified agreement, paid the assessee an amount of Rs. 3,66,649 and the assessee-company credited the said amount in its accounts under the head “Damages and compensation realised for the loss of agricultural income”. The assessee-company filed its original return on November 15, 1983. The case was posted to October 28, 1985. The Income-tax Officer passed an order on October 31, 1985, since it was a time-barring assessment. The return was accepted and the assessment was closed as ‘N.A’ by order dated October 31, 1985. The assessment order dated October 31, 1985, is extracted in paragraph 13 of the order of the Tribunal. The Commissioner of Income-Tax examined the assessment records and came to the conclusion in suo motu revision proceedings that the order passed by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the Revenue for the reasons contained in the show-cause notice dated January 11, 1988. According to the Commissioner of Income-Tax, the sum of Rs. 3,66,649.89 credited to the trading account under the head “Damages and compensation realised for the loss of agricultural income” was chargeable to tax under the head “Other sources” and the Income-tax Officer passed the order of assessment as “nil assessment” dated October 31, 1985, without applying his mind and reckoning the above. After hearing the assessee, the Commissioner of Income-Tax, by annexure D order dated February 9, 1988, held that the receipt of Rs. 3,66,649 by the assessee-company from Messrs. Supriya Enterprises is totally unconnected with any agricultural operations or activities and that the same should have been assessed as income from other sources and that the loss of revenue in the form of escapement of tax arises in the instant case as a result of the wrong decision of the Income-tax Officer by negligence or by incorrect application of law which is prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. The assessee carried the matter by way of appeal before the Tribunal and assailed the suo motu order of revision passed by the Commissioner of Income-Tax under section 263 of the Income-tax Act. Two-fold contentions were urged before the Tribunal: (1) the proceedings initiated by the Commissioner of Income-Tax under section 263 of the Income-tax Act is illegal and unauthorised; (2) on merits, the receipt under consideration is really agricultural income in nature and could not have been brought to tax as income from other sources. After exhaustively considering the matter, the Tribunal, by order dated August 5, 1988, rejected both the pleas. The Tribunal held that the assessment order passed by the Income-tax Officer dated October 31, 1985, does not show that the officer had considered all the aspects of the case included in the agreement and the damages and compensation realised for loss of agricultural income of Rs. 3,66,649.29 Which was credited to the profit and loss account of the estate for the year which ended on February 28, 1983. So it should be inferred that the Income-tax Officer did not apply his mind to the case in all its perspective. Even the return of income did not contain any note regarding the nature of the receipt and why it was claimed as exemption from income-tax. In the circumstances, the assessment made by the Income-tax Officer without making proper enquiries called for in the circumstances of the case is erroneous and prejudicial to the interests of the Revenue. In the circumstances, the revision made by the Commissioner of Income-Tax is justified and legal. The Tribunal found that the order passed by the Income-tax Officer is erroneous in so far as it was prejudicial to the interests of the Revenue and, therefore, the assumption of jurisdiction by the Commissioner of Income-Tax under section 263 of the Income-tax Act was valid. On merits, the Tribunal referred to clause 17 of the agreement dated July 18, 1982, and held that the terms and conditions regarding the payment of sale consideration in instalments were not fulfilled by the purchaser and, therefore, the damage clause came into operation automatically and the assessee's own version of the nature of the income showed that the amount represented compensation for loss of agricultural income and the source for the said income is obviously the contract. Damages have to be paid to the assessee if there is violation of the terms and conditions of the payment of the sale consideration by the purchaser and in so far as the agricultural operations by way of tapping stopped in November, 1982, the receipt under consideration did not relate to agricultural operations carried on by the assessee. It was in the nature of interest for the delay in awarding compensation and was a revenue receipt. The appeal filed by the assessee was dismissed. It is thereafter at the instance of the assessee that the two questions of law, formulated hereinabove, have been referred by the Tribunal for the decision of this court.

3. We heard counsel. The two aspects stressed before the Tribunal were again stressed before us. Mr. P. Balachandran, counsel for the assessee, contended that the initiation of suo motu revisional proceedings under section 263 of the Income-tax Act by the Commissioner of Income-Tax was unauthorised and uncalled for. The expression “prejudicial to the interests of the Revenue” occurring in section 263 of the Income-tax Act should be understood as a “prejudice to the Revenue administration” and should involve acts or orders which were subversive of the administration of the Revenue. There must be some grievous error in the order passed by the Income-tax Officer which might set a bad trend or a pattern for similar assessment order and an order passed by the Income-tax Officer cannot be said to be prejudicial to the interests of the Revenue merely because it was in the assessee's favour and failed to bring to tax some more money. In this connection, reliance was placed on a Bench decision of the Madras High Court in Venkatakrishna Rice Co. v. CIT, [1987] 163 ITR 129, at pages 137 and 138. The second point raised by counsel was that the accounts of the assessee pointedly showed that the amount of Rs. 3,66,649 was received and credited by the assessee-company as damages and compensation realised for the loss of agricultural income and the receipt was only agricultural which could not be brought to tax under the Income-tax Act. The assessee had offered the said income for agricultural income-tax assessment and the sum of Rs. 3,66,649.29 was credited to the trading account of the company under the head “damages and compensation realisable for loss of agricultural income”. The amount so received should have been held to be” agricultural income” and not as “income from other sources” taxable under the Income-tax Act.

4. We will first deal with the plea based on the jurisdiction of the Commissioner of Income-Tax to revise an assessment under section 263 of the Income-tax Act. Section 263 of the Act enables the Commissioner of Income-Tax to examine the record of any proceeding under the Act and if he considers that any order passed therein by the Officer is erroneous, in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justified. The main thrust of the argument by counsel for the assessee was based on the decision of the Madras High Court in Venkatakrishna Rice Co.'s case, [1987] 163 ITR 129, at pages 137 and 138. Counsel for the assessee contended that the words “prejudicial to the interests of the Revenue” should be considered in a limited or technical manner and should not be construed as having a wide import. In the aforesaid decision, the Madras High Court held thus (at page 137):

“… the expression ‘prejudicial to the interests of the Revenue’ is not to be construed in a petty-fogging manner, but must be given a dignified construction. It may be noted that the use of the expression ‘Revenue’, in our opinion, is significant. It denotes some kind of abstraction or symbol in the same sense in which the expression ‘crown’ is used to distinguish it from any person enthroned. The interests of the Revenue is not to be equated to rupees and paise, merely. There is a biblical saying that we do not live by bread alone. Varying this saying, it may be said that the Revenue does not live by tax alone. In this sense, therefore, the interests of the Revenue are not tied up merely with realising as much revenue as possible, willy-nilly, merely looking to the productivity aspect of taxation. The jurisdiction of the Commissioner under section 263 is undoubtedly a supervisory jurisdiction. It is intended for interference in special cases to counteract orders which are erroneous as well as prejudicial to the interests of the Revenue. In this context, therefore, the expression ‘prejudicial to the interests of the Revenue’ 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. There might be cases where the Commissioner might wish to interfere with an order of the Income-tax Officer in order to safeguard the fair name and reputation of the Income-tax Department without any thought of going into the particular aspects of the assessment. Assessments which are mala fide, politically and communally motivated may be, however, set aside as being prejudicial to the interests of the Revenue. It is unnecessary for us to illustrate the point any further. All that we wish to observe is that the scope of the interference under this section is not to set aside merely unfavourable orders and bring to tax some more money to the treasury. Nor is the section meant to get at sheer escape-ment of revenue which, as is well-known, is taken care of by provisions elsewhere in the Act such, for instance, as section 147 of the Act. The prejudice must be prejudice to the Revenue administration.”

5. Based on the above observation, it was argued that neither the Commissioner of Income-Tax nor the Tribunal has found that, in this case, the error committed by the Income-tax Officer, if any, might set up a bad trend or pattern for similar assessments and that this is not a case where any prejudice could be said to have resulted to the Revenue administration. In the absence of such result, the suo motu revisional proceedings passed by the Commissioner of Income-Tax under section 263 of the Income-tax Act is unjustified and unauthorised in law.

6. We are unable to accept the above plea. In our opinion, the language used in section 263 of the Income-tax Act has a very wide import. Similar words occurred in the predecessor Act in section 33B of the Indian Income-tax Act, 1922. In one of the earliest decisions, Dawjee Dadabhoy and Co. v. S.P Jain, [1957] 31 ITR 872 (Cal) at page 881, Sinha J., interpreted the words “prejudicial to the interests of the Revenue” thus:

“The words ‘prejudicial to the interests of the Revenue’ have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. It can mean nothing else.”

7. A Bench of the Gujarat High Court in Addl. CIT v. Mukur Corporation, [1978] 111 ITR 312, at page 323, quoted the above observations with approval. Similarly, a Bench of the Allahabad High Court in Addl. Commissioner Of Income-Tax, Lucknow v. Saraya Distillery, [1978] 115 ITR 34, at page 38, quoted the observations of Sinha J. of the Calcutta High Court with approval. In Smt. Tara Devi Aggarwal v. CIT, [1973] 88 ITR 323, the Supreme Court had occasion to interpret the words “prejudicial to the interests of the Revenue” that occurred in section 33B of the Indian Income-tax Act, 1922. In that case, an assessee was assessed on an income voluntarily returned by him. As a matter of fact, income was not earned by the said person and was not assessable. It was found that the assessee in that case returned the income in order to assist someone else who would have been assessed to larger amounts. The question arose whether, in a case where an assessee is assessed on an income voluntarily returned, the assessment can be said to be prejudicial to the interests of the Revenue. A plea was put forward that the Commissioner had no jurisdiction to cancel the assessment made by the Income-tax Officer inasmuch as it cannot be said that, in a case where an assessee has been assessed to tax, the assessment or proceeding was prejudicial to the interests of the Revenue on the ground that no assessment could have been made in respect of the income of which the assessee had made a voluntary return. Repelling the plea, the Supreme Court held in the said decision, Smt. Tara Devi Aggarwal's case, [1973] 88 ITR 323, at page 328, thus:

“The words of the section enable the Commissioner to call for and examine the record of any proceeding under the Act and to pass such orders as he deems necessary as the circumstances of the case justify when he considers that the order passed was erroneous in so far as it is prejudicial to the interests of the Revenue. It is not, as submitted by the learned advocate, prejudicial to the interests of the Revenue only if it is found that the assessment for the year was disclosed on the basis that an income had been earned which is assessable. Even where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assist someone else who would have been assessed to a larger amount, an assessment so made can certainly be erroneous and prejudicial to the interests of the Revenue. If so—and we think it is so—the Commissioner under section 33B has ample jurisdiction to cancel the assessment and may initiate proceedings for assessment under the provisions of the Act against some other assessee who according to the income-tax authorities is liable for the income thereof.”

8. The Supreme Court followed its earlier decision in Rampyari Devi Saraogi v. CIT, [1968] 67 ITR 84. We are of the view that the aforesaid observations of the Supreme Court justified the interpretation placed on the crucial words by the Calcutta, Gujarat and Allahabad High Courts. It is to the effect that the words “prejudicial to the interests of the Revenue” are of wide import and that they should not be limited to a case where the order passed by the Income-tax Officer can be considered to be one prejudicial to the Revenue administration as such. With great respect to the judges of the Madras High Court, we are unable to concur with the observations contained in the Bench decision in Venkatakrishna Rice Co.'s case, [1987] 163 ITR 129 (Mad) at pages 137 and 138, and, in our opinion, the view expressed in the said decision is not in accord with the decision of the Supreme Court in Smt. Tara Devi Aggarwal's case, [1973] 88 ITR 323, wherein the words “prejudicial to the interests of the Revenue” have been given a wide import and the matter had been viewed in a broad perspective. Indeed, a Bench of the Madras High Court in Hindu Bank Karur Ltd. v. Addl. CIT, [1976] 103 ITR 553, at page 558, held that the question whether an order of the Income-tax Officer is prejudicial to the interests of the Revenue would depend upon the facts of each case and there can be no universal formula applicable to finding out any such prejudicial error. The court further observed thus (at page 558):

“It would be seen that the prejudice to the Revenue was inferred in that case not from any finding that there was a loss of revenue, but from the mere fact that the procedure employed was defective.”

9. Perhaps, this earlier Bench decision of the Madras High Court in Hindu Bank Karur Ltd. v. Addl. CIT, [1976] 103 ITR 553, was not brought to the notice of the judges in the latter case, Venkatakrishna Rice Co.'s case, [1987] 163 ITR 129 (Mad). With great respect to the learned judges of the Madras High Court, we are unable to persuade ourselves to the view expressed by the Bench decision in Venkatakrishna Rice Co.'s case, [1987] 163 ITR 129 (at pages 137 and 138). In the “light of the above reasoning, we are of the view that the Tribunal was justified in holding that the Income-tax Officer, when he passed the order on October 31, 1985, did not make proper enquiries called for in the circumstances of the case, and the assessment order, quoted in paragraph 13 of the order of the Tribunal, did not show that the Income-tax Officer had considered all the aspects of the case including the agreement and the damages and compensation realised for the loss of agricultural income of Rs. 3,66,649.29. We hold that the Income-tax Officer has failed to apply his mind to the case in all its perspective and that the order passed by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue and, therefore, the assumption of jurisdiction by the Commissioner of Income-Tax under section 263 of the Income-tax Act was legal, valid and justified. We, therefore, answer question No. 1, referred to this court in the affirmative, against the assessee and in favour of the Revenue. We hold that there was material before the Commissioner of Income-Tax to hold that the assessment order was erroneous and prejudicial to the interests of the Revenue.

10. The second and only other question is regarding the taxability of Rs. 3,66,649 for the assessment year 1983–84. In this connection, clause 17 of the agreement dated July 18, 1982, entered into between the assessee-company and the purchaser is relevant.

“17. If the purchaser commits breach of any of the terms and conditions of this agreement it shall be open to the vendor to treat the agreement as repudiated by the purchaser and claim specific performance of the agreement and/or damages.”

11. After referring to clause 17 of the agreement aforesaid, and also the printed statement of accounts for the year ending February 28, 1983, the Tribunal held thus:

“The material furnished at the time of hearing amply show that the terms and conditions regarding the payment of sale consideration in instalments were not fulfilled by the purchaser and, therefore, the damage clause came into operation automatically. Admittedly, there is no provision in the agreement for payment of any damages or compensation for the loss of revenue on account of cessation of agricultural operations by the assessee. Clause 8 of the agreement clearly provides that time was of the essence of the contract and, consequently, any breach of the terms and conditions of the contract would give rise to a claim for specific performance and/or damages. As specified in the final statement of accounts, the assessee itself has shown the amount as relating to damages and compensation for the loss of agricultural income which has not been provided for in the contract. In other words, it is clear from the assessee's own version of the nature of the income that the amount represented compensation for loss of agricultural income, but it does not mean that itself is agricultural income in nature:… In this case, admittedly, the agricultural operations by way of tapping stopped in November, 1982, and, therefore, the receipt under consideration did not relate to any agricultural operations carried on by the assessee after that date.”

12. After stating as above, the Tribunal held that the source and basis of the amount obtained is obviously the agreement dated July 18, 1982. It was further held that the damages to be paid by the purchaser, Messrs. Supriya Enterprises, under clause 17 of the agreement arose directly from the failure of the terms and conditions of the payment of the sale consideration by the purchaser to the assessee-company and the amount of Rs. 3,66,649.29 represented compensation for the delay in receiving the instalments of sale consideration from the purchaser. It was further found that the assessee-company, admittedly, stopped the agricultural operations by way of tapping in November, 1982, and the receipt under consideration did not relate to any agricultural operations carried on by the assessee after that date. In the light of the above findings entered by the Tribunal which have not been questioned or assailed, we are of the view that the Tribunal was justified in holding that the sum of Rs. 3,66,649 was a taxable receipt for the year 1983–84. The basis for the receipt is important. It is based on the cause of action that arose by virtue of clause 17 of the agreement. The amount was paid solely for breach of contract. It represented damages. We are of the view that the amount received by the assessee is linked or related to the damages sustained by the assessee for breach of contract. It is compensation. It cannot and was not shown at any point of time that the amount was fixed or arrived at and quantified as loss of agricultural income and, admittedly, it cannot be so, as found by the Tribunal. In the instant case, the assessee-company stopped the agricultural operations in November, 1982, and the receipt of the amount in the instant case did not relate to any agricultural operations carried on by the assessee after the said date. The Tribunal was justified in holding that the Commissioner of Income-Tax was justified in directing the Income-tax Officer to assess the amount of Rs. 3,66,649.29 as income from other sources. We answer question No. 2 in the affirmative, against the assessee and in favour of the Revenue. Both the questions are answered against the assessee and in favour of the Revenue.

13. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.