CA Virat A. Bhavsar

CA Virat A. Bhavsar

Legislative Intent:

1. Section 263 of the Income-tax Act, 1961 (the Act) confers wide powers on the Principle Commissioner of Income Tax/Commissioner of Income Tax (Pr.CIT/CIT) to revise any assessment which is “erroneous and prejudicial to the interests of the revenue”. While the section is widely worded, Courts on have read in a number of checks and balances to ensure that the said power is not abused by the Commissioner.

2. Section 263 seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo motoproceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie The power of suo moto revision u/s 263(1) is thus in the nature of supervisory jurisdiction and same can be exercised only if the circumstances specified in section 263 exist. The power conferred u/s 263 of the Act presupposes;

i) Examination of records by the Pr. CIT/CIT

ii) Forming prima facie conclusion about prejudicialness in the order.

iii) Taking corrective action

Proceeding initiated in pursuance of direction of Pr. CIT/CIT and section 263:

3. The provision of section 263 gives absolute privilege to the jurisdictional Pr.CIT/CIT to assume suo moto jurisdiction to decide the prejudicialness in the orders passed by the Assessing Officer. It is to be noted that the over the years the scheme of Assessment has undergone tectonic changes. There have been instances of assignment of special powers to the Assessing officer in order to ensure that the Assessments are made in accordance with the provision of law. It is also matter of fact that superior authorities have been also empowered to step into the process of Assessment to facilitate proper enforcement of law by giving direction to the Assessing Officer and the Assessment proceeding is carried out either under their supervision or is completed with their approval. Therefore, broadly the can be two categories of the Assessment orders. One which is being passed by Assessing Office himself without the aid of designated higher Income Tax Authority and second which is being passed in pursuance of the supervision and guidance of the designated higher Income Tax authority.

4. Considering this tectonic transition of the Assessment process, it is essential to analyze as to whether the suo-moto power to review the orders by the Pr. CIT/CIT do absolutely be termed as unconditional and frivolous particularly in those cases where the Pr. CIT/CIT or higher authority play instrumental role in entire frame of Assessment proceeding.

5. Under the existing regime of Assessment, there are following categories of the  Assessment orders;

i) Regular Assessment Order u/s 143(3)

ii) Reassessment Order passed u/s 147

iii) Block Assessment Orders u/s 153A and 153C

iv) The Assessment Order passed u/s 143(3) read with 144BA

v) The Assessment Order passed u/s 143(3) read with 144C

Each of the above categories of the Assessment order displays unique and varied example of administrative functionality and therefore, it would not be proper to evaluate the scope of section 263 in all such orders passed by the Assessing office on same parameters. The Reassessment proceeding clearly stipulates that the power to reopen assessment u/s 147 is subject to fulfillment of the conditions laid down in section 148 to 152 of the Act. The provision of section 151 manifests that Assessing Officer must record valid satisfaction of escapement of income and it also requires proper approval of the designated Income tax authority. Similarly, the order passed u/s 153A and 153C requires not only recording of valid satisfaction (only in the case of proceeding initiated u/s 153C) but also the order is required to be passed after the appropriate approval of the Joint Commissioners of Income Tax (JCIT) u/s 153D. Similarly, the orders passed u/s 144BA and 144C are also passed in pursuance of specific direction and therefore, the term ‘any order’ u/s 263 can not be generalized.

Reassessment proceeding u/s 147 (Beyond period of 4 Years)  

6. The order of assessment passed u/s 147 per se is included in the scope of revisionary power u/s 263, yet it is essential to underline the principle of section 263 vis a vis scope and intent of the said provision and powers already conferred upon the Pr.CIT/CIT under the Act to evaluate the proposition that power u/s263 does not confer power to re-review. Sections 147 and 148 are charter to the revenue to reopen earlier assessments and are, therefore, protected by safeguards against unnecessary harassment of the Assessee. They are sword for the revenue and shield for the Assessee. Section 151 guards that the sword of section 147 may not be used unless a superior officer is satisfied that the Assessing Officer has good and adequate reasons to invoke the provisions of section 147. The superior authority has to examine the reasons, material or grounds and to judge whether they are sufficient and adequate to the formation of the necessary belief on the part of the Assessing Officer. If, after applying his mind, the Commissioner is of the opinion that the Assessing Officer’s belief is well reasoned and bona fide, he is to accord his sanction to the issue of notice under section 148.

7. The above proposition of law is well settled considering the various judicial pronouncements1. The process of getting appropriate approval of the Pr. CIT/CIT u/s 151 of the Act is therefore not mere mechanical process. The power vested in the Commissioner to grant or not to grant approval is coupled with a duty. The Commissioner is required to apply his mind to the proposal put up to him for approval in the light of the material relied upon by the Assessing Officer. The said power cannot be exercised casually and in a routine manner. The sanction issued by the Pr. CIT/CIT or JCIT therefore presupposes that the approving authority has to undergo detailed examination of all the records placed before him by the AO and evaluating the existence of valid reason of existence of escarpment of income. It can thus be asserted that process of examination of records by the Pr. CIT/CIT is already undergone at the time of sanctioning of the proposal for reassessment. The Pr. CIT/CIT is therefore cannot be said to have been deprived from examining the records as a part of their supervisory judicial power. It is well settled law that the Assessment order is not a mere scrap of paper2. The AO is well expected to pass the order in accordance with the law. In terms of the provision of section 147 read with 151 of the Act what emerges is that there is already a process of examination of records by the Pr. CIT/CIT which is sought to be examined while assuming jurisdiction u/s 263. Therefore, question would arise whether the power u/s 263 does really confer power to re-review same sets of records?  It is in this proposition, section 263(1) reads as under;

(1) The Principle Commissioner or Commissioners may call forand examine the records of any proceeding under the Act…….

The term suo-moto signifies any action on its own cognizance. The provision of section 151 on the other hand cast absolute duty on the Pr. CIT/CIT or JCIT to record satisfaction before sanctioning of reassessment. From the conjoined reading of section 263 and 151 of the Act, it is clear that power conferred u/s 263 of the Act covers power to review only those records which have never been examined by the Pr. CIT/CIT at any stage of the proceeding. Tough, the above contention is not raised before any authority or there is direct judgment on this issue, yet one cannot escape an opportunity in raising ground on this issue.

8. It is also pertinent to refer to the provision of chapter XIV-B of the Income Tax Act 1961 and in particular the provision of section 158BG which states that the Assessing office was required to take approval of the Pr. CIT/CIT before passing the Assessment order of block years. The provision was applicable prior to scheme of Assessment u/s 153A which has been formulated with effect from 1stJune, 2003.  The provision of section 158BG contemplates that before 1.01.1997, the Assessing Officer passing the order for the block years was required to take prior approval of Pr. CIT/CIT. The issue whether the order passed u/s 158BC in accordance with the provision of 158BG could be subjected to revision u/s 263 of the Act or not was came up for consideration before the Madras High Court3. The Madras HC had occasioned to deal with the issue whether the same rank officer can again review the order resorting the provision of 263 of not. While adjudicating the issue, the Madras HC held that

“Given the fact that the revisional jurisdiction of the Commissioner under section 263 or 264 enables the Commissioner to call for and examine the record of any proceedings under the Act and ‘record’ is defined under section 263 Explanation (b) to ‘include and shall be deemed to always have included all records relating to any proceedings under this Act’ available at the time of examination by the Commissioner and the approval under section 158BG also being part of the record in the passing of the order under section 158BC, the assessee’s contention that the same rank Officer cannot once again review an order passed under section 158BC made with the approval of the Commissioner has to be accepted”

9. The issue has been further examined and evaluated in several other judgments citing the said principles that once the order is passed by the Assessing Officer after getting the approval of Pr. CIT/CIT, same rank office ceases his power to review the same records and thus cannot then assume jurisdictions u/s 263 of the Act for amending the order.

10. What constitutes “prior approval” under section 158BG is of significant importance and this issue was came up for consideration before the Karnataka High Court5. The question posed before the High Court was whether the Commissioner can exercise his revisional jurisdiction under Section 263 of the Act in respect of block assessment order passed by the Assessing Authority when the Commissioner has accorded his approval to such order? In the context, the Karnataka High Court pointed out to the meaning of ‘approval’ as contained in Section 158BG. The HC held as under:-

“…The question arises if to make the said order, previous approval of the Commissioner is a condition precedent, was the Commissioner not expected to look into the draft block assessment order placed before him for approval to find out whether the said order is lawful and whether the said order is prejudicial to the interest of the revenue. If it was prejudicial to the interest of the revenue or if it is not lawful he was not obliged to accord approval. What he proposes to do under Section 263 of the Act, he should have done at the stage of approval. Because in a block assessment proceedings, the tax to be levied under Section 113 of the Act is 60% and it is in respect of an undisclosed income which will have serious consequences on the assessee, the Legislature thought it fit to introduce Section 158BG providing for previous approval to ensure that the said provision is not abused by the lower authorities. When the power of such approval is vested in a higher authority, when such higher authority approves an order of the lower authority, which means he has gone through the order of the lower authority, he has no reason to disagree he finds no fault with that order and therefore he confirms the order by his approval. It is to be seen that the statute has not used merely the word ‘approval’. The word used is ‘previous approval’. Therefore, unless the approval is previously taken, the assessment order would have no value at all. Therefore, when previous approval is a condition precedent and approval means to ‘agree’ i.e. to concur, to give mutual assent, to come into harmony, it is possible only after application of mind by the authority according approval”.

11. Though the decisions cited above was in the context of provision of section 158BG read with the section 158BC, yet the fundamental question that has been addressed in the cited cases is of the significant importance in deciding scope of review.  Once the higher authority examines the sufficiency and correctness of the records placed before it and approves it, the same authority cannot then said to have exercised suo moto power while exercising jurisdiction u/s 263 of the Act since it is examination of the same sets of records. In substance, it would tantamount to re-review of same records. Though, the provision of section 151 manifests recording of satisfaction before reopening of the Assessment, there is no bar on the Pr.CIT/CIT or JCIT in making further inquiry or conducting further examination based on same records. They can also suggest corrective actions/measures to be taken by the AO while discharging their supervisory judicial responsibility u/s151of the Act. it is important to refer to the provision of section 131 of the act which describes power regarding discovery, production of evidences etc. it is important to note that the legislature has accorded these powers which can be used for the purpose of the Act. Section 131 reads as under;

131. Power regarding discovery, production of evidence, etc.

(1) The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner , Commissioner (Appeals) , 54[Principal Chief Commissioner or] Chief Commissioner or 54[Principal Commissioner or] Commissioner and the Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C] shall, for the purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following matters, namely :—

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath,

(c) compelling the production of books of account and other documents; and

(d) issuing commissions.

From the above, it is clear that the Pr. CIT/CIT is already vested with power to make enquiry as they deems fit for the purpose of discharging their functional responsibility under the Act. Hence, it is not expected to assume that scope of section 151 is part of mere administrative function.  It sets same amount of duty on the Pr. CIT/CIT and therefore, it would not be wrong in saying that responsibility cast u/s 263 could be testified at the time of review of records for the first time since power are already vested with them.  The above Principe therefore cannot be ruled out in the case of Reassessment proceeding beyond period of 4 years. The possible litigation tough cannot be ruled out completely, yet one cannot undermine an opportunity to raise this aspect in hearing.

Explanation 2 to section 263(1)

12. Considering the above propositions, it is pertinent to analyze what could possibly be the position of various Assessments in the context of amended scope of section 263. This can be evaluated as under;

Scenarios Remarks
The order is passed without making inquiries or verification which should have been made In this proposition, it may be argued that the order is passed after getting approval and sanction of designated Income Tax Authority. The designated Income Tax Authority is bound to consider and examine the records and thus, the order passed either with the approval or JCIT/Pr. CIT or same is being passed after their approval, same clearly falls outside the purview of scope of clauses (a) to (c).
The order is passed allowing any relief without inquiring into the claim
The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119
The order has not been passed in accordance with any decision which is prejudicial to the Assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the Assessee or any other person Though this category of error may not directly be covered in the above proposition, and hence, provision of section 263 can be applied in this scenario.

Conclusion:

13. Considering the above, it can be argued as under;

i) In case of Reassessment proceeding imitated beyond the period of 4 years is subject matter of revision u/s 263:

The provision of section 151 additionally requires valid approval of the Pr. CIT/CIT apart from failure on the part of the Assessee to make true and complete disclosure of facts. In this proposition, it can be asserted that since the Pr. CIT/CIT having already examined the records while sanctioning reassessment u/s 147 of the Act, the same set of records cannot be reviewed again u/s 263. This proposition can be examined and evaluated in light of the Madras HC judgment.  It is also not out of place to mention that Explanation 2 to section 263 cannot said to be directly applicable also.

ii) In the case of Reassessment proceeding imitated within the period of 4 years with the approval of JCIT and said order is subject matter of revision u/s 263:

The approval of JCIT is a condition precedent. In this proposition though there is no clear law, it can be analyzed that as per Explanation-1 to section 263(1), the legislature has included only those orders which are passed in pursuance of direction of JCIT u/s 144A of the Act or which are specifically assigned to JCIT by any order of the CBDT/CIT. Thus, prima facie only order passed by the JCIT u/s 144A is not immune from the provisional power u/s 263 of the Act6.  The provision of section 263(1) is however silent on the issue of order sanctioned by the JCIT. The order passed in pursuance of direction of the JCIT is nonetheless an order which is passed as per the direction and guidance of the superior authority and thus, it is a reasoned order. Thus, one cannot completely overlook possibility of arguing that the said order would completely fall outside the purview of deemed erroneous order as per the Explanation 2 to section 263 introduced by the Finance Act 2015.

iii) Block Assessment proceeding u/s 153A and 153C:

These Assessments are predominantly the assessment in pursuance of search u/s 132 of the Act. The issue regarding scope of Assessment is not free from disputes. Yet, in the context of section 263, it is important to address the provision of 153D. In terms of the provision of section 153D it is mandated that the order u/s 153A or 153C of the Act cannot be passed without prior approval of the JCIT.  The provision of 153D reads as under;

‘153D. Prior approval necessary for assessment in cases of search or requisition.—No order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner in respect of each assessment year referred to in clause (b) of section 153A or the assessment year referred to in clause (b) of sub-section (1) of section 153B, except with the prior approval of the Joint Commissioner.”.

In the above scenario, one can certainly evaluate the proposition laid down in the Madras and Karnataka HC cited in the context of section 158BG and para (ii) stated herein above. The order passed by the AO after approval of JCIT is not erroneous order. Therefore, one can also argue that this order cannot be branded as erroneous.

iv) Assessment in pursuance of direction u/s 144BA:

The provision of section 144BA manifests that the Assessing Officer at any stage of the assessment or reassessment proceeding may refer the matter to the Pr. CIT/CIT in case he considers that it is necessary to declare  an arrangement as an impermissible avoidance arrangement in accordance with the provision of chapter X-A. The provision of section 144BA thus clearly stipulates that the Assessing office cannot pass the order without prior approval of the Pr. CIT/CIT. In view of the above discussion, it would be fair order is also beyond the scope of section 263.

v) Similarly, Assessment proceeding in pursuance of direction u/s 144C can also be said to be proceeding in pursuance of direction of Pr. CIT/CIT and hence it can be evaluated considering the above principle and thus, the Pr.CIT/CIT lacks complete jurisdiction in such assessments.

Concluding remarks:

14. The legislature intent of section 263 is to ratify the orders passed by the Assessing office causing revenue loss resulting from erroneous order. The mechanism is well defined yet the power conferred to the Pr. CIT/CIT is being widely used in recent time. The Pr. CIT/CIT have also started assuming jurisdiction u/s 263 on the premise of newly inserted Explanatipon-2 brought in by the Finance Act 2015. Certainly, that was neither the intent of legislature nor it was instrumented for blanket use. The above proportion is however not free from possible litigation, since there is no direct decision on this issue.  The scope of section 263 is not curtailed since the Pr. CIT/CIT possesses its right to judicially review the orders of the assessment at any stage.

Disclaimer

The contents of this document are solely for informational purpose. It does not constitute professional advice or recommendation of author. The authors neither accepts any liabilities for any loss or damage of any kind arising out of any information in this document nor for any actions taken in reliance thereon. Readers are advised to consult the professional for understanding applicability of this newsletter in the respective scenarios. While due care has been taken in preparing this document, the existence of the mistakes and omissions herein is not ruled out. No part of this document should be distributed or copied (except for personal, non-commercial use) without written permission of author.

1. Amrlal Bajaj v ACIT (2013) 37 taxmann.com 7 (Mum Trib.); Hirchamd Kanuga v DCIT (2015) 56 taxmann.com 199 (Mumb. Trib.);  Chanchal Kumar Chatterjee ITO [1974] 93 ITR 130; Lakhmani Mewal Dasv. ITO [1975] 99 ITR 296; Arjun Singh v. CIT [2000] 246 ITR 363; United Electrical Co. (P.) Ltd. v. CIT [2002] 125 Taxman 775

2. CIT v. Jet Speed Audio P Ltd, Appeal No.285 of 2013

3. Srinivasan v ACIT (2013) 29 taxmann.com 279 (Mad)

4. CIT v Smt.Annapoornamma Chandrashekhar (2012) 17 taxmann.com 120 (Kar)

5. Daulatram Chhotwani v CIT (2007) 293 ITR 123(MP); T.N.Civil Supplies Corporations Ltd. v CIT (2003) 260 ITR 82 (SC)

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