Understanding of revisionary powers of the Principal Commissioner or Commissioner to revise any assessment under section 263 which is ‘erroneous and prejudicial to the interests of the revenue’.
Section 263 of the Income-tax Act, 1961 (herein after referred to as “the Act”) confers wide powers on the Principal Commissioner or Commissioner to revise any assessment which is “erroneous and prejudicial to the interests of the revenue”. It confers the power upon the Principal Commissioner or Commissioner to call for and examine the records of a proceeding under the Act and revise any order if he considers the same to be erroneous and prejudicial to the interests of the revenue. The law of section 263 has been comprehensively laid down by the judicial authorities in a number of decisions. This article discusses various aspects related to revision under section 263 and its practical applicability.
Invoking of section 263 – Intent
To give powers to the Principal Commissioner or Commissioner to call for and examine the assessment records and verify the records to see whether the records reveal that the order passed by the Assessing Officer is erroneous in so far as prejudicial to the interest of revenue. The object is not merely to set aside wrong orders, and to bring to tax more money but to keep watch and vigil on revenue escapement
Legislative Background – Section 33B of Income-Tax Act, 1922
The 1922 Act as enacted originally did not have provisions relating to revision, but introduced from the year 1948. There was no reference to any assessment year in section 33B. This provision was subject to the limitation that he cannot revise an order after the expiry of two years from its date.
Origin of section 263 of the Income-tax Act
The Revenue has no right to appeal against assessment order of the Assessing Officer, and, hence, section 263 has been created, whereby the Principal Commissioner or Commissioner can revise any order that is erroneous and prejudicial to interest of Revenue.
Order is erroneous in so far as it is prejudicial to the interests of the revenue
Section 263(1) provides that the Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act. If he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may pass such order thereon as the circumstances of the case justify. Before passing such order after – (a) giving the assessee an opportunity of being heard; (b) making or causing to be made such inquiry as he deems necessary. Such order may include
(i) an order enhancing or modifying the assessment; or
(ii) cancelling the assessment and directing a fresh assessment.
Such power shall extended and shall be deemed to have extended to the Principal Commissioner or Commissioner on any order passed by the Assessing Officer which has been the subject matter of appeal to such matters as had not been considered and decided in such appeal. The explanation to this section gives the list of orders as erroneous.
Kinds of orders which can be revised by the Principle Commissioner or Commissioner
Under section 263, the Principle Commissioner or Commissioner can revise the order of Assessing Officer only. Following orders are covered under section 263 can be revised :
(i) Order passed in any proceedings by the Assessing Officer
(ii) Intimation under section 143(1)(a)
(iii) Regular Assessment Order under section 143(3)
(iv) Reassessment Order under section 143(3) read with section 147
(v) Rectification order under section 154
(vi) Order for Communication under section 195(2)
(vii) Certificate under section 197(1)
(viii) Advance Tax Order under section 210
(ix) Assessment/ Refund from ITNS
Analysis of the provision
Sub-Section (1) to Section 263 starts with the words “the Principal Commissioner or Commissioner may call for any record and examine the record of any proceeding”. There are 3 essential ingredients of this part.
Firstly, that “the Principal Commissioner or Commissioner may call for”. Therefore it is the absolute discretion of the Principal Commissioner or Commissioner to revise an order passed by the Assessing Officer. He need not take the permission of any authority/court for exercising his powers. The condition precedent is that he has to apply his own mind and come to a definite conclusion, which has to be an independent act and not act on the directions of the CBDT or any other authority. – [See Sirpur Paper Mill Ltd. v CWT (77 ITR 6) (SC) and CIT, Shimla v. Green world Corporation (2009) 314 ITR 81 : 7 SCC 69 (SC)]
Secondly, “record” has been given a wide connotation to mean not only the record before the Assessing Officer during scrutiny proceedings, but also any such material/information coming into the possession of the CIT even after the passing of the Assessing Officer’s order, if such record/information conclusively proves the Assessing Officer’s order is erroneous in so far as prejudicial to the interest of the revenue.
Thirdly, he can exercise such discretion in relation to “any order” passed by the Assessing Officer. Such order has been construed as not necessarily an order passed under section 143(3). Example an order rejecting the registration of a firm or; dropping the assessment proceedings even though a return has not been filed. Once an order passed by the Assessing Officer has attained finality meaning thereby it affects the rights of an assessee, the Principal Commissioner or Commissioner has the authority to revise any such order.
Requirement for assuming revisional jurisdiction under section 263
The Principal Commissioner or Commissioner can exercise power of revision under section 263 if the following factors are present :
There must exist an written order, which is sought to be revised by the Commissioner.
(i) There are any proceedings under the Act
The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing 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 making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Any issue, which Assessing Officer has not considered in the assessment under section 143 (3) r.w.s. 147, can be brought to life by Commissioner in exercise of his powers under section 263. – [Spencer & Co. Ltd. v. ACIT (2012) 137 ITD 141 (ITAT Chennai)]
(ii) The assessing officer has passed an order in such proceedings
The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under the Income Tax Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue.
The Gujarat High Court in case of New Jagat Textile Mills (P) Ltd. v. CIT, has held as under:
(a) Section 263 of the Income-tax Act, 1961, empowers the Commissioner to take up for consideration ‘any order passed’ in any proceedings under the Act. In these circumstances, it is not possible to read the provisions as being limited to exercising revisional powers qua order of assessment only. It would take within its sweep even the orders wherein either the proceedings are dropped or the proceedings are filed.
(b) Therefore, once the twin conditions for exercise of jurisdiction under section 263 of the Act were shown to be fulfilled, the Commissioner was perfectly justified in taking action under the said provisions and exercising his revisional powers.” – [New Jagat Textile Mills (P) Ltd. v. CIT (2006) 282 ITR 399 (Guj)]
Words ‘any order’ under section 154 vs. ‘the order’ under section 263
The words ‘any order’ in section 154(1)(a) would mean even the reassessment order under section 147. It cannot be stated that both the expressions, ‘any order’ and ‘the order’, as occur in sections 154 and 263 respectively, would have the same meaning. The word ‘the’ clearly denotes the specific order, while the word ‘any’ would mean any order passed by the Income-tax Authority. – [Rastriya Ispat Nigam Ltd. v. ACIT (2015) 377 ITR 420 (AP)]
Assessment order passed under section 143(3) – Notice under section 154 issued by Assessing Officer but dropped – CIT can still pass order under section 263 since powers under sections 154 and 263 operates in different fields
In the case of CIT v. Ralson Industries Ltd. (2007) 288 ITR 322 : 207 CTR 201 : 198 Taxation 97 : 158 Taxman 160 : 2 SCC 326, the Hon,ble Supreme Court has held that revision proceeding under section 263 cannot be held to become bad only because subsequently, an order of rectification was passed by the assessing officer under section 154. In such cases, the consenting party should bring the subsequent development to the notice of the Commissioner so as to enable him to take same into consideration. The principle that when an authority having discretionary power exercises the same for unauthorized purpose or on consideration of irrelevant facts, the same must be held to be bad in law is to be applied only in administrative jurisdiction; it cannot be applied in cases where an authority exercises a judicial or a quasi judicial function. Further, the lower authority is bound by the order passed by the higher authority keeping in view the principles of judicial discipline. (Related Assessment year : 1992-93).
In the case of Pentamedia Graphics Ltd. v. ACIT (2012) 17 ITR 302, the ITAT Chennai has held that the order passed by the authority, which is subordinate to the Commissioner, to give effect to the orders of the Tribunal is covered under the phrase “any order”. Thus, invoking of power of revision under Section 263 by the Commissioner is within the permissible limits of the law. –
In the case of Smt. Bhartiben M. Kelawala v. CIT (2011) 128 ITD 4, the ITAT Ahmedabad has held that the word ‘order’ mentioned in section 263 which can be the subject-matter of revision by the Commissioner would mean an order determining the rights and liabilities of the assessee under the Act.
(iii) The Principal Commissioner or Commissioner is of the opinion that such order is erroneous and prejudicial to the interest of the revenue
Provisions of section 263 can be invoked only when the twin conditions are satisfied i.e. order should be both erroneous and prejudicial to the interest of the Revenue. It is a well settled law that to invoke the provisions of section 263 both the conditions that the order must be erroneous and prejudicial to the interest of Revenue must be satisfied.
Provisions of section 263 reads –
“(1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue.
Twin conditions
In the case of Surender Kumar Madan, Prop. Diamond Service Station v. ITO (2004) 179 Taxation 19, the ITAT, Jabalpur has held that the Commissioner would assume jurisdiction under section 263 only when both the conditions, namely, the order passed by the assessing officer was erroneous and the same was prejudicial to the interest of the revenue were fulfilled and if the order was not prejudicial, the powers under section 263 could not be invoked.
Phrase “prejudicial to the interest of Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer
The Hon’ble Supreme Court of India in case of Malabar Industrial Co. Limited v. CIT (2000) 243 ITR 83 (SC) has held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. It has further been held that an order passed without applying the principles of natural justice or without application of mind will also be erroneous. The Hon’ble Supreme Court has further held that the phrase “prejudicial to the interest of Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer and where the Income Tax Officer adopted one of the course permissible in law and it has resulted in loss of Revenue or where two views are possible and the Income Tax Officer has taken one view with which the ITA No. 2102/Del/2016 Assessment year: 2011-12 Commissioner does not agree, it cannot be treated as erroneous order “prejudicial to the interest of Revenue” unless the view taken by the Income Tax Officer is unsustainable in law.
If income is assessed assessed in wrong hands order is erroneous
In the case of Smt. Tara Devi Aggarwal v. CIT (1973) 88 ITR 323, the Hon’ble Supreme Court has held that 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 for a larger amount, an assessment so made can certainly be erroneous and prejudicial to the interest of the Revenue and in such a situation, the CIT has ample justification to exercise his revisional power to cancel the assessment and initiate proceedings for assessment against some other assessee who, according to the Income Tax authorities, is liable for the income thereof.
Explanation 1(a) to Section 263
For the purpose of this section, order passed by the Assessing Officer shall include: (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by Jt. CIT in the capacity of Assessing Officer.
Explanation 1(b) to Section 263 – Meaning of the term “record”
For the purpose of this section, “record” shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Commissioner or Commissioner.
Revision of orders prejudicial to revenue – Record – Wider scope
In the case of CIT v. K. Ramachandran (Dr.) (2004) 187 CTR 654 : 139 Taxman 320 (Mad.), it was held that ‘Record’ does not mean only ‘record’ available with ITO at time of passing of assessment order. It would include the records available with the Commissioner at the time of passing of the order by the Commissioner. (Related Assessment year : 1986-87).
In the case of CIT v. Shree Manjunathware Packing Products & Camphor Works (1998) 96 Taxmann 1, the Hon’ble Supreme Court held that “Record, connotation of Word record used in section 263(1) would mean record as it stands at the time of examination by commissioner and not as it stands at the time of order passed by Assessing Officer and, as such, Commissioner would be justified in invoking section 263 on the basis of valuation report submitted by DVO subsequent to assessment order.”
Explanation 1(c) to section 263 – Powers of CIT when the issue(s) is in appeal
Clause (c) of Explanation 1 to Section 263(1) has clarified that when the subject matter of revision is in appeal before the CIT(A), the CIT has no power to revise the same. This is because the powers of the CIT(A) are co-terminus to that of the CIT and the CIT(A) has the powers to enhance qua that subject matter. However, if the subject matter of revision is not in appeal before the CIT(A) and the Assessing Officer has not conducted any inquiry on those issues, then the CIT has the power to revise under section 263 so as to guard the interests of the revenue.
Explanation 2 to Section 263 – Deeming fiction
Explanation 2 has been inserted by the Finance Act, 2015 with effect from 01.06.2015. The explanation sets out what orders passed by the Assessing Officer constitute orders which are erroneous in so far as they are prejudicial to the interests of the Revenue. The Memorandum of Objects and Reasons to the Finance Bill, 2015 specifies that the issue of what constitutes orders erroneous and prejudicial to the Revenue is a contentious one. In view of such ambiguity, the Explanation was introduced to clarify what constitutes an erroneous order prejudicial to the Revenue. The order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue by virtue of the below mentioned appendages:
(a) When the order is passed without making inquiries or verification which should have been made;
(b) When the order is passed allowing any relief without inquiring into the claim;
(c) When the order has not been made in accordance with any order, direction or instruction issued by the CBDT under section 119; or
(d) When 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.
Order passed by Assessing Officer without making inquiries or verification [Clause (a) of Explanation 2 to Section 263(1)]
Clause (a) of Explanation 2 to Section 263(1) provides that an order shall be deemed to be erroneous if, in the opinion of the Principal Commissioner or Commissioner “the order is passed without making inquiries or verification which should have been made”.
In the case of Rissala Décor (P) Ltd. v. PCIT, Gurgaon (2020) 203 TTJ 521 : 186 DTR 73, the ITAT, Delhi dismissed the appeal of the assessee and it was held that the assessee has not produced any material during assessment proceedings to prove genuineness of share capital issued at premium. Revision order is held to be valid. (Related Assessment Year : 2014-15).
No proper enquiry was made in respect of unexplained investment, revision was held to be justified
In the case of Syed Abubacker Riyaz v. CIT (2018) 403 ITR 252, the Karnataka High Court, dismissed the appeal of the assessee and it was held that it was only during the enquiry under section 133(6) of the Act that unexplained investment in bank deposit was unearthed. If the enquiry which was required to be made by the Assessing Officer had not been done, the order has to be considered erroneous order prejudicial to the interests of the Revenue in terms of Section 263. No enquiry was made by the Assessing Officer as regards the retail business said to have been carried on by the assessee. Thus, the exercise of power under Section 263 by the Commissioner was justifiable. (Related Assessment year : 2010-11).
Order passed by Assessing Officer allowing any relief without inquiring into the claim [Clause (b) of Explanation 2 to Section 263(1)]
Clause (b) of Explanation 2 to Section 263(1) provides that an order shall be deemed to be erroneous if, in the opinion of the Principal Commissioner or Commissioner “the order is passed allowing any relief without inquiring into the claim”.
Where order has not been made in accordance with any order, direction or instruction issued by the Board under section 119 [Clause (c) of Explanation 2 to Section 263(1)]
Clause (c) of Explanation 2 to Section 263(1) provides that an order shall be deemed to be erroneous if, in the opinion of the Principal Commissioner or Commissioner “the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119”. In other words, the order has been made in violation of any order, direction or instruction issued by the CBDT under Section 119 of the Act.
Where 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 [Clause (d) of Explanation 2 to Section 263(1)]
Clause (d) of Explanation 2 to Section 263(1) provides that an order shall be deemed to be erroneous if, in the opinion of the Principal Commissioner or Commissioner “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.”. In other words, the order has been made disregarding any decision of the jurisdictional High Court or the Supreme Court, Farther, the Order is not made in conformity with the jurisdictional High Court or the Supreme Court.
Assessee is not eligible to claim any new benefit in assessment proceedings pursuant to section 263
In the case of ACIT v. ITW India (P) Ltd. (2010) 40 SOT 348, the ITAT Hyderabad, held that Only in cases where assessment order is erroneous and prejudicial to interest of assessee, assessment can be reopened under section 263, and thus assessee is not eligible to claim any new benefit in assessment proceedings pursuant to section 263.
Commissioner may correct both errors of fact and errors of law
In the case of Jubilent Organosys v. CIT (2004) 265 ITR 420, the Allahabad High Court has held that the Commissioner may correct both errors of fact and errors of law. His jurisdiction is not limited to correct errors of law alone as there is no such express restriction in the language of section 263. The only requirement is that the impuned order should be prejudicial to the Revenue.
Time limit for passing revision order under section 263 [Section 263(2)]
Normally, order under section 263 can be passed within a period of 2 years from end of financial year in which order sought to be revised was passed by the Assessing Officer.
In computing the period of 2 years, following periods shall be excluded.
(a) Period taken in giving an opportunity of re-hearing under section 129;
(b) Period during which proceeding under section 263 are stayed by an order/ injunction of any court.
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