Section 263 of the Income Tax Act, 1961, stands as a custodian, guarding the integrity of the tax assessment process in India. Its origin can be traced back to the imperative need for a mechanism that could rectify orders perceived as both erroneous and prejudicial to the interests of the revenue. Its genesis lies in recognition of subjectivity of tax assessments which is coupled with intricacies of tax laws, can lead to decisions with adverse implications for revenue collection.
Section 263 acts as safeguard, acknowledging dynamic nature of tax assessments , providing a reviewing mechanism to ensure fairness, accuracy, and protection of the revenue’s legitimate claims. Essentially, it embodies the legislative commitment to a tax administration system that is both effective and just.
In essence, Section 263 is a response to the complexities of the tax landscape, acknowledging the delicate balance needed between empowering tax authorities and preventing potential errors. Through its existence, the section reflects commitment to maintaining integrity of the tax assessment process, acknowledging the ever-evolving nature of tax laws and the need for a mechanism that can adapt to changes in interpretations and protect the revenue’s interests.
Section 263 is not merely a provision for revision but very crucial component of Act ensuring that tax administration system remains robust, fair, and equipped to address the challenges arising in the course of tax assessments.
Now let us understand from very basic to technical functions of section 263 of Income Tax Act, 1961.
Basic Concept : –
Main Objective of Section 263: Primary purpose of Section 263 is to rectify orders that are not only erroneous but also have the potential to adversely affect the revenue’s interests. It provides a mechanism for the Commissioner to ensure correctness of orders passed by subordinate officers.
The Commissioner’s role extends beyond mere oversight; they serve as custodians of revenue. When an order is deemed “erroneous” and “prejudicial to the interests of the revenue,” the Commissioner’s revisionary power comes into play. “Erroneous” signifies a departure from the legal framework, while “prejudicial” pertains to circumstances that could diminish revenue rightfully owed to the government.
In simpler words, if the Commissioner thinks that an order issued by assessing officer is incorrect and could result in the loss of tax revenue for the government, the Commissioner has authority to take corrective action
From above basic understanding of section we can drive two key Triggers para are must for Revision of order passed its “ Erroneous and Prejudicial “
Now let’s see these two core principles lie at the heart of Section 263
“erroneous” and “prejudicial ”
An order is deemed “erroneous” if it violates the provisions of the Income Tax Act or if any relevant legal provisions are not correctly applied. However, it must be noted that mere difference of opinion between taxpayer and tax officer does not render an order “erroneous.”
Furthermore,
An order is considered “prejudicial to the interests of the revenue” if it results in an avoidance or reduction of tax liability that should have been rightfully assessed. This safeguards against situations where an order might inadvertently or deliberately harm the government’s revenue collection.
Initiating the Revision Process: Notice and Opportunity
Issuance of notice u/s. 263 of the Act, marks a critical step in a revisional process, providing taxpayer with an opportunity to respond and present their case. This procedure involves meticulous series of steps outlined in the statute to ensure fairness and transparency.
Identification of Erroneous Orders : Before issuing a notice, the Commissioner identifies orders that are deemed both “erroneous” and “prejudicial to the interests of the revenue”. This involves a comprehensive examination of an assessment order by Commissioner (self) or their designated representatives.
Initiation of Revision Proceedings: Once an order is identified for revision, the Commissioner initiates revision proceedings u/s. 263, proactive step taken by tax authority to rectify potential errors in the original assessment.
Notice Issuance: The Commissioner issues a notice to taxpayer, informing them of the intention to revise the order. The notice typically includes specific grounds on which the revision is contemplated. It serves as a communication tool, ensuring transparency in the revision process.
Providing Opportunity to be Heard : Notice provides taxpayer with a crucial opportunity to be heard. Its fundamental principle of natural justice, allowing the taxpayer to present their case, explain the grounds on which the original order is contested, and submit relevant evidence in their defence.
Firstly, upon receipt of the notice, it is crucial for the taxpayer to promptly acknowledge it and meticulously review the grounds for revision outlined by the Commissioner. Understanding the specifics of the issues raised lays the foundation for an effective response.
In responding to the notice, taxpayer should prepare detailed and well-structured written submission. This submission should address each ground for revision systematically, offering a clear and coherent explanation of the facts surrounding the assessment. Moreover, incorporating legal interpretations and citing relevant case laws, if applicable, can significantly bolster the taxpayer’s position. To complement explanations, the submission should include supporting evidence, such as financial records and transaction details, to substantiate the claims made. By responding diligently and presenting a well-substantiated case, the taxpayer not only enhances the chances of a positive outcome but also plays a pivotal role in contributing to a fair and just resolution of the revision proceedings.
Commissioner’s Consideration :
- Review of Taxpayer’s Response: Commissioner carefully assesses the taxpayer’s written response, examining explanations, evidence, and legal interpretations.
- Assessment of Factual and Legal Aspects: The Commissioner evaluates the accuracy of the taxpayer’s claims and checks the legal alignment with the Income Tax Act provisions.
- Consideration of Case Laws: If the taxpayer cites case laws, the Commissioner reviews their relevance and contribution to the argument.
- Examination of Original Assessment Order: Simultaneously, the Commissioner critically re-examines the original assessment order for factual correctness and legal soundness.
- Decision-making Process: Based on the review, the Commissioner decides whether to confirm, modify, or set aside the original order.
- Communication of Revision Order: A revision order is issued, outlining findings, reasons for revision, and any modifications made to the initial assessment.
By summarizing basic to technical Section 263 serves as critical tool designed to rectify orders that are not only erroneous but also have the potential to adversely impact the revenue’s interests. The Commissioner, in wielding this power, acts as a custodian of revenue, ensuring the correctness of orders passed by subordinate officers. Two key triggers for the revision process are orders deemed “erroneous” and “prejudicial.” An order is considered “erroneous” if it violates the provisions of the Income Tax Act, and it is “prejudicial to the interests of the revenue” if it results in tax avoidance or reduction rightfully owed to the government.
Initiating revision process involves the issuance of notice to the taxpayer, providing them with a crucial opportunity to respond and present their case. This procedure ensures fairness and transparency, involving a meticulous examination of orders by the Commissioner. The taxpayer’s response becomes pivotal in this process, with a detailed and well-structured submission addressing each ground for revision, incorporating legal interpretations, and citing relevant case laws. The Commissioner’s consideration involves a comprehensive review of the taxpayer’s response and the original assessment order, assessing factual accuracy, legal alignment, and the relevance of case laws. Ultimately, the Commissioner issues a revision order, outlining findings and any modifications to the initial assessment, contributing to the fairness and justice of the tax administration system.
Revision vs. Appeal:
– It’s crucial to distinguish between revision under Section 263 and the appellate process. Revision is not an appeal; it is a corrective measure undertaken by the Commissioner to protect the revenue’s interests.
Other Similar sections under income tax Act.
Section 264 – Revision by the Principal Commissioner or Commissioner : –
Section 264 grants the Principal Commissioner or Commissioner of Income Tax the power to revise orders. This provision allows for the revision of orders that are prejudicial to the interests of the taxpayer.
Recent Case laws in favour of assessee : –
In the assessment year 2018-19, an assessee-firm engaged in the business of letting out properties offered its income under the head ‘income from business and profession.’ The Assessing Officer, after conducting exhaustive inquiries and considering detailed submissions by the assessee-firm, accepted this approach. The assessing officer’s stance was deemed plausible and supported by CBDT Circular No. 16/2017 dated 25-4-2017, which guided the treatment of such income. Despite this, the Commissioner, utilizing the powers under section 263 of the Income-tax Act, took a divergent view. The Commissioner contended that the income should be categorized as rental income rather than business income, deeming the original order by the Assessing Officer as erroneous and prejudicial to the interests of revenue.
The legal position was contested, asserting that Section 263 does not empower the Commissioner to impose his view over a judicious view adopted by the Assessing Officer unless the latter’s view is proven to be legally unsustainable. The conclusion favoured the assessee, emphasizing that the assessment completed by the Assessing Officer was based on thorough inquiries and detailed submissions. Furthermore, the Assessing Officer’s stance was considered plausible and in line with the guidance provided by CBDT Circular No. 16/2017 dated 25-4-2017. Consequently, the assessment was deemed not erroneous under the provisions of Section 263. This legal outcome was in favour of the assessee.
In the assessment year 2017-18, Section 68, in conjunction with Section 263, of the Income-tax Act, 1961, came into play regarding a cash credit. The assessing officer had initially passed an assessment order under Section 143(3). Subsequently, the revision jurisdiction under Section 263 was invoked, contending that the assessee had failed to substantiate, with evidence, the source of a cash deposit of Rs. 3.85 crores made during the demonetization period. The assessing officer, despite dissatisfaction with the assessee’s reply, had only made an addition of 20% of the deposited cash.
Upon examination, it was observed that the assessment order had thoroughly investigated the cash deposit during demonetization, and the assessee consistently asserted that the deposit was a result of cash sales. The assessee demonstrated that the deposit was not abnormal but rather a consequence of its substantial cash-based business, particularly during the demonetization year. The assessing officer duly considered these explanations, noting the significant increase in sales during the demonetization period. The assessing officer, therefore, deemed it appropriate to treat 20% of the sales as unexplained credits.
The legal conclusion favored the assessee, determining that the revision invoked by the Commissioner, asserting that the assessment order was erroneous and prejudicial to the revenue, was not legally sustainable. The revision was set aside, rendering the decision in favor of the assessee.
Present case involve Section 50C and Section 263 of the Income-tax Act, 1961, were invoked. scenario involved the Principal Commissioner revising an assessment under Section 263 and grounds for revision were that the assessee had sold a piece of land at a value below what was considered by the authority for stamp duty. This raised concerns about the under-assessment of income to the extent of the difference.
However, upon examination, it was revealed that assessee had faced financial difficulties, leading to erosion of its net worth. Consequently, the assessee underwent SARFAESI proceedings. Importantly, it was clarified in the records that the sale of the land was not executed by the assessee but by secured lenders seeking to recover dues owed to them by the assessee.
Principal Commissioner failed to recognize these crucial facts when exercising powers under Section 263. The legal requirement for invoking Section 263 includes two conditions: the order should not only be erroneous but also prejudicial to the interest of revenue. In this case, since the revision was based on an incorrect understanding of the sale of the land and the financial circumstances of the assessee, the Tribunal rightly set aside the revision order.
Conclusion: In conclusion, Section 263 of the Income Tax Act, 1961, serves as a crucial tool for the Commissioner to rectify orders that are not only incorrect but also detrimental to the revenue’s interests. The jurisprudence around this section continues to evolve through judicial pronouncements, emphasizing the need for a balanced and judicious exercise of revisional powers.
This comprehensive understanding of Section 263 is essential for both taxpayers and tax professionals, as it sheds light on the intricacies of the revisional process and the principles governing its application.
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This article is not served as professional advice. You may not rely on the opinion expressed in this article to make a business or regulatory compliance-related decision. If you are looking for professional advice, please consult a professional. Any comments and/or suggestions concerning this article may be sent to dipak_fca@yahoo.in for any query feel free to whatsapp at +91 8000777854
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