Explanation 2 to section 263 – Circumstances when an order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of revenue – Need for clarification

Issue/Justification

Section 263(1) provides that if the Principal Commissioner or Commissioner considers that any order passed 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 an enquiry pass an order modifying the assessment made by the Assessing Officer or cancelling the assessment and directing fresh assessment.

Explanation 2 is being inserted in section 263(1) w.e.f. 01.06.2015 to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which, should have been made;

(b) the order is passed allowing any relief without inquiring into the claim;

(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119;

or

(d) the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

Probable hardship

The language of the Explanation gives scope for multiple interpretations and hence, can be the subject matter of  litigation. It is possible that there may be cases where the Assessing Officer makes inquiries to his satisfaction, but it may be inadequate in the opinion of the Commissioner. Also, it is not clear as to the point of time when it must be seen whether the order has been passed by the Assessing Officer in accordance with any direction or instruction of the CBDT under section 119 or in accordance with any decision rendered by the jurisdictional High Court or Supreme Court – whether at the time of passing of the order by the Assessing Officer or at the time when the Commissioner invokes his jurisdiction under section 263. It may be possible that the order passed by the Assessing Officer is not in accordance with the decision of the Supreme Court or jurisdictional High Court pronounced after passing of such order.

Further, since the amendment has already been made applicable from 1st June 2015, it needs clarification whether the same would be applicable only in cases where the order of the Assessing Officer is passed on or after that date; or whether the amended provisions would get attracted even if the order is passed before that date but the revisionary proceedings are pending before the Commissioner/Principal Commissioner on that date.

Suggestion

It is suggested that appropriate clarification may be issued by way of a circular or otherwise to ensure clarity on the aforesaid issues and reduce the discretionary exercise of revisionary powers by the Commissioner/Principal Commissioner.

Further, clause (a) of Explanation 2 to section 263(1) providing that an order would be deemed to be erroneous in so far as it is prejudicial to the interest of revenue, if it is passed without making inquiries or verification which should have been made, may be removed, since the condition is very subjective.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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