Executive summary: This article analyses Sections 263 and 264 of the Income‑tax Act, 1961 (the Act). It discusses the statutory language, judicial interpretation, the twin conditions for invocation, procedural steps for the revenue and protections available to an assessee. Principal judicial precedents are explained and applied to practical scenarios, including a corporate case study and a numerical illustration. The primary objective is to provide a practitioner‑level, authoritative explanation that can be used for drafting replies, preparing legal arguments and advising corporate clients on litigation risk and remedies.
1. Introduction
Sections 263 and 264 occupy adjacent, yet distinct positions in Chapter XX of the Act. Both provisions permit senior authorities to revisit actions of subordinate authorities, but they pursue different public policy objectives and contain materially different pre‑conditions, limitations and safeguards. Section 263 is a revisional power exercisable by the Commissioner where an order passed by an Assessing Officer (AO) is found to be both erroneous and prejudicial to the interests of the revenue. Section 264 is a separate, limited revisionary power exercisable by specified higher authorities in relation to orders (other than those to which section 263 applies), either suo motu or on application by an assessee, subject to conditions and time limits.
2. Statutory text (extracts)
Section 263 (Revision of orders prejudicial to revenue) — in summary — empowers the Principal Commissioner or Commissioner to call for and examine the record of any proceeding under the Act and, if satisfied that an order passed by an authority subordinate to him is erroneous in so far as it is prejudicial to the interests of the revenue, to modify, cancel or direct fresh assessment. Section 263(2) contains a limitation period for issuance of such revisional orders.
Section 264 (Revision of other orders) — in summary — empowers the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner to call for and examine records of any order other than an order to which section 263 applies passed by an authority subordinate to him, and to revise it in certain circumstances, either on application by the assessee or on the authority’s own motion. Section 264 contains a one‑year time limit for initiation and other procedural safeguards.
3. Basic legal tests — twin conditions under Section 263
Section 263 will lie only when both of the following conditions are satisfied:
a) the order of the Assessing Officer is erroneous; and
b) the error is prejudicial to the interests of the revenue.
The phrase ‘erroneous’ imports an objective legal or factual error — for example, a finding based on no evidence, a mistake of law (such as ignoring a statutory provision), or a manifest arithmetic or legal misconception. ‘Prejudicial to the interests of the revenue’ requires an adverse financial consequence — an omission or wrong acceptance that results (or will result) in loss of tax legitimately due to the exchequer.
The twin‑test is settled by authoritative precedent which has repeatedly stated that absence of either condition defeats jurisdiction under Section 263.
4. How courts have described ‘erroneous’ and ‘prejudicial’
The Supreme Court has addressed the meaning of these terms on multiple occasions. The classic exposition of the twin conditions is found in leading case law where the Court emphasised that an order that merely represents an arguable or plausible view taken by the AO is not ‘erroneous’ within the meaning of section 263. If the AO has applied his mind and taken a possible view supported by materials on record and law, the Commissioner must not substitute his own view merely because he disagrees.
Conversely, if the AO has failed to make any enquiry on relevant material or has ignored binding law resulting in loss of revenue, such failure has been held to constitute an ‘erroneous’ order prejudicial to revenue and within the scope of section 263. (See illustrative case discussion below.)
5. Scope of Section 263 — what orders are amenable
Section 263 empowers revision of ‘any proceeding under this Act’ and lists examples including orders enhancing, modifying, cancelling an assessment, or modifying/cancelling an order passed under special provisions (for example, transfer pricing). The provision therefore extends to many orders passed by AO that directly determine tax liability. However, the scope is not unlimited: the order to be revised must be one passed by a subordinate authority and must satisfy the twin conditions referred above.
6. Section 264 — counterpart and differences
Section 264 is complementary to section 263 but carries important differences:
- Section 264 applies to orders other than those covered by section 263.
- Revision under section 264 may be initiated on an assessee’s application or suo motu by the higher authority.
- Section 264 contains a one‑year limitation for initiation; an assessee may apply to the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner seeking revision of an order.
The revising authority under section 264 cannot pass any order prejudicial to the assessee; its power is framed with the object of correcting non‑prejudicial errors and to provide a remedy to the assessee in specified circumstances.
Because section 264 is beneficiary in character, courts have interpreted it purposively to protect assessee rights while ensuring administrative fairness.
7. Time limits and limitation jurisprudence
Section 263(2) provides that no order shall be made after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. The Supreme Court has clarified that the relevant date for the limitation calculation is the date on which the revisional order is ‘made’ (i.e., passed) by the Commissioner and not the date of ‘receipt’ by the assessee. This distinction has important procedural consequences for contested cases. For section 264, the statutory period for initiation is generally one year (subject to grounds for condonation where permitted under the Act and on judicial principles).
8. Procedure — step‑by‑step for revenue (Section 263)
A practical checklist for the Commissioner (or Principal Commissioner) when invoking section 263:
1. Preliminary review — call for and examine the record of the assessment or order in question.
2. Form satisfaction — record a reasoned satisfaction in writing stating why the AO’s order is considered erroneous and how it is prejudicial to revenue.
3. Opportunity to be heard — afford the assessee a reasonable opportunity of being heard. The law is clear that a formal ‘show‑cause’ similar to s.147 is not strictly required, but the assessee must be put on notice and allowed to file written submissions and/or to be heard orally. (See jurisprudence discussed below.)
4. Inquiry and fact finding — conduct any limited inquiries necessary and examine the AO’s file, records and material to reach a working conclusion.
5. Speaking order — pass a reasoned, speaking order recording the precise factual findings and legal conclusions; the order must identify the specific error and the prejudice caused.
6. Directions — the Commissioner may (i) revise the order (enhance/modify), (ii) cancel the order and direct fresh assessment, or (iii) exercise other powers as permitted by law.
7. File and communicate — ensure the order is properly communicated and the AO is directed to take necessary action. The assessee has a statutory right to appeal to the ITAT against such order.
9. Procedure — step‑by‑step for an assessee responding to s.263
An assessee who receives notice/communication under section 263 should follow a disciplined response strategy:
1. Immediate review of the notice and the AO’s file — identify the grounds of alleged error and the scope of facts relied upon by the Commissioner.
2. Gather supporting documents and contemporaneous material that the AO considered — if AO applied mind and recorded reasons, demonstrate that a ‘plausible view’ was taken.
3. Reply in writing — file a focussed reply addressing the legal and factual allegations; point to binding precedents, plausible views and documentary evidence.
4. Attend hearing — ensure counsel or authorised representative attends and puts the assessee’s case succinctly before the revisional authority.
5. Preserve remedy — if an adverse revisional order is ultimately passed, be prepared to file an appeal to the ITAT; request stay or interim relief where available (judicial/tribunal relief) to avoid recovery while appeal is pending.
6. Consider writ remedy — where the revisional order is perverse or suffers grave jurisdictional infirmity, a writ petition before the High Court may be considered as an extraordinary remedy.
10. Key judicial precedents (illustrative)
1) Malabar Industrial Co. Ltd. v. CIT — the Supreme Court (reported at 243 ITR 83) laid down important principles relating to ‘erroneous’ and ‘prejudicial’ and emphasised that the Commissioner cannot simply substitute his opinion where the AO has taken a plausible view supported by the record. This decision has been foundational in drawing the line between a mere difference of opinion and an order that is actually erroneous and prejudicial. It remains a touchstone for courts and tribunals when testing the validity of s.263 orders.
2) Supreme Court decisions since Malabar have, at times, clarified nuances — notably the requirement of a reasoned order and that where the AO has undertaken a proper inquiry and recorded a plausible view, the Commissioner should not interfere. Subsequent authorities have also restricted routine remands and emphasised that the Commissioner should act on merits (making specific findings) rather than simply remanding the matter unless there is a demonstrable failure in inquiry.
11. Representative case studies
A. Ballarpur Industries (PCIT v. Ballarpur Industries Ltd., 2019) — the courts considered whether the revisional proceedings were legitimate on the facts, and the decision is a good study on the interplay of appellate fact‑finding and revisional jurisdiction. The case demonstrates how appellate findings and factual records influence a revisional jurisdictional analysis.
B. V‑Con Integrated Solutions (Pr. Commissioner of Income Tax‑1 v. V‑Con Integrated Solutions Pvt. Ltd., Supreme Court order 2025) — a recent authoritative pronouncement emphasised that the Commissioner cannot routinely remand an assessment back to the AO when the AO had inquired and reached a view; where the AO’s investigation is not shown to be an abject failure, the revisional authority should decide on merits and not issue a naked remand. This judgment is particularly important in current practice and constrains mechanical remands.
12. Numerical illustration
Assume an assessee (corporate) files a return where taxable income is computed at INR 100 crore. During assessment the AO accepts a deduction of INR 10 crore without detailed enquiry (reason: assessee’s claim). Tax rate assumed 25% (for illustration only).
- Tax as assessed = 25% of 90 crore = INR 22.5 crore
- If the AO had disallowed the INR 10 crore, taxable income would have been INR 100 crore and tax INR 25 crore — hence revenue shortfall is INR 2.5 crore.
If the Commissioner invokes section 263 and concludes that the AO’s order was erroneous and prejudicial, he may direct reassessment to bring the INR 10 crore back into tax. The practical consequences for the assessee could include: additional tax (INR 2.5 crore), interest under section 234A/234B/234C for delayed payment (amount depends on period), and possible penalty under relevant sections if concealment is found. The example shows the material monetary consequence that will engage section 263 and the importance for an assessee to defend on evidence and plausible view grounds.
13. Protections available to the assessee — checklist and best practice
1. Twin‑condition defence: demonstrate that the AO applied mind and took a plausible view.
2. Procedural fairness: point to absence of a meaningful opportunity to be heard or to defects in the notice/hearing process.
3. Limitation: show that the revisional order is barred by section 263(2) (two‑year rule) or, in relation to section 264, by the one‑year rule.
4. Doctrine of merger and pending appeals: if the issue is covered by an appeal already pending before an appellate authority, raise bar against revisional interference.
5. Challenge the absence of a speaking order — insist on factual findings and law being recorded; non‑speaking orders are vulnerable on judicial review.
6. Use interim measures: apply to the ITAT for stay of operations arising from the revisional order while appeal is pending; where appropriate, apply for writ relief on grounds of jurisdictional excess.
14. Section 264 — protections and limitations specific to assessee
Section 264 is, by its terms, protective of the assessee when invoked on the assessee’s application; the revising authority is not permitted to pass any order prejudicial to the assessee in response to such an application. The power is convenient for an assessee who believes an order of a subordinate authority is incorrect and wishes a reconsideration without pursuing appeal in strict timelines. However, courts have emphasised that section 264 cannot be used to re‑open matters where other efficacious remedies (like appeal) are available and that the authority must honor limitation and pendency bars.
15. Practical drafting tips — replying to a Section 263 notice
Begin with a factual narrative listing the precise dates, the AO’s steps and documents placed on record.
- Demonstrate application of mind by the AO: cite contemporaneous notes, questionnaire responses, witness statements and internal working papers.
- Produce legal authorities for the view taken by the AO; if there is binding precedent in the jurisdiction, emphasise it.
- If the Commissioner relies on new facts or documentary material not earlier in the AO’s file, insist that such material be placed on record and an opportunity to comment be given.
- Request a limited time for filing a detailed reply and for providing documents. Keep the reply concise but legally robust.
16. Remedies and appellate strategy
The immediate statutory remedy against an order of the Commissioner passed under section 263 or an order under section 264 is an appeal to the Income Tax Appellate Tribunal (ITAT). Where the assessee has strong grounds to establish failure of natural justice or jurisdictional excess, writ jurisdiction of the High Court may be invoked as an extraordinary remedy. For practical litigation strategy, a combined approach (appeal to ITAT; parallel application for stay of the operation of assessment/demand) is commonly deployed.
17. Conclusion
Sections 263 and 264 are powerful tools for the tax administration to correct manifest errors and to protect revenue. At the same time, they are tempered by statutory limitation periods, the twin conditions (for section 263), and by fundamental principles of natural justice. Recent jurisprudence — including Supreme Court guidance — has refined the contours of these powers, prohibiting routine remands, requiring reasoned and speaking orders, and protecting legitimate ‘plausible views’ taken by Assessing Officers. For an assessee, attention to documentary evidence, contemporaneous records and to procedural fairness is critical in defending revisional actions.
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