Introduction:-Commissioner of Income Tax (CIT) has the power u/s 263 & 264 of the Income Tax Act, 1961, to consider an order passed by Assessing officer (AO). U/S 264, CIT can consider the order passed by AO, only when an appeal is made by assessee to him within stipulated time frame. However, u/s 263 CIT possesses the power to consider the order passed by AO and prejudicial to revenue, relevant extract of section 263 is as follows:-
The 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.
Section-263 states that CIT can examine the records of any proceedings conducted under Income tax Act, in which order passed by an AO is erroneous in so far as it is prejudicial to the interests of the revenue.
For applicability of section 263, there are three requisites namely:-
1). Order must be passed by AO
2). Order must be erroneous
3). Order must be prejudicial to the revenue.
Therefore CIT can revise only the order of AO, however intimation or deemed intimation u/s 143(1) is not an order.
Meaning of records:-“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 Commissioner. Commissioner can revise the order on the basis of a valuation report which came to the records subsequent to the assessment. Valuation Report forms part of the assessment records although it may come subsequent to the assessment (S.M. Oil Extraction Pvt. Ltd.).
What constitutes that order passed by AO is Erroneous:-For invoking the section 263, CIT has to prove that order of AO is erroneous on the basis of:-
1). A Supreme Court judgment.
2). A retrospective amendment in law.
3). Evidence in his possession that the assessee has understated the income.
4). Evidence in his possession that the assessee has claimed excessive loss, deductions and relief.
5). Mistake apparent from record.
However, revision u/s 263 is not possible on account of change in personal opinion.
What constitutes that order passed by AO is prejudicial to the interest of revenue:-An order can be said to be prejudicial to the interest of revenue, in which:
1). Income has been under assessed
2). Loss has been over assessed
3). Income has been assessed at a lower rate
4). Excessive loss, deductions, allowances and reliefs have been allowed to the assessee.
Time Limit for passing the order u/s 263:-CIT can passed the order u/s 263 within two year from the end of financial year in the order sought to be revised is passed by AO. However, an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.
In computing the period of limitation for the purposes of passing an order u/s 263, the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.
Order of CIT u/s 263:-CIT can pass an order either enhancing the income assessed under order passed by AO or reducing the loss assessed under order passed by AO or directing the AO to make fresh assessment.
Concept of partial merger is affirm for section-263:-There are two concept in appeal, one is concept of total merger and second is concept of partial merger. For an assessee concept of total merger is applicable and for revenue the concept of partial merger is applicable. If assessee make an appeal on few matters of an order passed by AO to appellate authority, then it shall be deemed that whole order of AO has been merged with order of appellate authority for an assessee. For example Assessing office passed an order including 5 points and assessing make an appeal only against 3 point out of total 5 points then assessee can not make the appeal against reaming 2 point u/s 264 at latter time period because concept of total merger is affirmed for assessee and revenue can consider the remaining two points u/s 263 (if applicable) because of concept of partial merger is affirmed for revenue.
Analysis of amendment proposed by Finance Bill, 2015 :-Clause 65 of Finance Bill, 2015 propose to increase the ambit of erroneous order passed by AO to be considered as prejudicial to the interest of revenue through insertion of an explanation to sub-section (1) of section 263 as follows.
“Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the AO 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 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.”.
Now following order passed by assessing office shall be considered as erroneous and prejudicial to the interest of revenue w.e.f. 01.06.2015, where AO passed order:-.
1). without making any inquiries/verification which he/she is required to be made.
2). without making inquiry into a claim which is claimed by assessee and allowed such claim.
3). which is not in accordance with any order/direction/instruction (i.e. circulars) issued by CBDT u/s 119 of Income Tax Act, 1961.
4). which is not in accordance with any decision of jurisdictional High Court or Supreme Court which is prejudicial to the assessee or any other person. In other words, where jurisdictional High Court or Supreme Court’s decision is against the assessee or any other personal and AO passed their order without considering such judgment then such order shall be considered as erroneous and prejudicial to the interest of revenue.
Conclusion:- Section 263 provides the great power and responsibility to CIT, this section also confer the power/authority to CIT for keeping an eye on the order passed by his sub-ordinances. Through section 263, law maker tried to prevent the leakage of revenue to a great extent and this extent is further purpose to enhance by clause 65 of Finance Bill-2015 by enhancing the scope of erroneous order prejudicial to the interest of revenue. Now AO has to be more alert/conscious while making the assessment.