Revision u/s 263 of the IT Act

Introduction-

Section 263 of the Income-tax Act, 1961 (‘the Act’) provides revisional power to Principal Commissioner (‘Pr. CIT’) or Commissioner (‘CIT’) if he is of the opinion that an order passed by the AO is erroneous and prejudicial to the interests of the revenue. Nadine under the income tax act there are no provisions to appeal against the order of assessing officer before a higher appellate authority. And therefore the provisions of section 263 comes very much in handy in dealing with instances where order of the assessing officer may be erroneous and not in accordance with law. In addition to the order being erroneous a second condition with regards to the order being prejudicial to the interest of revenue needs to be satisfied. Only in cases where the order is both erroneous and prejudicial to the interest of the revenue revision under this section can be resorted to.

Relevant extracts of law-

“(1) The Principal Chief Commissioner or Chief Commissioner or 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 or the Transfer Pricing Officer, as the case may be, 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,—

(i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or

(ii) an order modifying the order under section 92CA; or

(iii) an order cancelling the order under section 92CA and directing a fresh order under the said section.”

“(b) "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 Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner;”

Analysis-

• The Principal Commissioner of Income Tax (Pr. CIT) or Commissioner of Income Tax (CIT)

• may call for and examine the record of any proceeding under the Income Tax Act, 1961 (the Act).

• If the Pr. CIT/CIT considers that any order passed therein by the Assessing Officer (AO) is erroneous in so far as it is prejudicial to the interests of the revenue,

• they may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as they deem 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.

In order to exercise revisional jurisdiction under section 263 of the Act, the following two conditions must be met:

1. The order must be erroneous. This means that the order must be wrong or incorrect. The term "erroneous" in section 263 is not defined in the Act, but it has been held by the Supreme Court to mean "wrong" or "incorrect".

2. The order must be prejudicial to the interests of the revenue. This means that the order must have resulted in a loss of revenue to the government. Some examples of orders that could be considered prejudicial to the interests of the revenue include:

   • An order that underassesses the assessee`s income.

   • An order that allows the assessee excessive deductions or allowances.

   • An order that assesses the assessee at a lower rate than they should have been assessed.
     
     If the tax effect of an order passed by the AO is nil, then even if the order is erroneous, it will not be open to revision under section 263 of the Act. This is because an order that does not affect the amount of tax payable cannot be considered prejudicial to the interests of the revenue.

Any record can be considered by Pr. CIT/CIT provided it is available when the Pr. CIT/CIT exercises his jurisdiction u/s 263, even if it was not considered by the AO. For example, Pr. CIT / CIT 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 even if it came subsequent to assessment.

In summary, the powers under section 263 of the Act can only be exercised if the order being revised is both erroneous and prejudicial to the interests of the revenue. That even if an order is passed by an AO on the directions of his senior tax officials (JC- u/s 144A), still such an order can be considered for revision u/s 263 provided other requisite stipulations are met.

Any communication by the AO u/s 195(2) that disposes of application made under section 195(1) and determines liability towards tax to be deducted at source in accordance with provisions of section 195(2), is an order for purposes of section 263 and can be revised.

The order passed by an authority which is subordinate to the Pr. CIT/CIT, to give effect to the orders of the Tribunal is covered under the phrase “any order”. Thus, invoking of power of revision u/s 263 by the pr. CIT/CIT is within the permissible limits of the law.

AO’s omission to follow the binding Circular, which makes it mandatory for the AO to make a reference to the TPO if the aggregate value of the international transaction exceeds Rs. 5 crores, amounted to making asstt. without conducting proper inquiry and investigation and resulted in the order becoming “erroneous & prejudicial to the interest of the Revenue”.

An order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, 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 Chief Commissioner or Chief Commissioner or 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.

The concept of partial merger applies here which means that Pr. CIT / CIT will be competent to revise an order of assessment passed by the AO on all the matters except those which have been considered and decided in an appeal. Therefore, let’s say if in an order the AO has made additions on three issues and the Assessee has filed an appeal on two of them then Pr. CIT/CIT can exercise the revisional powers on any issue other than said two issues.

Some Judicial precedents-

Section 263 does not in express terms require a notice to be served as in the case of section 147. Section 263 merely requires that an opportunity of being heard should be given to the assessee and the stringent requirement of the service of notice u/s 147 cannot be therefore be applied to a proceeding u/s 263

Gita Devi Aggarwal v. CIT [1969] 11 TAXLOK.COM (IT) 232 (SC) CIT v. Hukamchand Mohanlal [1971] 12 TAXLOK.COM (IT) 402 (SC)

Section 263 does not require any specific show cause notice detailing specific grounds on which revision of assessment order is tentatively being proposed affecting initiation of exercise in absence thereof or to require commissioner to confine himself to terms of notice and foreclosing (excluding/barring) consideration of any other issue or question of fact; Commissioner is free to exercise his jurisdiction on consideration of all relevant facts, provided an opportunity of hearing is afforded to assessee to contest facts on the basis of which he had exercised revisional jurisdiction.

CIT v. Amitabh Bachchan [2016] 156 TAXLOK.COM (IT) 067 (SC)

If an order is passed by the AO against a non-existent entity, e.g. against an Amalgamating Company or against a Dissolved Firm, such an order is void-ab-initio and no revision can be made u/s 263 against such a void-ab-initio order. On the issue that “an order passed against a non-existent entity is void-ab-initio”, following judicial precedents can be referred to: Supreme Court – PCIT v. Maruti Suzuki India Ltd. – [2019] 175 TAXLOK.COM (IT) 413 (SC)

For the purpose of exercising jurisdiction u/s 263 of the Act, the conclusion that the order of the AO is erroneous and prejudicial to the interest of the revenue has to be preceded by some minimal enquiry by Pr. CIT/CIT. If the Pr. CIT/CIT is of the view that the AO did not undertake any enquiry, it becomes incumbent on the Pr. CIT/CIT to conduct such enquiry. If the Pr. CIT/CIT does not conduct such basic exercise then the Pr. CIT/CIT is not justified in setting aside the order u/s. 263 of the Act. Delhi ITAT in its ruling in the case of – Dwarkadhis Buildwell Pvt. Ltd. v. CIT – ITA No.3097/Del/2014 – order dated 1 July 2019. [2019] 175 TAXLOK.COM (IT) 004 (ITAT-DELHI)

• Supreme Court in the case of PCIT vs. Shree Gayatri Associates – [2019] 173 TAXLOK.COM (IT) 022 (SC)

Where Commissioner passed a revisional order making addition to assessee’s income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was to be dismissed

• Supreme Court in the case of PCIT vs. Sumatichand Tolamal Gouti – [2019] 175 TAXLOK.COM (IT) 761 (SC)

Where High Court upheld Tribunal’s order holding that AO had made detailed enquiries while allowing assessee’s claim for deduction of business expenditure and, thus, revisional order passed by Commissioner was not sustainable, SLP filed against High Court’s order dismissed

When the Assessing Officer takes one of the two views permissible in law and which the Commissioner does not agree with and which results in a loss of revenue, it cannot be treated as erroneous order prejudicial to the interest of revenue, unless the view taken by the Assessing Officer is completely unsustainable in law.

CIT v. Max India Limited [2007] 111 TAXLOK.COM (IT) 218 (SC)

Where Assessing Officer after making due enquiries found assesee’s claim for exemption of income as correct and, thus, dropped reassessment proceedings, since view taken by him was one of possible views, impugned revisional order passed under section 263 was to be set aside

Karnataka High Court in the case of CIT vs. International Society For Krishna Consciousness – [2020] 180 TAXLOK.COM (IT) 307 (KARN)