1. Section 263 deals with the powers of the Commissioner to revise the orders pre-judicial to the interest of the Revenue. During recent times, this power is being utilised frequently, particularly with respect to assessment passed u/s 147 of I.T. Act, especially in cases where share capital were raised by the concerned companies. In this article, an attempt is made to under-stand the scope of the Section and conditions necessary for the exercise of the power u/s.263.
2. Section 263 of I.T. Act reads as follows:
"263(1) 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 enquiry 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.
Thus, the Commissioner authority is to direct a fresh assessment and not to pass assessment himself. The Commissioner may give orders to
· Cancel the assessment order and direct to pass a fresh assessment.
· Pass fresh assessment order on certain issues
· May give specific direction to make certain additions or disallowances.
3. When section 263 can be evoked?
· It has been observed by the Supreme Court in the case of Malabar Industrial Co. Ltd., (2000) 243 ITR 83 (SC), that "A bare reading of this provision makes it clear that the pre-requisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely,
(i) the order of the Assessing Officer sought to be revised is erroneous; and
(ii) it is prejudicial to the interests of the Revenue. If one of them is absent — if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue — recourse cannot be had to S. 263(1) of the act.
· The expression “erroneous” has not been defined in the Act. However, Black’s Law Dictionary defines the word “erroneous” to mean “involving error ; deviating from the law”. “Erroneous assessment” refers to an assessment that deviates from the law and is, hence, invalid. The erroneous assessment pertains to a defect, which is jurisdictional in nature. It does not refer to the judgment of the Assessing Officer in fixing the amount or valuation of property. “Erroneous judgment” means one rendered according to course and practice of court; but contrary to law, upon a mistaken view of law or upon an erroneous application of legal principles.
· An order cannot be termed erroneous unless it can be shown to be an order, which is not in accordance with law. If the Income-tax Officer, acting in accordance with law, makes certain assessment, the same cannot be termed as erroneous by the Commissioner merely because the order, according to the Commissioner, should have been more elaborate in writing. Section 263 of the Income-tax Act does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who makes the assessment, unless the decision of the Income-tax Officer is held to be an erroneous one.
· There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the Section will be attracted. An incorrect assumption of facts or an incorrect application of Law will satisfy the requirements of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
· The phrase, ‘prejudicial to the interests of the Revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S. P. Jain, (1957) 31 ITR 872, the High Court of Karnataka in CIT v. T. Narayana Pai,(1975) 98 ITR 422, the High Court of Bombay in CIT v. Gabriel India Ltd., (1993) 203 ITR 108 and the High Court of Gujarat in CIT v. Smt. Minalben S. Parikh, (1995) 215 ITR 81 treated loss of tax as prejudicial to the interests of the Revenue".
4. When section 263 cannot be evoked?
Section 263 cannot be evoked in the following cases:-
· The order of the AO cannot also be revised if it has been passed after application of mind.
· Merely because the opinion of the CIT is different from that of AO this section cannot be resorted to.
5. The Bombay High Court has considered the provisions of Section 263 in detail in the case of CIT v. Gabriel India Ltd., 203 ITR 108 (1993). In this case, the assessee had claimed certain expenses as revenue expenditure. The Income-tax Officer (ITO) sought details of the same and the assessee gave the details and explained the nature of expenditure. The ITO considered the explanation and allowed the same but did not include the discussion in this regard in the assessment order. The Commissioner initiated proceeding u/s.263 on the ground that such expenditure was capital expenditure and as such the order of the ITO was erroneous so as to be prejudicial to the interests of the Revenue. The assessee offered the explanation that the issue was examined in detail by the ITO. The CIT passed an order observing that ITO had not discussed the allowability of the expenses in the Assessment Order and this indicated non-application of mind. He cancelled the order of the ITO directing him to make a fresh assessment on the lines indicated by him.
The assessee appealed to the Tribunal which ruled in favour of the assessee. The CIT appealed to the High Court against the decision of the Tribunal. The High Court observed that it was clear that the ITO had raised a query about the allowability of the said expenditure and the assessee had offered explanation on the said query. After considering the explanation of the assessee, the ITO had allowed the expenditure as revenue expenditure. Though the Commissioner had passed an order u/s.263, he had not given a definite finding that the expenditure was capital in nature.
The Court observed that the Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in the matters or orders which are already concluded. The power u/s.263 can be exercised only when the order is erroneous and due to this, prejudice has been caused to the interests of the Revenue. The order cannot be branded as erroneous by the Commissioner because according to him the order should have been written more elaborately. The Court observed that when ITO has exercised the quasi-judicial power vested in him in accordance with the law and arrived at a conclusion, such a conclusion cannot be termed to be erroneous simply because the Commissioner doesn’t feel satisfied with the conclusion. The Court held that in order to exercise power u/s.263, the order must be presented in material before the CIT and if that order was erroneous in so far as it is prejudicial to the interests of the Revenue. Accordingly, the Court decided in favour of the assessee and against the Revenue.
Recently, in the case of CIT v. Arvind Jeweller, 259 ITR 502 (Guj.), the Court held that the assessee had produced relevant material and offered explanations in pursuance of the notices issued u/s.142(1) as well as u/s.143(2) of the Act and after considering the materials and explanations, the Income-tax Officer had come to a definite conclusion. Merely because the Income-tax Officer had taken a particular view with which the Commissioner did not agree cannot form the basis for an action u/s.263 of the Act and as such order of Revision was not justified. The Gujarat High Court applied the principles laid down by the Supreme Court in the case of Malabar Industrial Co. Ltd.’s. case mentioned above and decided the case in favour of the assessee.
6. From the discussions held above, what emerges is that an order of assessment made by a primary authority may not be agreed to by a revisional authority. Merely, however, for the fact that the revisional authority disagrees with the findings of the primary authority, either in imposing liability or in refusing to impose any liability, such disagreement cannot be made a ground for interference with the order of the primary authority. An erroneous order, as is commonly understood, is not conceived by section 263. There has been unanimity in judicial opinion that the error committed by the primary authority must be an error of jurisdiction, for if the order is not kept confined to jurisdictional error, no distinction would be left between corrective powers or power of rectification conferred on an authority under the provisions of the Act and the revisional power exercisable by another authority. If the distinction between the power to reopen an assessment and the power to rectify is not distinguished from revisional jurisdiction, every incorrect order would become amenable to revisional jurisdiction and the fall out would be that revisional jurisdiction would then become exercisable even in a case where the provisions for initiating a rectification proceeding are attracted. Such an approach would lead to intermingling of powers by various authorities resulting in utter confusion and uncertainty.
Merely because of the fact that an Assessing Officer’s order is erroneous, a Commissioner cannot interfere. Similarly, because an order of the Assessing Officer is prejudicial to the interests of the Revenue, it will not attract revisional jurisdiction under section 263. These two elements, namely, that the order is erroneous and it is prejudicial to the interests of the Revenue must co-exist. When an Assessing Officer has several choices and he adopts one of the choices, it cannot be interfered with unless it is shown that the choice of exercise by the Assessing Officer is without application of mind or wholly contrary to the law. The revisional power conferred on the Commissioner is not an appellate power, but a supervisory power. Thus, a Commissioner cannot sit as an appellate authority under section 263 on an order passed by an Assessing Officer. Section 263, it must be borne in mind, gives to the Commissioner a special power, which has almost no parallel in any other statute. It is an extraordinary revisional power. This power cannot be exercised as a jurisdictionally corrective power or as a review of the orders passed by subordinate authorities. This power under section 263 can be invoked only for the purpose of correcting such wrongs, which have taken place because of non-application of law or for a wholly incorrect application of law and when such application or non-application of law causes prejudice to the Revenue. The power under section 263 cannot be equated to, or be regarded as, an appellate jurisdiction or even ordinary revisional jurisdiction. The revisional jurisdiction under section 263 is a unique jurisdiction, which has to be understood in the context of the scheme of the Act. Such a power being exercisable only against orders which are erroneous in the sense that it goes to the root of the jurisdiction and also prejudicial to the interests of the Revenue.
Though section 263 cannot be invoked to correct each and every type of mistake or error committed by an Assessing Officer, the fact remains that an incorrect assessment of facts or an incorrect application of law can be regarded as erroneous. In the same category would fall orders passed without applying the principles of natural justice or without application of mind. Thus, when an order of deduction is passed on incorrect assumption of facts or incorrect application of law, such an order, being erroneous, may be revised if such an order is prejudicial to the interests of the Revenue. Similarly, when a deduction is allowed without application of mind, such an order can also be revised under section 263 provided that the order is prejudicial to the interests of the Revenue. When an Assessing Officer has jurisdiction but passes in exercise of such jurisdiction, an order which suffers from non-application of mind or incorrect assumption of facts or incorrect application of law, it would amount to an erroneous order within the meaning of section 263. Thus, when a deduction is not permissible yet is allowed either because of non-application of mind or because of incorrect application of law, such an order would be regarded as an erroneous order and can be interfered with in revision under section 263, if it is prejudicial to the interests of the Revenue.
It needs to be borne in mind that section 154 of the Act vests in an Assessing Officer, the power to initiate proceeding for rectification if there is some mistake in making the assessment and the mistake is apparent from the face of the record. Thus, when a mistake is apparent from the face of the record, it is section 154 which becomes applicable. Section 147 empowers an Assessing Officer to reopen a completed assessment if he has reason to believe that an income of the assessee has escaped assessment. Thus, the power of rectification which is exercisable under section 154, is distinct and separate from the power exercisable under section 147 of the Act. Similarly, the power of suo motu revision under section 263 has to be read as a power outside the purview of section 154 and also section 147, for if in respect of a matter, power under section 154 is exercisable, the power under section 147 cannot be exercised and if, in a matter, power under section 147 is exercisable, the power under section 154 cannot be exercised and when neither the power of rectification vested under section 154, nor the power to reopen the assessment as envisaged under section 147, is attracted to a case, the power under section 263 may become exercisable provided that the error committed by an Assessing Officer, while making an assessment, is, as already indicated above, jurisdictional in nature. Since all these powers, conferred on different authorities, operate in distinctly separate fields, one authority cannot entrench upon the field of power reserved for the other authority.
In other words, the power to reopen an assessment under section 147, the power to rectify an order under section 154 and the power to suo motu revise an assessment under section 263 of the Income-tax Act operate in different and distinct fields. The authorities prescribed for the exercise of such powers are also different as are the facts and situations which would justify recourse to the provisions. To permit the revisional authority to exercise powers under section 263 of the Act in the instant case, on the ground that excess deduction on account of bonus has been allowed, would amount to permitting the revisional authority to intrude into the powers of the authorities under sections 147 and 154 of the Act.
What may be pointed out is that section 154 of the Act confers power on the Assessing Officer to initiate proceeding for rectification if it is found that there is some mistake apparent from the face of the records. Independent of, and distinct from, this power is the power which section 147 confers on the Assessing Officer making it possible for him to reopen a completed assessment if he has reason to believe that any income of the assessee has escaped assessment. The basis on which the notice under section 263 has been issued and the impugned order has been passed does not come within the purview of section 263, for the Act has conferred jurisdiction on the Assessing Officer specifically to deal with a situation, such as the present one and when the Assessing Officer had already resorted to section 154 to re-verify whether there was any mistake in allowing the claim of bonus or not, the revisional authority could not have taken resort to section 263.
From what have been discussed above, it becomes abundantly clear that a revisional authority cannot entrench upon the powers which are expressly reserved by the Act in favour of the other authorities. The Act nowhere authorises the revisional authority to intrude into inquiries properly made by the assessing authority and to reopen an already completed assessment.
· On passing of order u/s 263 of I.T. Act, the assessee has two options:
i) Let the fresh order be passed by the A.O. in terms of order of CIT u/s 263. The time limit of passing such order is one year from the end of financial year in which order u/s 263 is passed by the CIT [Section 153(2A)], and
ii) File appeal to ITAT against order of CIT u/s 263 of I.T. Act within sixty days of receipt of order u/s 263 by it. If the ITAT quashes 263 order, then the A.O. is not bound to pass order pursuant to 263 order. However, this is possible only when ITAT passes order prior to A.O. passing order pursuant to directions of CIT u/s 263 of I.T. Act. Even if the A.O. passes order prior to order passed by ITAT against 263 order, and if ITAT passes order quashing 263 order, order u/s 254 of the Act should be passed by A.O. giving effect of ITAT’s order and nullify the additions (if any) made in fresh assessment order passed pursuant to 263 order.
· Even if the assessee loses its appeal in ITAT against 263 order passed by CIT, he doesn’t lose a right to file appeal against fresh order passed by A.O. pursuant to 263 order.
· Thus, it becomes advisable to file appeal to ITAT against 263 order and preferably pursue the case such that the order is passed by ITAT before A.O. passes fresh assessment order. Now a days, ITAT generally gives time of four to six months from the date of filing appeal. Thus, if the ITAT passes order quashing 263 order in the first hearing, chances are bright that the no fresh order would have been passed by the A.O. by that time.
· It is important that Grounds of Appeal is properly drafted. A sample Grounds of Appeal is reproduced below (Refer appeal against CIT-II, Kol’s Order u/s 263 dated 06.01.2012 by GPSK Capital Private Limited) :
i) For that in the facts and circumstances of the case, the Ld. CIT. erred in violating the principles of natural justice by not the mentioning the grounds for initiating action u/s 263 of Income Tax Act, 1961 in the show cause notice issued. As such, the order passed u/s 263 is void ab-initio. The action of the Ld. CIT was wholly unreasonable, uncalled for and bad in law.
ii) For that in the facts and circumstances of the case, the Ld. CIT erred in not passing a speaking order against the submissions of your appellant. As such, the order passed u/s 263 is void ab-initio. The action of the Ld. CIT was wholly unreasonable, uncalled for and bad in law.
iii) For that in the facts and circumstances of the case, the order u/s 263 is merely ‘change in opinion’. The order u/s 143(3) passed by the Ld. AO does not in any way represent erroneous order. The action of the Ld. CIT was wholly unreasonable, uncalled for and bad in law.
iv)Other grounds may be raised on merits of additions.
CA K.K. Chhaparia
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