[Opinion] Audit Objections cannot be the sole basis for Revision u/s 263

Amit Kumar Gupta – [2022] 145 taxmann.com 181 (Article)

The presence of Revisional authorities in Income tax laws has utmost importance to ensure safeguard to fair justice and also to protect the interest of revenue.

Revision keeps the administrative authorities within the bounds of their authority and make them work according to well defined principle of law. The object of these provisions is to set right a patent defect or an error of jurisdiction or law or the perversity which has crept in the proceeding.

Income tax Act has section 263 & section 264 which empowers Principle Chief Commissioner or Chief Commissioner or Principle Commissioner or Commissioner to act as reviewer of the order passed by their subordinate authorities which falls under their respective jurisdiction.

Today in this article we will be understanding section 263 by referring a recent case law.

Bare Act: Revision of orders prejudicial to revenue

263. (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 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.

Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

(a) An order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include —

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;

(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 Commissioner or Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

Explanation 2.—For the purposes of this section, it is hereby declared 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 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.

(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

(3) Notwithstanding anything contained in sub-section (2), 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.
Explanation.—In computing the period of limitation for the purposes of sub-section (2), 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.

Plain reading of section 263 makes it clear that the power confers in section 263 can be exercisable only in cases which qualifies the following twin conditions:

– There has to be an order passed by the AO which is erroneous
– In so far as it is prejudicial to the interest of revenue.

Before 01st June, 2015, The interpretation of expression “erroneous in so far as it is prejudicial to the interests of the revenue” had been a contentious one.

In order to provide clarity on the issue the Government, in Finance Act 2015, inserted the Explanation 2 in section 263(1) which specifies when an order shall be deemed to be erroneous. Explanation 2 provides above mentioned four scenarios in which an order shall be deemed to be erroneous.

However After going through many orders passed by various appellate forums one can say that the government, in its attempt to provide clarity by inserting the explanation 2 to section 263(1), has made it more complex for the authorities to interpret the expression “erroneous in so far as it is prejudicial to the interests of the revenue.

Even the ICAI in its Pre Budget Memorandum -2018 has highlighted the probable hardships, caused by Explanation 2 to section 263(1), by stating that:

“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.”

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