[Opinion] Section 263 | Litigation Without Results

Sarabjeet Singh – [2025] 170 taxmann.com 696 (Article)

Executive Summary: The success rate of survival of orders passed u/s 263 is very low in the higher appeal authorities. The primary reason for the same is the high expectations of these authorities from the officer to the level of the PCIT who is required to pass flawless orders on merits and law. It is true that there are certain limitations in the application of this section, but many a times the small mistakes done by the authors of these orders resulting in failure in the test before these authorities. All shortcomings, as identified by these appeal authorities, are highlighted along with the possible solutions.

Introduction: It has been seen, while working as CIT DR ITAT Chandigarh, that orders passed by the PCITs u/s 263 of the Income Tax Act, 1961 are not being sustained generally, even though some orders are very strong on merits. The orders are primarily quashed on technical grounds though discussion on merit is also done. The ITATs are relying upon various judgments which are directly or indirectly linked to this section.

Audit objection: The majority of cases are struck down saying that the orders u/s 263 were passed at the instance of audit objection. This finding is based on the order in the case of Sohana Woollen Mills ( 296ITR238 Punjab & Haryana HC). The findings of Hon’ble Court are as under;

“…7. A reference to the provisions of Section 263 of the Act shows that jurisdiction there under can be exercised if the CIT finds that the order of the AO was erroneous and prejudicial to the interest of Revenue. Mere audit objection and merely because a different view could be taken, were not enough to say that the order of the AO was erroneous or prejudicial to the interest of the Revenue. The jurisdiction could be exercised if the CIT was satisfied that the basis for exercise of jurisdiction existed. No rigid rule could be laid down about the situation when the jurisdiction can be exercised. Whether satisfaction of the CIT for exercising jurisdiction was called for or not, has to be decided having regard to a given fact situation…”

Although, the Hon’ble Court has mentioned the word ‘mere audit objection’ but the Tribunals have interpreted this word liberally in the favour of the Assessee. However, lately in the case of Sh. Rajender Chohan (ITA 308/CHD/2020), the ITAT has discarded its earlier approach. The para 8.1 of the said order is reproduced here as under;

“…8.1 Thus, we are of the view that the argument canvassed on behalf of the assessee that merely because there is an Audit Objection, the exercise of powers u/s 263 is invalid, we hold ITA 308/CHD/2020 A.Y. 2015-16 Page 28 of 29 cannot be accepted. What we understand from the aforesaid decision and various other decisions cited on this proposition is that a mechanical exercise of revisionary powers u/s 263 by the Revisionary Authority by merely citing the Audit Objection cannot be said to be a valid exercise of Revisionary Powers. The ld. PCIT is required to give an independent finding considering the record. The error in the order of the AO, that too such an error which is prejudicial to the interests of the Revenue, has to be pointed out by the Revisionary Authority in the order. The onerous power cannot be exercised mechanically and arbitrarily. The sagacious arguments of the ld. CIT-DR to this extent, we find are well founded…”

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