Rectification vs. Revision Proceedings under the Income-tax Act with Case Studies

Table of Contents

1. Rectification Order Under Section 154
2. Revision of Order under Section 263
3. Revision of Order under Section 264

1. Rectification Order Under Section 154

1.1 Scope and ambit of provisions

Section 154(1)

With a view to rectifying any mistake apparent from the records, an income tax authority referred in Section 116 may –

(a) amend “any order” passed by it under the provisions of this Act;

(b) amend any intimation or deemed intimation under sub-section (1) of section 143;

(c) amend any intimation under sub-section (1) of section 200A (processing of statements of TDS);

(d) amend any intimation under sub-section (1) of section 206CB (processing of statements of TCS)

Section 154(1A)

• Amend the order in relation to any matter other than the matter which has so considered and decided

Section 154(2)
Subject to the other provisions of this section, the authority concerned-

(a) may make an amendment under sub-section (1) of its own motion, and

(b) shall make such amendment for rectifying any such mistake which has been brought to its notice by the assessee or by the deductor or by the collector, and where the authority concerned is the Joint Commissioner (Appeals) or the Commissioner (Appeals), by the Assessing Officer also.

Section 154(3)
An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of assessee or the deductor or the collector, shall not be made under this section unless the authority concerned has given notice to the assessee/the deductor/the collector of its intention so to do and has allowed the assessee/the deductor/the collector, a reasonable opportunity of being heard.

Section 154(4)
An order shall be passed in writing by the income tax authority

Section 154(5)
Any refund as a result of such amendment due to such assessee/the deductor/the collector

Section 154(6)

• A notice of demand in the prescribed form specifying the sum payable shall be served on the assessee/the deductor/the collector where any such amendment has the effect of enhancing the assessment for reducing a refund or otherwise increasing the liability
• Notice of demand shall be deemed to be issued u/s 156

Section 154(7)
No amendment under this Section shall be made after the expiry of four years from the end of the financial year in which the order sought to be amended was passed

Section 154(8)

• Where the application under this Section is made by the assessee/the deductor/the collector, the order shall be passed within a period of six months from the end of the month in which the application is received by the income tax authority
• However, without prejudice to the provisions of Sub Section (7)

1.2 Meaning of “any mistake apparent from the records”

• Mistake of law as well as of facts must be obvious, glaring, self-evident, plain, without debate or dissertation
• Mistake apparent means mistake that is manifest, incapable of argument or debate
• Records means record of the case which inter alia contains the entire proceedings, the documents and materials produced and taken on the records by the income tax authorities, being available at the time of passing of the order – thus, the entire records of the assessee relating to all assessment years at the time of carrying out and concluding the proceedings for the relevant assessment year
• Records within the ambit of Section 154(1) means the record available to the authorities at the time of initiation of the proceedings for rectification and not merely the record of the original assessment proceedings sought to be rectified
• In the era of e-filing of ITR, the facts available on e-portal including statutory order/decision at the relevant point of time, falls within the ambit of “records” (Amrik Singh Bhullar Vs. ITO (2021) 128 taxmann.com 245 (Chandigarh Trib.)
• Debatable issues or points on which there may be two opinions at the time of passing of the order, not within the meaning of “mistake apparent from records”
• Relevant judicial pronouncements:
  1. ITO Vs. Volkart Brothers (1971) 82 ITR 50 (SC)
  2. Dinosaur Steel Ltd. Vs. JCIT (2012) 349 ITR 360 (SC)
  3. Pr. CIT Vs. Lanshree Products & Services Ltd. (2023) 150 taxmann.com 389 (Cal.)
• Subsequent interpretation of the law by the Supreme Court
  1. Would constitute “mistake apparent from records”, if no further investigation is required.
     • B.V.K. Seshavataram Vs. CIT (1994) 210 ITR 633 (AP))
     • ACIT Vs. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 227 (SC)
  2. CBDT’s Circular No. 68 dtd. 17-11-1971
  3. Diversion views of various Courts
• Retrospective amendment in the Act – “mistake apparent from records” – Pr. CIT Vs. Jigna Construction (2016) 75 taxmann.com 58 (Guj.)
• Diversion views on any issue between High Courts – not within the purview of Section 154
• However, non-following the decision of the jurisdictional High Court is the apparent mistake of the law and thus, rectifiable u/s 154 (Hindustan Lever Ltd. Vs. JCIT (2019) 104 taxmann.com 215 (Cal.))
• Income tax authorities cannot go beyond the records available at the initiation of the proceedings and cannot pass the order u/s 154 based on fresh evidence or materials
• The income tax authorities (i.e. the AO) cannot rectify the assessment at the instructions of the higher authorities
• The income tax authority empowered to rectify an order u/s 154 is the authority which had passed the order sought to be rectified and not any higher or lower authority

1.3 Significant Issues – Section 154

• As provided u/s 154(1A), the AO can pass the rectification order in relation to any matter other than that of considered and decided in appeal or revision
• As provided u/s 154(3), an opportunity of being heard shall be allowed to the assessee and for that, the notice to the assessee shall be served – Likewise, before rejecting an application for rectification made by assessee claiming any deduction/rebate/relief/exemption, the AO is required to provide an opportunity of being heard – However, not required when the order of rectification reducing the assessment
• Duty of the AO – Quasi judicial officer – Circular No. 14(XL-35) dtd. 11-04-1955
• During pendency of proceedings u/s 154, it was not permissible for Revenue to initiate reassessment proceeding u/s 147 / 148 of the Act – S.M. Overseas (P.) Ltd. Vs. CIT (2022) 145 taxmann.com 375 (SC)
• Pendency of appeal or revision does not make the matter subjudice
• Tax demands wrongly uploaded on CPC portal – inability of the AO on the ground of limitation for four years u/s 154(7) – refer CBDT’s Circular No. 4 of 2012 dtd. 20-06- 2012 and also Circular No. 8 of 2015 dtd. 14-05-2015
• Demand notice u/s 156 issued erroneously even though no tax liability as a result of assessment u/s 143(3) of the Act – mistake apparent from records – Madras High Court Co.operative Society Ltd. Vs. Addl./Joint/Deputy/Asstt.CIT/ITO/NeAC (2022) 140 taxmann.com 269(Madras)

Time Limit u/s 154(7) r.w. Section 154(8):

• The provision is directory and not mandatory provision
• General Time limit of 4 years, but if the application made by the assessee/the deductor/the collector, time limit is of six months from the end of the month in which the application is received
• Circular No. 73 dtd. 07-11-1972 – application filed within time limit, but not disposed off within four years, it may be disposed off even after expiry of statutory time limit on the merits in accordance with the law – Sree Ayvanar Spinning and Weaving Mills Ltd. Vs. CIT (2008) 301 ITR 434 (SC)

1.4 Faceless Rectification

• Section 157A – inserted by TOLA, 2020 w.e.f. 01-11-2020
• Processing of the return by the CPC – Intimation u/s 143(1)(a) with variation between the returned income and the return processed, if the assessee disagrees with the demand raised –
  1. At the first instance, the assessee may file online response of his disagreement of the demand electronically
  2. Simultaneously, the assessee may file online application for rectification
  3. If not disposed off, or disposed off without consideration of the online application, the assessee may prefer the appeal before the CIT (Appeals)/Jt. CIT (Appeals)

1.5 Whether appealable order?

Remedies under the law available to the assessee as under:

• Prefer an appeal before the CIT (Appeals)/Jt. CIT (Appeals) u/s 246A OR
• Make an application before the jurisdictional Pr. CIT/CIT u/s 264 for revision of the order u/s 154

2. Revision of Order under Section 263

2.1 Revision of order prejudicial to the Revenue

Scope of Powers and Functions of the Pr. Chief CIT or Chief CIT or Pr. CIT or CIT – Section 263(1)

• Prior to the initiation of revision proceedings, the IT Autho. (for the short) may call for and examine the records” of any proceedings under the Act
• After examining the records the IT Autho. may form an opinion that order passed is an erroneous as well prejudicial to the interest of the Revenue
• The IT Autho. has to give an opportunity of being heard to the assessee
• Not restricted to revise original assessment order, but includes revision of reassessment order or rectification order or order passed by the TPO
• The IT Autho. can revise whole of the order to be made denovo or revised or set aside the order on limited issue
• Explanation 1, 2 and 3 below Section 263(1) – it’s relevance

2.2 Meaning of “order being erroneous and prejudicial to the interests of the Revenue”

2.2.1 Explanation 1 to Section 263:

Explanation 1(b):

“Record” means all the records relating to any proceedings under the Act (i.e. the order which is subject to revision) available IT Autho. at the time of examination

Explanation 1(c):

• No power to the IT Autho. u/s 263 to extend to those issues which are the subject matter considered and decided in appeal
• Doctrine of merger
• If there is no order of CIT (Appeals), there is no merger
• However, where the AO had partly disallowed expenses which had been confirmed by the CIT (Appeals), no jurisdiction u/s 263
• The issue of any expenses/deduction/exemption/relief already decided in favour of the assessee by the Tribunal in assessee’s own case , no powers u/s 263

MBL Infrastructure Ltd. Vs. DCIT (2020) 84 ITR (Trib.) 189 (Kol.)
Alfa Laval Lund AB Vs. CIT (TP) (2021) 92 ITR (Trib.) (SN) 4 (Pune)
Sir Dorabji Tata Trust Vs. Dy.CIT (Exemption) (2021) 209 TTJ 409 (Mum.)
JRD Tata Trust Vs. Dy.CIT (Exemption) (2021) 85 ITR (Trib.) 431 (Mum.)

2.2.2 Explanation 2 to Section 263:

Explanation 2(a):

• AO/TPO pass the order without making inquiries or verification which should have been made – revision powers available u/s 263
• Difference between lack of inquiry and inadequate inquiry
• No unfettered powers to the IT Autho. u/s 263 – powers u/s 263 available in the case of lack of inquiries and not for inadequate inquiries as per the personal views of IT Autho.
  1. CIT Vs. Max India Ltd. (2007) 295 ITR 282 (SC)

Explanation 2(b):

• Allowing any relief in respect of any expenditure, deduction, exemption, allowance or set off, without inquiring into the claim – revision powers available u/s 263
• AO granted relief/partial relief for the deductions claimed, after making detailed inquiry and adopting the plausible view, which is not unsustainable in law, the IT Autho. has no power u/s 263
  • CIT Vs. Nirma Chemical Works Pvt. Ltd. (2009) 182 Taxman 183 (Guj.)

Explanation 2(c):

• The onus is upon the “IT Autho.” to establish which order, direction, instruction of the Board not followed by the AO

Explanation 2(d):

• The onus is upon the “IT Autho.” to establish which order of Court applicable to the facts of the case and having binding effect and not followed by the AO
• Where there are two contrary decisions of Courts and there is no decision of the jurisdictional High Court, then taking one view by the AO will not make the order erroneous in so far as prejudicial to the interests of the Revenue
• The foremost condition to assume the jurisdiction u/s 263 is that the order passed by the AO/TPO should be erroneous and such error must be prejudicial to the interest of the Revenue
• Twin conditions has to be satisfied by the IT Autho.
• Mere inadequate inquiry on an issue is not enough to invoke revisional powers u/s 263
• An incorrect assumption of facts or an incorrect application of law will fall within the concept of “erroneous”
• Every loss of Revenue as a consequence of an order of the AO/TPO cannot to be treated as prejudicial to interests of the Revenue

The order of the AO/TPO will be “erroneous” if –

a) The order passed on incorrect assumption of facts.
b) The order passed for lack of enquiry
c) The order is potentially wrong or unlawful
d) The return of income is accepted as it is without conducing any inquiry and non-application of mind on the issue
e) The AO/TPO grievously failed to follow the order of the jurisdictional High Court or the Supreme Court
f) The view/inferences in the order is contrary to law or based on mistaken view of law or erroneous application of legal principles
g) The assessment proceedings concluded arbitrarily in violation of principles of natural justice and the AO/TPO failed to act as a quasi judicial officer

The order of the AO/TPO will be “prejudicial to the interests of the Revenue” if –

a) The order is passed without conducting inquiries
b) The order is not in accordance with law, as a result whereof, the lawful revenue has not been realized
c) The order passed without applying the principles of natural justice or without application of fair and judicious mind

2.2.3 Landmark Judgements:

• Malbar Industrial Co. Ltd. Vs. CIT (2000) 243 ITR 83 (SC)
• CIT Vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom.) Para 9 & 10
• CIT Vs. Amitabh Bachchan (2016) 69 taxmann.com 170 (SC)

2.2.4 Significant propositions:

• Where two views are possible and both are sustainable in law and the issue is debatable (contrary judgments of the different High Courts and no judgment of the jurisdictional High Court), no powers to invoke the provisions of Section 263
  • CIT Vs. Ansal Housing Finance & Leasing Co. Ltd. (2013) 29 taxmann.com 303 (Delhi)
• No reassessment proceedings when the order has been set aside u/s 263 and pending before the AO
• Scope of assessment in set aside matter is confined to the specific issue set aside and cannot be extended to other issues for making denevo assessment
• Mandatory requirement to issue and serve the Show Cause Notice
  1. Principle of natural justice
  2. Revision order passed on the issue not included in SCN – without jurisdiction and bad in law
     • Dipak Natwarlal Dholakiya Vs. Addl./Joint/Deputy/ACIT (2023) 149 taxmann.com 151 (Gujarat)
• If the assessment order is void (being non-est), no revision permissible u/s 263
• Draft order u/s 144C – No jurisdiction available u/s 263
• No powers u/s 263 merely on the allegation that the AO did not write specific reasons for accepting the explanations of the assessee
• Powers of revision – Not to make fishing or roving inquiry
• No powers u/s 263 in the cases where the AO has raised the query on the specific issue,
  carried out inquiries, appreciated the replies filed by the assessee and after in-depth
  verification/examination of corroborative materials, reached to the conclusions to allow
  the claim of the assessee, but not discussed/dealt with in the body of the assessment
  order-
  • Reassessment proceedings brought by the AO adopting one of the plausible/possible views, no revision u/s 263
• The issue has already been covered in the order u/s 263, no jurisdiction u/s 147 with the AO
• Date of passing the order u/s 263 and not the date of receipt of the order by assessee,
  would have relevance for the purpose of counting period of limitation – the word “made”
  used in Section 263(2) – CIT Vs. Mohammed Meeran Shahul Hameed (2021) 131
  taxmann.com 94 (SC)
• Plausible views – no jurisdiction u/s 263
  • CIT Vs. Usha martin Ventures Ltd. (2023) 150 taxmann.com 491 (Calcutta)
  • Pr. CIT Vs. Shreeji Prints (P.) Ltd. (2021) 130 taxmann.com 294 (SC) – SLP of Revenue dismissed
  • Pr. CIT Vs. Cartier Leaflin (P.) Ltd. (2023) 146 taxmann.com 281 (SC)
  • Abdul Hamid Vs. ITO (2020) 207 TTJ 1109 (Gau.)
• Under new reassessment regime:
  • Order u/s 148A(d) passed, after considering the reply of the assessee as required u/s 148A(c), with the prior approval of the Specified Authority, that it is not the fit case to issue notice u/s 148, no powers u/s 263
  • Reassessment Order passed u/s 148 after following the procedure u/s 148A of the Act can be subject to the revision u/s 263 only in respect of those issues which was subject matter of reassessment
  • Limitation will apply in respect of the issues covered under reassessment proceedings, w.e.f. the date of reassessment order
  • Limitation will apply in respect of the issues covered in original assessment order w.e.f. the date of original assessment order passed – CIT Vs. Laxmi Vilas Bank Ltd. (2023) 146 taxmann.com 227 (Madras)
  • Limited scrutiny – the AO cannot travel beyond the issues before him for scrutiny
    • no revision u/s 263 on other issues
    • Balvinder Kumar Vs. PCIT (2021)125 taxmann.com 83 (Delhi-Trib.)
    • Su-raj Diamond Dealers Pvt. Ltd. Vs. Pr. CIT (2020) 203 TTJ 137 (Mum.)
  • The position of the law as on the date of passing the order u/s 263 is relevant

2.3 Whether appealable order?

Yes.

• Appeal to be filed before the jurisdictional ITAT with appeal filing fee of Rs. 500/-
• Request to the JAO to keep in abeyance the assessment proceedings under the direction of order u/s 263 till the outcome of the appeal before the ITAT

3. Revision of Order under Section 264

3.1 Revision of other orders – Section 264 – prejudicial to the interests of the asessee

• Other than the order u/s 263
• Either on own motion or on an application by the assessee for revision
• Call for the record for any proceedings under the Act, make such inquiry or cause such inquiry to be made
• Within one year if at his own motion
• In the case of an application for revision, the assessee has to make such application within one year from the date on which the order in question was communicated to him on the date on which he otherwise came to know of it, whichever is earlier
• Delay may be granted for sufficient cause
• However, no jurisdiction u/s 264 in the cases where appeal lies before the FAA or the ITAT or the time for filing the appeal has not expired or the assessee has not waived his right of appeal – Aafreen Fatima Fasal Abbas Sayed Vs. ACIT (2021) 434 ITR 504 (Bom.)
• Fees of Rs. 500/-
• Order u/s 264 to be passed within one year from the end of the FY in which the application is made by the assessee
• Faceless revision of orders – Section 264A

3.2 Order of the ITAT under Section 254

• Scope and ambit of the provision
• The distinction between the ‘review’ and ‘rectification’ of the order
  If it is mistake apparent from records, the Miscellaneous Application is required to be filed with filing fees before jurisdictional ITAT – with detailed submission as to how it is the apparent mistake subject to rectification and not mere review of the order passed by the ITAT u/s 254(1) of the Act