1. Introduction

The Principal Commissioner/Commissioner of Income-tax (hereinafter referred as Revisional Authority) commands a unique position within his territorial jurisdiction. He, apart from being immediate head of assessing officers within his charge, has to perform judicial act as revising authority. He has to safeguard interest of the revenue as also to provide necessary relief to a harassed taxpayer. He has to keep a balance between the tax collector and the taxpayer. He has an equal obligation to the taxpayer. Section 263 of Act casts a duty on the Commissioner of Income-tax to enhance or modify assessment or cancel the assessment and direct a fresh assessment, if any, order passed by the Assessing Officer, Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner u/s. 144A; Joint Commissioner in exercise of the powers conferred or assigned to him by the prescribed authority (hereinafter referred as “an Assessing Officer”) is found to be erroneous and prejudicial to the interests of the revenue. However, such a revisional order can be made after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary.

2. Order

There must exist an order, which is sought to be revised by the Commissioner. An order which is sought to be revised must be in writing. The concept of the words “any order” is very wide. However, if an assessment order does not contain any satisfaction for initiation of penalty proceedings, such an order cannot be revised because the proceedings for levy of penalty are independent proceedings and separate from the assessment proceedings as held by the Delhi High Court in
Addl. C.I.T. v. J.K.D’Costa (1982) 133-ITR-7. Same view has been expressed by the Rajasthan High Court in
C.I.T. v. Kesari Mal Parasmal (1986) 154-ITR-484 and by the Calcutta High Court in
C.I.T. v. Linotype and Machinery Ltd. (1991) 192-ITR-337. All orders made by an Income Tax Officer or Assistant Commissioner or Deputy Commissioner made with or without the directions issued under section 144A, shall be liable to be revised under the said section. The order made by the appellate authority cannot be revised. In respect of matters, which have not been agitated before, considered, dealt with or decided by the First Appellate Authority, the order shall be deemed to be an order of the Assessing Officer and the Revisional Authority shall be competent to exercise revisional jurisdiction.

3. Jurisdiction

The jurisdiction cannot be exercised unless and until the Revisional Authority makes out that the impugned order of the Assessing Officer is erroneous and is also prejudicial to the interests of the revenue. Both the preconditions are cumulative, concurrent and must coexist. If one of it is lacking, the power to revise cannot be exercised. “Erroneous” means suffering from errors or mistakes. The expression ‘erroneous’ has been explained and expanded by insertion of Explanation 2 by the Finance Act, 2015 with effect from 1st day of June, 2015 namely:- “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 u/s.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”.

3.1 If the Assessing Officer fails to make an enquiry into the truth of the facts stated in the return filed by the assessee before accepting the statement made by the assessee his order can be said to be erroneous and the Commissioner may be justified to revise, if facts are found to the contrary. However, the learned Commissioner should indicate the basis on which he comes to the
prima facie conclusion and should also apprise the assessee as to the material on the basis whereof he comes to the conclusion that the order is erroneous. After indicating his reasons for such a conclusion and after hearing the assessee, he should give reasons for rejecting the plea of the assessee. The Commissioner should examine the merits of the objections raised by the assessee.

3.2 With the insertion of Explanation 2 and on its applicability, if an order is passed without making inquiries as deemed necessary by the Competent Authority or non-making of a required verification the order shall be deemed as ‘erroneous’. To illustrate in case of share application money mere receipt by a cheque/banking channel having PAN and confirmation alone would not suffice, the Assessing Officer should examine credit worthiness, source of receipt, recording in the audited accounts and other relevant aspects preferably with verification from the Assessing Officer of the applicant company/person, if practicable and possible. Similarly in respect of deductible expenditure, deductions, reliefs and allowances claimed, inquiry is to be made. Much vigilance is necessary at the level of Corporate Advisors/Authorized Representatives, as to fulfilment of these requirements.

3.3 The impugned order shall be deemed as ‘erroneous’ if it is not in conformity with any order, direction or instruction issued by the Central Board of Direct Taxes u/s. 119 of the I.T. Act. hence, it is desirable that the Corporate Advisors/Authorised Representatives remain well-equipped with complete data of such orders, directions, instructions which are of binding nature on the Assessing Officer and to see that the impugned assessment is in accord therewith and not ignorant of it.

3.4 The impugned order must be in accord with the binding precedents laid down on the subject by the Hon’ble Supreme Court and the Hon’ble High Court, which are otherwise binding under Articles 141 and 226/227, respectively of the Constitution. If the impugned order is contrary to the law laid down by the Hon’ble Courts, then such an order would be deemed as ‘erroneous’ and the competent authority is to correct and make it in accord with the binding precedents. To maintain consistency orders made on the issue in question in other persons case, would have to be followed. It is in accord with Article 14 of the Constitution. The Corporate Advisors/Authorised Representatives are well-advised to keep a complete record of binding precedents and see that they are followed not faulted but respected. Similar is the duty castes on the Competent Authority, if brought to its notice by the assessee.

3.5 However, it should not be an endeavour of the Commissioner of Income-tax to find one or other minor fault or mistake or lapse on the part of the Assessing Officer but the object should be to correct an erroneous order, which may affect the tax administration as a whole and which involves prejudices to the income-tax administration. The Madras High Court held in Venkatakrishna Rice Co. v. C.I.T. (1987) 163-ITR-129 that the scope of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act; the prejudice that is contemplated under section 263 is prejudice to the income-tax administration as a whole; section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate’s order in exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue. The Supreme Court in
Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 observed: “The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the A.O. Every loss of revenue as a consequence of an order of the A.O, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law”.

3.6 The Supreme Court in
CIT v. G.M. Mittal Stainless Steel P. Ltd. (2003) 263 ITR 255 observed that the satisfaction must be one objectively justifiable and based on material either legal or factual when available, it cannot be mere ipsie dixit of the Commissioner. The Supreme Court in
CIT v. Greenworld Corporation (2009) 314 ITR 81 held: “The jurisdiction u/s. 263 can be exercised only when both the following conditions are satisfied (i) the order of the Assessing Officer should be erroneous, and (ii) it should be prejudicial to the interests of the Revenue. These conditions are conjunctive. An order of assessment passed by the Assessing Officer should not be interfered with only because another view is possible”. The Apex Court in
CIT v. Max India Ltd. (2007) 295 ITR 282 observed: ‘Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. When the Assessing Officer adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the Assessing Officer is unsustainable in law’. In my view supremacy of law has been recognised.

3.7 Full Bench of Guwahati High Court in
CIT v. Jawahar Bhattacharjee (2012) 341 ITR 434 observed: ‘Not holding such inquiry as is normal and not applying the mind to relevant material in making an assessment would be an erroneous assessment warranting exercise of revisional jurisdiction’. It held ‘cases of assessment orders passed on a wrong assumption of facts, or an incorrect application of law, without due application of mind or without following the principles of natural justice are not beyond the scope of section 263 of the Act’.

4. Record

It is the bounden duty of the Revisional Authority to examine the record of the assessee before assuming jurisdiction. Attention of the Revisional Authority can be drawn by any lower authority including the Assessing Officer himself. It can be a source but not in a mechanical manner. He should examine the point issued by himself and after examination, verification and satisfaction may issue show cause notice. Record includes dissolution of partnership taking place after passing of assessment order as held in
South India Steel Rolling Mills v. CIT (1997) 224 ITR 654 (S.C.).

4.1 The Apex Court in CIT v. Shree Majunathesware Packing Products & Camphor Works (1998) 231 ITR 53 held: ‘ In view of the clear words used in clause (b) of the Explanation to s. 263(1), it is open to the Commissioner, while calling for and examining the record of any proceeding, not only to consider the record of that proceeding but also the record in relation to that proceeding available to him at the time of examination. The Commissioner can take into consideration the valuation report called for by the Assessing Officer before making the assessment but submitted by the valuer after the assessment’.

5. Show Cause Notice & Service

The show cause notice containing all the information on the basis whereof the Commissioner forms his opinion as to the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue must be sent and served on the assessee in the manner required u/s. 282 of the Act. The Commissioner should give adequate, sufficient and reasonable opportunity to represent. The S.C. in
CIT v. Ramednra Nath Gosh (1971) 82 ITR 888 did not approve of the action on finding that the service made was not a proper service. The Rajasthan High Court in
CIT v. Girdhari Lal (1984) 147 ITR 379 observed that it is well-settled that the power of attorney given to an agent should be construed strictly and from that power of attorney only such authority which has been conferred expressly or by implication, should be taken into consideration.

5.1 The show cause notice should be detailed, pointing out the mistakes or inaction which needs correction. No new issue de hors the notice can be made as a basis of the order. The Andhra Pradesh High Court in
CIT v. G.K. Kabra (1995) 211 ITR 336 observed that it is necessary for the Commissioner to point out the exact error in the order which he proposes to revise. In final order the Commissioner cannot travel beyond the issues raised in the show cause notice. Taking up of any new issue would be in violation of principles of natural justice and

6. Our duty

It is our bounden duty to minutely examine the show cause notice, the issues raised therein and to pin-pointedly reply and meet with each and every error or inaction and support it with detailed explanation with the supporting material. It is equally advisable to adduce additional evidence/material to justify the action of the Assessing Officer, supported by case laws and to co-operate. Notice should be seriously taken note of and not in a casual manner. Personal appearance is desirable.

7. Order

The Competent Authority on receipt of the reply and after giving a personal and patient hearing at his own level to pass a reasoned and speaking order highlighting the fulfillment of two conditions precedent and considering the supporting material and pleas raised by the assessee. The Revisional Authority is entitled to pass such order thereon as the circumstances of the case justify. The Commissioner can enhance or modify the assessment. He can cancel the assessment and direct a fresh assessment. If he sets aside the assessment and directs a fresh assessment, he should give guidelines, on the basis whereof fresh order is to be made. If the assessment is set aside, it should not be set aside as a whole but should be set aside only in part, to the extent the order is erroneous and on the points, which have made the order erroneous and prejudicial to the interests of the Revenue. It is a quasi-judicial function and must be discharged with due care and precaution, with full fairness and good conscience and in judicial manner and not as a futile exercise.

8. Limitation

A Revisional Order can be made within two years from the end of the financial year in which the order sought to be revised has been passed by the Assessing Officer. The only exception to the above said rule is that an order 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, the High Court or the Supreme Court. While computing the period of limitation, the time taken in giving an opportunity to the assessee to be reheard under the proviso to sec. 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.

8.1 Where items other than item sought to be revised by the Commissioner are the subject of reassessment the period of limitation for revision by the Commissioner begins from the date of the original assessment not from reassessment in which the item was not dealt with. The doctrine of merger does not apply in such a case as held by the Supreme Court in
CIT v. Alagendran Finance Ltd. (2007) 293 ITR 1.

9. Remedy

An appeal u/s. 253 can be filed against order of the competent authority before the Income-tax Appellate Tribunal, within 60 days for the date of receipt of the order. Statement of facts and grounds should be drawn after minute examination of the impugned order, original order, material/evidence adduced earlier, the show cause notice, detailed reply etc.

10. Whether Explanation 2 to Sec. 263(1) is prospective or retrospective?

Explanation 2 has been inserted with effect from 1st day of June, 2015 and primarily to nullify view expressed on the expression ‘Erroneous’ by the Apex Court, High Courts and Income-tax Appellate Tribunal. However, it expands the meaning of the expression ‘Erroneous’ earlier construed and interpreted by the Hon’ble Courts. Though it has been inserted as an Explanation but to expand its meaning and to read its meaning different to the one arrived at consistently by the Courts and its natural meaning, hence, it can be claimed that it is ‘substantive’ in effect, bringing in a large number of cases not ‘erroneous’ earlier and putting additional burden of extra revenue payment, hence, prospective and effective on all orders made by the Assessing Officer on or after 1-6-2015. It cannot be said to be corrective. It is well settled proposition that when a provision imposes additional penal liability, such provision should be strictly construed/interpreted and in favour of the taxpayer. That apart the legislature in its wisdom has made it effective from 1-6-2015 and not retrospectively from any earlier date. Hence, it should be considered as prospective and effective on assessment orders made on or after 1-6-2015. At best it can be applied on all orders passed by the Revisional Authority on or after 1-6-2015.

10.1 The Supreme Court in
CIT v. Vatika Township P. Ltd (2014) 367 ITR 466 observed: ‘The proviso added to section 113 of the Act is not beneficial to the assessee. On the contrary, it is a provision which is onerous to the assesseee. Therefore, the normal rule of presumption against retrospective operation would apply. The fundamental rule is that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication’. It has been consistently held that a provision must be read subject to the rule that in the absence of an express provision or clear implication, the Legislature does not intend to attribute to the amending provision, a greater retrospectivity than is expressly mentioned’. It is settled law that a taxing provision imposing liability is governed by the normal presumption that it is not retrospective as held in
S.S. Gadgil v. Lal And Co. (1964) 53 ITR 231 (SC).

11. Conclusion

It has been noticed that many Assessing Officers take the solemn act of framing an assessment in casual manner, ignoring binding precedents and circulars of the Board and without making desired or required investigation, examination and verification at their level, causing loss of revenue and enhancing evasions. Hence, Explanation 2 has been inserted in order to do justice with equality and uniformity. The readers are advised to be well-equipped with law and adduce material/evidence supported by case laws at the assessment stage, in the scrutiny assessment, to avoid exercise of revisional power and to avoid unending litigation and harassment at all levels. Vigilance and due diligence at all levels is demand of the day.

[Source: Article published in Souvenir of National Tax Conference held at Ahmedabad on 11th and 12th July, 2015.]

N. M. Ranka
Sr. Advocate

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