I. Revision of orders erroneous and prejudicial to the interests of revenue – Amendments proposed to section 263
1. Introduction
As per section 263 of the Income-tax Act, 1961 (the “Act”), the Commissioner (and the Principal Commissioner on or after 1st June, 2013) have revisionary powers in respect of orders passed by the Assessing Officer (AO) if the former considers the impugned order “erroneous in so far as it is prejudicial to the interests of the revenue”. The revisionary powers include passing of order enhancing or modifying or cancelling the assessment and directing a fresh assessment. For invoking the provisions of this section, two conditions need to be satisfied as held in the case of Malabar Industrial Co. Limited v. CIT [2000] 243 ITR 83 (SC). These two conditions are as follows: (i) order must be erroneous; and (ii) order must be prejudicial to interests of revenue.
Section 263 has been subject matter of much controversy as regards when an order can be said to be erroneous and whether such error has resulted in the order being prejudicial to the interests of the revenue.
2. Proposed amendment
Clause 65 of the Finance Bill, 2015 proposes to introduce a new Explanation to section 263(1) which provides as follows:
“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.”
The reason for this amendment, as stated in the Memorandum explaining provisions of Finance Bill, 2015 (the “Memorandum”) is to provide clarity on the issue – [2015] 371 ITR (St.) 292, 342.
3. Analysis of amendment
Clause (a) of Explanation 2: This clause provides that section 263 can be invoked and an order can be revised if it is passed “without making inquiries or verification which should have been made”. Judicial opinion on whether lack of enquiry by AO alone constitutes sufficient cause for invoking revisionary powers under section 263 is divided. In CIT v. Vikas Polymers [2010] 194 Taxman 57 (Del.) (HC), the Delhi High Court held that mere lack of inquiry by the AO is not sufficient for revision under section 263. Similarly, in Institute of Chartered Accountants of India v. DIT [2011] 136 TTJ 548 (Del.) (Trib.), it was held that non-examination of an issue by AO does not, per se, make the assessment order prejudicial to interest of revenue for revision.
However, with the insertion of this clause (a), this position is now sought to be reversed and the Legislature seeks to affirm the ratio in Anil Kumar v. ACIT [2005] 147 Taxman 5 (Mag.) (Del.) (Trib.) that AO was not justified in accepting gifts without making further enquiry about creditworthiness of donors as well as source of funds making revision under section 263 justified.
The proposed amendment gives power to the Commissioner or the Principal Commissioner to sit in judgement over the adequacy of the enquiries or verification which the AO has made. In Salora International Ltd. v. Addtl. CIT [2005] 2 SOT 705 (Delhi) (Trib.), it was held that merely because from a perfectionist point of view, it is felt that some more enquiries and verifications could have been made by AO while making assessment/assessment order cannot be declared to be erroneous and prejudicial to interest of revenue. In my view, with effect from 1st June 2015, the ratio this decision may not be good.
An order allowing a particular deduction/claim of an assessee after verification of the AO may still be open to revision under section 263 if the Commissioner or the Principal Commissioner opines that verification which ought to have been made by the AO has not been so made. While the provisions of section 263 did not originally visualize substitution of judgement of the AO with that of the Commissioner as held in Antala Sanjaykumar Ravjibhai v. CIT [2012] 135 ITD 506 (Rajkot) (Trib.) and Manish Kumar v. CIT [2012] 134 ITD 27 (Indore) (Trib.), the new amendment, if enacted, would, in my view, have this effect.
For instance, an order under section 143(3) is to be passed by the AO “after hearing such evidence as the assessee may produce and such other evidence as the AO may require on specified points, and after taking into account all relevant material which he has gathered”. But, even after doing so and after proper application of mind by the AO, the order cannot be said to be immune from revision as the scope of further enquiry/ verification may not, in many cases, be ruled out which may be a subjective matter. To my mind this clause would bestow on an administrative authority in exercise of revisionary oversight jurisdiction, powers usually vested in an appellate authority under appellate jurisdiction in a fiscal law.
Clause (b) of Explanation 2: As per this clause, an order 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, it is passed allowing any relief without inquiring into the claim.
In Bharat Overseas Bank Ltd. v. CIT [2013] 152 TTJ 546 (Chennai) (Trib.), it was held when the impugned order was silent on the claim made by assessee, and allowed such claim, without any discussion, such an order was erroneous and prejudicial to the interest of revenue. This decision is sought to be affirmed with clause (b).
It is important to note that the term “relief” has been used many times in the Act but not defined. Every deduction or exemption availed by an assessee would in a general sense be relief but whether the Legislature has sought to include the same under this clause (b) may be a debatable issue. This is because the term “relief” is used in contradistinction with the terms “exemption”, “deduction” etc. at various places in the Act. In my opinion, even if a view is taken that the term “relief” does not cover exemptions and deductions, non-verification of such relief may satisfy the requirements of clause (a), and hence, the impugned order may even otherwise be open to revision under section 263.
It is often seen that during scrutiny assessments, the AO calls for details regarding major items and passes an order based on his verification of these items while omitting the insignificant ones. After the amendment, in my view, even such orders may be revised by the Commissioner or the Principal Commissioner in so far as these unverified items.
This clause can be a major cause of litigation for assessees in whose cases assessment orders are revised under section 263 because no details were called for by the AO.
But, what is the position if the AO after calling for relevant details accepts the contention of the assessee but does not deal with the issue in the assessment order? This issue was considered by the Bombay High Court in Idea Cellular Ltd. v. DCIT & Ors. [2008] 301 ITR 407 (Bom.) (HC) and in CIT v. Fine Jewellery (India) Ltd, ITA No. 296 of 2013 dated 3rd February, 2015 wherein it was held that the fact that assessment order is silent on a point does not mean that there is no application of mind by AO if he has raised a query during the assessment proceedings and assessee has replied, and revision under section 263 was not permissible under these circumstances. In my view, this position continues to hold good even post the amendment.
Clause (c) of Explanation 2: As per this clause, any order which has not been made in accordance with any order, direction or instruction issued by the Board under section 119 can be subject matter of revision under section 263. It is settled law that the orders, directions and instructions issued by the Board are binding on the AO. Therefore, it is now proposed to be provided that orders of AO which are in violation of such orders, directions and instructions would be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue.
Under section 119, the Board may also issue directions etc. which are in favour of the assessee. One consequence of this amendment could be that failure to follow such directions which are favourable to the assessee could also satisfy the requirements of this section after the amendment takes effect. This is because vide the proposed Explanation 2, the Legislature seeks to widen the meaning of expression “erroneous in so far as it is prejudicial to the interests of the revenue” and does not make a distinction between direction etc. which are favourable to the assessee and the ones which are not.
The question that arises is whether the proposed amendment can be read in this manner and revision of orders under section 263 justified even in cases where the AO has passed an order ignoring a direction favourable to the assessee. In my view, the answer to this question would be no as such an interpretation would not satisfy condition (ii) mentioned in the Supreme Court decision of Malabar Industrial Co. Limited (supra).
Also, a situation may arise as to whether an order can be revised under this section if it is contrary to a Board direction but in line with a High Court or Supreme Court judgement. It is now settled that instructions or circulars which are contrary to the law declared by Supreme Court or High Court cannot override judicial declaration of law as was held in the case of Hindustan Aeronautics Limited v. CIT [2000] 243 ITR 808 (SC). Therefore, in my view, if the order of the AO is in accordance with the decision of High Court or the Supreme Court, then revision under section 263 should not be permissible notwithstanding that that order is contrary to a Board direction, instruction or order. This view has also been taken by the Calcutta High Court in the case of Bhartia Industries Ltd. v. CIT [2013] 353 ITR 486 (Cal.), and in my view, continues to be good law.
Clause (d) of Explanation 2: This clause proposes to give to the Commissioner or the Principal Commissioner the power to exercise revisionary power if an order has not been passed in accordance with any decision of the jurisdictional High Court or Supreme Court which is prejudicial to the assessee whether such decision is rendered in the case of the assessee or any other person.
This clause is applicable only when an order has been passed in ignorance of a Supreme Court decision or a jurisdictional High Court decision. The amendment does not seek to cover situations wherein the AO passes an order in ignorance of a non-jurisdictional High Court decision.
A question arises as to whether an order can be revised under section 263 if subsequent to the passing of such order, there is a contrary decision of the jurisdictional High Court or the Supreme Court on a particular issue. The assessee may contend that if a particular decision is not available for consideration of the AO, it is impossible for him to pass his order “in accordance with” such decision. However, in this regard, it is also important to note the decision in CIT v. Dr. K. Ramachandran [2004] 139 Taxman 320 (Mad.) (HC) wherein it was held that “record” would mean record which was available to the AO at the time of passing of assessment order, and would include records available with the Commissioner at time of passing of order under section 263. A similar view was taken in Star India Limited v. Addtl. CIT [2012] 14 ITR (T) 106 (Mum.). On the basis of these decisions, in my view, revision under section 263 may be permissible even if subsequent to the AO’s order, a Supreme Court decision or a jurisdictional High Court decision is rendered deviating from the position taken by the AO.
The amendment is proposed to take effect from 1st June, 2015 i.e. on or after this date, the Commissioner or the Principal Commissioner, as the case may be, would have the enhanced powers under this section subject to sub-section (2) and sub-section (3). In my view, this Explanation 2 should also apply to orders of AO which are passed before 1st June, 2015.
Though the intended reason for the new Explanation is to “provide clarity”, it has substantially enhanced the power vested in the Commissioner and Principal Commissioner under this section, and such enhanced powers, in my view, would lead to heightened litigation against the revision orders.
A corresponding amendment could also have been made in section 264 to expressly provide assessees the benefit of revision due to subsequent decisions of higher courts. However, the assessees should still be entitled to the same in light of the Gujarat High Court decision in Parshuram Pottery Works Co. Ltd. v. WTO [1975] 100 ITR 651 (Guj.) (HC).
II. Sanction before issuance of notice under section 148 – Substitution of section 151
1. Introduction
Under the existing provisions of section 151, the AO is required to obtain sanction before issuance of notice under section 148. The authority from which sanction is to be obtained depends on (i) whether scrutiny under section 143(3) or under section 147 has been made earlier or not, (ii) whether notice is proposed to be issued within or after four years from the end of relevant assessment year, and (iii) the rank of the AO proposing to issue notice.
2. Proposed amendment
The existing section 151 has been sought to be replaced by a new section 151 which provides that for issuance of notice under section 148 within a period of up to four years from the end of relevant assessment year, the approval of Joint Commissioner shall be required and that of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner if the issuance of notice under section 148 is beyond four years from the end of relevant assessment year.
3. Analysis of amendment
The new provisions introduced vide Clause 35 of the Finance Bill, 2015 seek to do away with two of the existing abovementioned three criteria. After the enactment of this section, the only criteria that would need to be considered, is the time within which the assessment is sought to be reopened under section 147. If the reassessment is proposed within four years, the approval of Joint Commissioner would be required and in other cases i.e. after four years, the approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall be required.
The amended provision reverts to the position prevailing prior to 1st April 1989 where the competent authority for according approval for reopening of assessment depended only on the number of years elapsed from the assessment year sought to be reopened. That position was altered by the Direct Tax Laws (Amendment) Bill, 1987 – [1987] 168 ITR (St.) 301, 330 – and is now proposed to be done away with.
The reason for this amendment as stated in the Memorandum is to bring simplicity in the provision – [2015] 371 ITR (St.) 292, 340. However, one effect of this amendment is that, now sanction would be required even if the assessment is proposed to be reopened within a period of four years even when no assessment under section 143(3) or under section 147 had been made earlier. This is a marked change from the existing provision wherein no prior sanction is required if the assessment is sought to be reopened within four years and no assessment either under section 143(3) or under section 147 had been made for that year.
This amendment is proposed to take effect from 1st June, 2015.
Thus, if the sanction under section 151 is obtained and notice under section 148 is issued before this date, the existing provisions would govern the case. Similarly, for sanction obtained and notice under section 148 issued on or after this date, the substituted provisions would govern the case.
However, a question may arise as to the position wherein the sanction is obtained before 1st June, 2015 and notice under section 148 issued after this date. Take for instance the case of ABC Limited where no assessment either under section 143(3) or under section 147 is earlier made for Assessment Year 2009-10 and the AO proposes to reopen the assessment on 29th May, 2015 (last working day of that month). As per the existing provisions of section 151(2), the AO (lets assume the Assistant Commissioner) is required to obtain sanction of the Joint Commissioner before issuance of notice under section 148. Therefore, if the notice is issued on 29th May, 2015 itself, the notice would be valid (subject to satisfaction of other conditions such as “reason to believe” etc.) as sanction is duly obtained from the appropriate authority as on the relevant date.
Now one needs to analyse as to whether the reopening would be valid if after recording his reasons on 29th May, 2015 and sending the same to the Joint Commissioner for approval on the same day, the sanction is obtained on 1st June, 2015 and the AO issues the notice thereafter. In such a case, at the time of recording reasons and at the time of sending the case of approval, the proper authority for obtaining sanction was the Joint Commissioner. However, at the time of issuance of notice, due to amended provisions, the appropriate authority for obtaining sanction is changed to Principal Chief Commissioner/ Chief Commissioner/ Principal Commissioner/ Commissioner. Whether in such a case, the impugned notice can be said to be invalid for want of sanction from appropriate authority?
In this regard, it is important to note the wording of the proposed amendment:
“151. (1) No notice shall be issued under section 148 by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice.”
Thus, with effect from 1st June, 2015, there is a provision in the statute which prohibits issuance of notice under section 148 without the sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner after expiry of four years from the end of the relevant assessment year. The requirement of sanction is with respect of date of issuance of notice under section 148, and hence, in my view, the law as on such date should be considered for examining whether appropriate sanction has been obtained or not. Therefore, the impugned notice in the instant case should not be said to be valid.
Though this amendment is being brought in to bring in simplicity in matters of obtaining sanction for reopening cases and is for the benefit of the revenue, it also has the effect of protecting the assessee from needless harassment even in cases where detailed assessment has not been earlier made and reopening is proposed within four years by mandating the AO to obtain prior sanction even in such cases.
Rahul R. Sarda,
Advocate