Scope of Revision of orders by the Commissioner u/s.263

Section 263 of the Income-tax Act, 1961 (‘the Act’) corresponding to section 33B of the Income-tax Act, 1922 (‘the 1922 Act’) was inserted in the statute with the main objective of arming the Commissioner of Income-tax (‘CIT’) with the powers of revising any order of the Assessing Officer (‘AO’), where the order is erroneous and resulted in prejudice to the interest of the Revenue. Prior to the introduction of section 33B in the 1922 Act, the Department had no right of appeal against any order passed by the AO and therefore, it was necessary to provide the CIT with the powers of revision.

While the power is not meant to be a substitute for the power of the AO to make assessment, the same can certainly be exercised when the order of the AO is erroneous and prejudicial to the interest of the Revenue. Whether or not the order is erroneous and prejudicial to the interest of the Revenue has to be decided from case to case.

The relevant provisions of section 263 reads as under:

“263(1) The 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 insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and making or causing to 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 . . . . .”

The controversy discussed here revolves around the scope of revisional power of the CIT — whether it extends to issues examined by the AO but not discussed in the assessment order.

The Karnataka High Court recently had an occasion to deal with this issue, wherein the Court held that an assessment order is erroneous and prejudicial to the interest of the Revenue, if the AO has not given any conclusion and finding on the ground of revision in the assessment order, thereby, justifying the exercise of powers of revision u/s.263. In deciding the issue, the Karnataka High Court dissented with the earlier findings of the Bombay and Delhi High Courts on the subject.

Gabriel India’s case

Upon completion of assessment, the CIT issued notice u/s.263 on the ground that there was an error in the order of the AO in allowing the deduction of the amount, as it was capital in nature. The CIT did not accept the contention of Gabriel that there was proper application of mind by the AO, before allowing the claim of expenditure as revenue in nature.

On appeal by Gabriel to the Tribunal, the Tribunal concluded that the action of the CIT was not in accordance with the provisions of section 263.

Being aggrieved by the order of the Tribunal, the Revenue appealed to the High Court. The High Court, after the considering the facts of the case and perusing the orders of lower authorities, opined that the power of suo moto revision u/s.263(1) was in the nature of supervisory jurisdiction and could be exercised only if the circumstances specified therein existed.

Two circumstances must exist to enable the CIT to exercise power of revision u/s.263:
— The order of AO must be erroneous; and
— By virtue of the order being erroneous, prejudice is caused to the interest of the Revenue.

The High Court held that if the AO acting in accordance with law makes certain assessment, it cannot be termed as erroneous by the CIT simply because according to him the order should have been written more elaborately. The section does not visualise a case of substitution of judgment of the CIT for that of the AO, who has passed the order, unless the decision is held to be erroneous.

The High Court further observed that the AO had exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion. Such a conclusion could not be termed as erroneous simply because the CIT did not feel satisfied with the conclusion. In such a case, in the opinion of the CIT, the order may be prejudicial to the interest of the Revenue, but it cannot be held to be erroneous for the exercise of revisional jurisdiction u/s.263. According to the Court, for an order to be erroneous, it must be an order which is not in accordance with the law or which has been passed by the AO without making any inquiry in undue haste. The Court noted that though the words ‘prejudicial to the interest of the Revenue’ have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. [Following Dawjee Dadabhoy & Co. v. S. P. Jain & Anr., (31 ITR 872) (Cal.) and Addl. CIT v. Mukur Corporation, (111 ITR 312) (Guj.)]

The High Court also observed that for re-examination and reconsideration of an order of assessment, which had already been concluded and controversy about which had been set at rest, to be set again in motion, must be subject to some record available with the CIT and should not be based on the whims and caprice of the revising authority. The High Court made the following specific observations as regards the issue under consideration to uphold the contention of the Tribunal, which is as under: “The ITO in this case had made enquiries in regard to the nature of expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing . . . . . Such a decision of the ITO cannot be held to be ‘erroneous’ simply because in his order he did not make elaborate discussions in that regard . . . . . Moreover, in the instant case, the CIT himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous . . . . . He simply asked the AO to re-examine the matter. That in our opinion is not permissible.”

Ashish Rajpal case

The issue under consideration had also come up before the Delhi High Court in the case of CIT v. Ashish Rajpal, (320 ITR 674). In that case, in the course of scrutiny, several communications were addressed by the assessee to the AO, whereby the information, details and documents sought for, were adverted to and filed, which were subject to grounds of revision u/s.263. On challenge before the Tribunal by the assessee of the powers of revision of the CIT, the Tribunal held that the assessee had filed all the relevant details and there was due application of mind by the AO on the grounds of revision. Therefore, merely because the assessment order did not refer to the queries raised during the course of the scrutiny and the response of the assessee thereto, it could not be said that there was no enquiry and that the assessment was therefore erroneous and prejudicial to the interest of the Revenue.

On appeal by the Revenue before the High Court, similar conclusions were arrived at and the exercise of the revisional power of the CIT, on the ground that there was lack of proper verification by the AO, was found to be unsustainable. Further, the High Court, after considering the decisions on the subject, explained the meaning of the expression ‘erroneous’ and ‘prejudicial to the interest of the Revenue’ as under:

“…..(iii) An order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of principles of natural justice or is passed without application of mind, that is, is stereotyped, inasmuch as, the AO, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds with ‘undue haste’. [See Gee Vee Enterprises v. ACIT, (99 ITR 375) (Del.)]

(iv)    The expression ‘prejudicial to the interest of the Revenue’, while not to be confused with the loss of tax, will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the Revenue. [See Malabar Industrial Co. Ltd. (243 ITR 83)]”

Infosys Technologies’ case

The issue under consideration came up recently before the Karnataka High Court in the case of CIT v. Infosys Technologies Ltd., (341 ITR 293).

Infosys had claimed certain deductions for A.Y. 1995-96 and A.Y. 1996-97 towards its tax liability on account of tax deducted at source (‘TDS’) from payments received in respect of its business activities in Canada and Thailand. The aggregate tax relief as claimed as per Double Taxation Avoidance Agreement (‘DTAA’) under India-Canada tax treaty and India-Thailand tax treaty for A.Ys. 1995-96 and 1996-97 were Rs.18,12,897 and Rs.48,59,285, respectively. The AO, during the course of original assessment proceedings, after considering the submissions and records of Infosys duly allowed the tax relief as claimed by it under the respective treaties.

However, the CIT, on a consideration of non-speaking order of the AO on the aforesaid tax relief so allowed and in light of Article 23(2) of the India-Canada DTAA and Article 23(3) of the India-Thailand DTAA, was of the view that the order was erroneous and prejudicial to the interest of the Revenue. The CIT exercised his powers u/s.263 of the Act and remanded the matter to the file of the AO to ascertain the exact tax relief to which Infosys was entitled under respective tax treaties.

On appeal by Infosys before the Tribunal, the revisional orders of the CIT u/s.263 were set aside by the Tribunal vide a common order, on the ground that the orders passed by the AO were not shown as erroneous and prejudicial to the interest of the Revenue by the CIT.

The Revenue, aggrieved by the order of the Tribunal, appealed to the Karnataka High Court. After considering the arguments of the respective sides and perusing the orders of the lower authorities, the High Court accepted the fact that the CIT in his order does not anywhere explicitly show as to how the order of the AO is erroneous and prejudicial to the interest of the Revenue. The High Court held that the object of section 263 is to raise revenue for the state. The said provision is intended to plug leakage of revenue by erroneous orders passed by the lower authorities, whether by mistake or in ignorance or even by design.

Reference was made by the Karnataka High Court to the observations of the Supreme Court in the cases of Electro House (82 ITR 824) and Malabar Industrial Co. Ltd. v. CIT, (supra) to hold that since the AO had not disclosed the basis on which the tax reliefs were arrived at in the assessment order, which being important for determination of tax liability, there was definitely a possibility of the order being both erroneous and prejudicial. The ratios of the decisions of the Bombay High Court in the case of Gabriel India (supra) and the Delhi High Court in the case of Ashish Rajpal (supra) were referred to but were considered as not applicable to the facts and circumstances of the present case. The High Court held that the argument that the materials had been placed before the AO and therefore, the AO had applied his mind to the same could not be accepted to restrict the power of the CIT to revise the orders u/s.263.

Further, the following specific findings were made by the High Court as regards the issue under consideration to uphold the exercise of revisional power of the CIT u/s.263:

“We are of the clear opinion that there cannot be any dichotomy of this nature as every conclusion and finding by the assessing authority should be supported by reasons, however brief it may be, and in a situation where it is only a question of computation in accordance with the relevant articles of a DTAA and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority has failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the Revenue…….”

Further the AO, pursuant to the directions of the CIT u/s.263, had re-examined the tax reliefs, resulting in some reduction of tax relief to Infosys. On appeal by the assessee before the CIT(A) and further before the Tribunal, the Tribunal had set aside the fresh assessment on the ground that the revisional jurisdiction of the CIT u/s.263 had been set aside at that point in time and the appeal against such fresh assessment by Infosys was accordingly allowed with necessary tax reliefs. Aggrieved by this Tribunal order, the Revenue had appealed against this order to the High Court, which appeal was clubbed with the appeals against the orders u/s.263. The High Court, on taking cogni-zance of these facts, set aside the matters to the file of the Tribunal, for deciding the issue on merits and in accordance with law.

Observations

Recently, the Full Bench of the Gauhati High Court in the case of CIT v. Jawahar Bhattacharjee, (67 DTR 217), after extensively considering the legal decisions and precedents on the subject, explained the expression ‘erroneous’ assessment in context of section 263 is an ‘assessment made on wrong assumption of facts or on incorrect application of law or without due application of mind or without following the principles of natural justice.’ Though the decisions of the Bombay High Court in the case of Gabriel India Ltd. (supra) and the Delhi High Court in the case of Ashish Rajpal (supra) were not specifically referred to in the aforesaid decision, the ratio of these judgments were accepted by the Full Bench in the decision.

The Karnataka High Court in the case of Infosys Technologies Ltd. (supra) has held that the AO should record reasons for his conclusions and findings in the assessment order, irrespective of whether the issue has been accepted or not by the AO. In case the assessment order does not contain the reasons for his findings and conclusions, then it may be construed as an order which is erroneous and prejudicial to the interest of the Revenue, whereby the action of revision by the CIT shall be justified u/s.263.

This interpretation would subject the concluded assessments of the assessees to revision by the CIT for want of duty not performed by the AO in recording reasons for his findings and conclusions in his orders. In other words, the assessees may be penalised for want of non-performance of the duty by the AO. If one were to construe the provisions of section 263 in such a manner, then all settled issues which are concluded at the assessment stage after due application of mind by the AO, may also be subject to revision by the CIT. Such a construction of the expression ‘erroneous order and prejudicial to the interest of the Revenue’ by the Karnataka High Court is clearly in contradiction to the Full Bench of the Gauhati High Court and other High Courts as referred to above.

In addition to the above, the following decisions have also held that merely because the AO should have gone deeper into the matter or should have made more elaborate discussion could not be a ground for exercising power u/s.263:

•    CIT v. Development Credit Bank Ltd., (323 ITR 206) (Bom.);

•     CIT v. Hindustan Marketing and Advertising Co. Ltd., (341 ITR 180) (Del.);

•     CIT v. Ganpati Ram Bishnoi, (296 ITR 292) (Raj.);

•     CIT v. Unique Autofelts (P) Ltd., (30 DTR 231) (P&H);

•     Hari Iron Trading Co. v. CIT, (263 ITR 437) (P&H); and

•     CIT v. Goyal Private Family Specific Trust, (171 ITR 698) (All.).

Further, from the limited facts as understood from the order, the Karnataka High Court also failed to appreciate that the material as filed by Infosys during the course of assessment before the AO for the claim of tax relief was also available for consideration before the CIT. However, the CIT, instead of considering the materials on record and then reaching the necessary conclusions, chose to remand the matter to the file of the AO for re-examination without giving any reasons and findings for satisfaction as to how the tax relief so claimed by the assessee was erroneous and prejudicial to the interest of the Revenue. The CIT, in that case, seems to have relied on the text of the impugned Articles of the DTAAs to remand the matter to the file of the AO for re-examination, without taking cognizance of the material filed by the assessee before the AO for claim of tax reliefs or pointing out any specific defects in the application of the impugned articles. The CIT has also in his order seems to have neither opined, nor demonstrated how the conditions provided under the respective tax treaties were not fulfilled by the assessee or satisfied only for a particular amount out of the total tax relief claimed. Under similar circumstances on different issues, the Bombay High Court in the case of Gabriel India Ltd. (supra), after elaborate discussions as reproduced above, had set aside the revisional order of the CIT.

Though it may sound paradoxical, the Karnataka High Court while expecting the AO, being a quasi-judicial authority, to record the reasons and conclusions for the findings in the assessment order, it allowed the CIT, also a quasi-judicial authority, to exercise the revisional power, though the satisfaction and reasons were not recorded for holding the order of the AO as erroneous and prejudicial to the interest of the Revenue. The powers of revision had been exercised by the CIT merely on the ground of a doubt that the AO had not properly applied his mind in carrying out the procedural aspect of allowing the tax relief as per the impugned Articles under consideration and because the assessment order did not discuss the issue.

While one appreciates that the CIT u/s.263 is never required to come to a firm conclusion before exercising his powers of revision, it is equally true that the CIT being a quasi-judicial authority, is also required to satisfy himself and give reasons before invoking the powers of revision. This legal proposition is also approved in the following decisions rendered in the context of section 263:

•     CIT v. T. Narayana Pai, (98 ITR 422) (Kar.);

•     CIT v. Associated Food Products, (280 ITR 377) (MP);

•     CIT v. Jai Mewar Wine Contractors, (251 ITR 785) (Raj.);

•     CIT v. Duncan Brothers, (209 ITR 44) (Cal.) — an order of the CIT not bringing any cogent materials on record and based only on certain hypothesis is unsustainable;

•     CIT v. Kanda Rice Mills, (178 ITR 446) (P&H);

•     CIT v. Trustees, Anupam Charitable Trust, (167 ITR 129) (Raj.) — the error envisaged in this section is not one which depends on possibility or guesswork, it should be actually an error either of fact or of law; and

•     CIT v. R. K. Metal Works, (112 ITR 445) (P&H);

Without prejudice to the aforesaid discussions, it would be relevant to mention that in the case of Infosys Technologies (supra), the reference to the observations of the decisions of the Supreme Court in the case of Electro House (supra) and Malabar Industrial Co. Ltd. (supra) may not help the case for justification of exercise of revisional power by the CIT u/s.263. While the decision of the Apex Court in the case of Electro House (supra) dealt with the question of whether it is necessary to issue notice to the assessee before assuming jurisdiction u/s.33B of the 1922 Act (corresponding to section 263) vis-à-vis requirements of issue of notice u/s.34 of the 1922 Act (corresponding to section 148, section 149 and section 150), the decision of the Apex Court in the case of Malabar Industrial Co. Ltd. (supra) had a specific finding of fact that the AO had undertaken assessment in absence of any supporting material and without making any inquiry, which does not seem to be the case in Infosys Technologies matter (supra).

In light of the above, the findings of the Karnataka High Court in the case of Infosys Technologies Ltd. (supra) may require reconsideration. Otherwise, practically, considering the manner in which orders are passed by the AOs, wherein the reasons for the conclusions and findings are only spelt out with regard to the issues where the claims of the assessees are not accepted, such a view may give a free hand to the CIT to exercise powers of revision u/s.263 in almost all cases and revise all such settled assessments, which is unwarranted.

Further, judicial propriety and judicial discipline required that the case of Infosys Technologies Ltd. (supra) should have been referred to a Larger Bench of the Karnataka High Court, particularly considering that the same High Court in the case of T. Narayana Pai (supra) had decided otherwise regarding want of satisfaction and recording of a finding by the CIT in the context of section 263.

The view taken by the Bombay and Delhi High Courts, that revision cannot be resorted to in cases where the relevant information has been examined by the Assessing Officer, though not recorded in the assessment order, therefore seems to be the better view.