Introduction: 1.1 Section 263 empowers the Commissioner of Income Tax to revise any order passed under the Income-tax Act, 1961, “ the Act” which is erroneous insofar as it is prejudicial to the interest of the revenue. These are special and wide powers conferred upon the Commissioner of Income Tax, to bring to tax any loss of revenue from the orders passed under the Act. At the same time, these are not unfettered powers but are specific and are subject to conditions contained in the section for invoking the jurisdiction. A bare reading of section 263, makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo moto under it is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent—if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to section 263(1) of the Act.
1.2 In the above background, in many cases, the ground of invoking jurisdiction u/s. 263 is found to be non-inquiry or failure to make inquiry by the Assessing Officer that warrants revision of the order passed by the Assessing Officer. The law had been settled that if there is a failure to make enquiry which causes prejudice to the interest of the revenue, the Commissioner gets the jurisdiction to revise the order. By the Finance Act 2015, an amendment has been brought in by adding an Explanation to section 263 providing that an order passed by the Assessing Officer shall be deemed to be erroneous insofar as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, the order is passed without making inquiries or verification which should have been made. The Amendment has raised concerns about the exact implications of the Amendment and the possible interpretations of the Explanation. An attempt is therefore made to analyse the law that prevailed and the ramifications of the Amendment.
2. Failure to make inquiry – Erroneous:
2.1 Whenever the orders passed by the Assessing Officers are found to be cryptic and without any inquiry, thereby accepting the return of income as filed by the assessee, the orders have been held to be erroneous and prejudicial to the interest of revenue. The Supreme Court in case of Rampyari Devi Sarogi vs. CIT ( 67 ITR 84) and in Smt. Tara Devi Aggarwal vs. CIT ( 88 ITR 323) have upheld the orders u/s. 263 on this ground. In these cases, the assessment record showed lack of inquiry by the Assessing Officers and mere acceptance of the returned income. The Commissioners made independent inquiries to show that the order caused prejudice to the revenue. In these facts, the Supreme Court came to the conclusion that passing an order without any inquiry would make the order erroneous.
The Delhi High Court in case of Ghee Vee Enterprises vs. Add CIT ( 99 ITR 375) has given a further dimension to the aspect of ‘failure to make inquiry.’ It held that the position and function of the ITO is very different from that of a civil Court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil Court in the absence of any rebuttal. The civil Court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word “erroneous” in section 263 emerges out of this context. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry necessary. The word “erroneous” in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.
It implies that the Assessing Officer is bound to carry out prudent inquiries so as to ascertain and assess the correct income of the assessee. If they are lacking, the order becomes erroneous.
3. Failure to make inquiry – Scope:
The ground of failure to make inquiry would cover different situations. They can be categorised as follows
i. There is a complete failure to make inquiry while passing the order. The entire assessment order is passed summarily. The record does not show any examination or verification of the details furnished. The AO called for the basic details of income returned and accepted the same. The record, order sheet as well as the order is cryptic and silent about the application of mind by the AO. In this situation, the simple ground of non-enquiry by AO is sufficient to make the order erroneous and could warrant action u/s. 263 by CIT.
ii. In a given case, the AO may have completely missed verification of one aspect of income and no facts or details have been called for and furnished by the assesse. This lack of inquiry then results into prejudice to the revenue. In this situation both the error as well as prejudice to revenue is so apparent and glaring which could not have escaped the attention of any prudent Assessing Officer. E.g. the assessee had significant borrowings and at the same time, there are significant non-business advances to sister concerns. The rates of interest are variable. If the AO does not make any inquiry whatsoever about the claim of interest, the order may become erroneous if the facts prima facie indicate prejudice to the revenue.
iii. The AO has made enquiries about the income of the assessee. After applying his own judgment about the inquiries to be carried out, the income was assessed by him. The record is speaking about the inquiries, examination and application of mind by the AO. In such situation, CIT feels that a particular inquiry should have been carried out in a particular manner which has not been done or the AO should have taken particular view about a particular income. On such ground of failure of inquiry, action for revision is invoked. The Bombay High Court in a well- known decision in the case if CIT vs. Gabriel India Ltd. ( 203 ITR 108) has dealt with the situation and explained the law as –An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO , who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the ITO . That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo moto revision because the first requirement, namely, the order is erroneous, is absent.”
In CIT vs. Honda Siel Power Products Ltd., the Delhi High Court held that while passing an order u/s. 263, the CIT has to examine not only the assessment order, but the entire record of the profits. Since the assessee has no control over the way an assessment order is drafted and since, generally, the issues which are accepted by the AO do not find mention in the assessment order and only those points are taken note of on which the assessee’s explanations are rejected and additions/disallowances are made, the mere absence of the discussion would not mean that the AO had not applied his mind to the said provisions. In this connection, reference is invited to the decisions in CIT vs. Mulchand Bagri (108 CTR 206 Cal.) CIT vs. D P Karai (266 ITR 113 Guj) and Paul Mathews vs. CIT ( 263 ITR 101 Ker).
4. Failure to make inquiry vs. Application of mind:
4.1. In Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) the Apex Court considered the scope of the word “erroneous” and held that:
“The provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase “prejudicial to the interests of the Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO , the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase “prejudicial to the interest of the Revenue” has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue, for example when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT 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.”
4.2 The above observations of the Supreme Court highlight the fact that if there is an application of mind by the AO, the order cannot become erroneous. The question has to be decided by evaluating the process of assessment undertaken by the AO. If the assessment has been done after proper application of mind and thereby adopting a permissible course of action, it cannot be said to be erroneous.
5. Prejudice to the Revenue:
5.1 The lack of inquiry making the order erroneous has to be coupled with prejudice to the interest of the revenue. As explained by Bombay High Court in case of Gabriel India Ltd., there must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. There must be material available on record called for by the Commissioner to satisfy him, prima facie, that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo moto revision under such circumstances will amount to arbitrary exercise of power.
6. Principles Emerging:
The following principles emerge from the above discussion-
1. Failure to make inquiries coupled with prejudice to revenue makes the order vulnerable for revision u/s. 263 being erroneous and prejudicial to the interest of the revenue.
2. For evaluating as to whether inquiry was made or not, the complete record at the time of assessment has to be seen. Absence of discussion in the assessment order is not sufficient to conclude that there has been no noninquiry.
3. The ground of lack of inquiry so as to substitute the judgment of CIT over that of AO is not permissible. If AO has used his judgment and passed the order in accordance with law, CIT cannot substitute his judgment about how a particular assessment has to be done by carrying out enquiries in a particular manner.
4. The powers of revision cannot be invoked to correct each and every mistake but only when the order is erroneous on account of an incorrect assumption of facts or an incorrect application of law or without applying the principles of natural justice or without application of mind or inquiry.
5. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue, for example when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT 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.
7. Amendment by Finance Act 2015:
7.1 With effect from 1st June 2015, an Explanation is added to section 263 which provides as under-
“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.”
8. Memorandum Explaining the Provisions:
The memorandum explaining the provisions states as under
“Revision of order that is erroneous in so far as it is prejudicial to the interests of revenue
The existing provisions contained in sub-section (1) of section 263 of the Income-tax Act provides that if the Principal Commissioner or Commissioner considers that any order passed by the assessing officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making an enquiry pass an order modifying the assessment made by the assessing officer or cancelling the assessment and directing fresh assessment. The interpretation of expression “erroneous in so far as it is prejudicial to the interests of the revenue” has been a contentious one. In order to provide clarity on the issue it is proposed to provide 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.”
9. Analysis of the Amendment:
9.1 A plain reading of the above amendment implies that the said Explanation has been added for clarifying the scope of the words ‘erroneous so far as prejudicial to the interest of the revenue.’ The term was not been defined under the Act. But by way of this amendment, the scope of the term has been clarified. While clarifying the position, four different situations have been contemplated so as to call an order to be ‘erroneous so far as prejudicial to the interest of the revenue.’ The provision further creates a fiction as to order being erroneous in so far as prejudicial to the interest of revenue if the Commissioner or Principal Commissioner forms an opinion about the existence of four situations stated therein.
9.2 Considering the phraseology or the words used in the amendment and also considering the fact that the amendment pertains to procedural or machinery provisions, the same is perceived as clarificatory and may apply to pending proceedings. The amendment can also be understood to be a “Declaratory Law” thereby explaining or clarifying the law that prevailed all along. Needless to mention, assessee would like to argue that the amendment is substantive in nature and therefore would operate prospectively. In that situation, the question would become debatable and would be left for the Courts to decide.
9.3 The question arises as to whether it implies a subjective opinion of the Commissioner or Principal Commissioner and having formed such opinion, the jurisdiction u/s. 263 can be invoked without any fetters. The question has relevance to mainly to first situation as well as second situation regarding inquiry not done by AO as it deals with more of a factual or practical situation and may lend unfettered powers to the Commissioner for revising the order. The other two situations mainly consider the incorrect application of law by not applying the relevant circular or judicial decisions. Extending the question further, does the provision mean merely a formality on the part of the Commissioner or Principal Commissioner to form an opinion and invoke the jurisdiction?
9.4 To answer the above question, the scheme of revision provisions under the Act has to be considered. The power of revision is vested with Commissioner which is perceived to be his exclusive jurisdiction to be excercised upon satisfaction of conditions stated therein. The powers can be invoked on his satisfaction arrived after examination of record. The words satisfaction or opinion of Commissioner perceived in section 263 has been explained by Bombay High Court in Gabriel India Ltd. as- “ It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on records to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Any other view in the matter will amount to giving unbridled and arbitrary power to revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. It is quasi-judicial power hedged with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly it is an administrative act, but on examination, “to consider”, or in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interest of the Revenue, is a quasijudicial act because on this consideration or opinion the whole machinery of reexamination and reconsideration of an order of assessment, which has already been concluded and controversy about which has been set at rest, is again set in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from records called for by the Commissioner.”
The above principles explained by the Bombay High Court therefore enable us to reach to the conclusion that the formation of opinion cannot be arbitrary and left at the whims of the authority this being a quasi judicial act that would be subjected to judicial review by higher authorities.
9.5 The further question arises about the application of fiction as to whether it allows an interpretation that having formed an opinion about non inquiry the order becomes erroneous and prejudicial to the interest of revenue. The fiction impliedly raises a presumption. It can be seen that the factum of inquiry is always verifiable with reference to record. If after forming an opinion by Commissioner about non inquiry, the record speaks about proper inquiry and application of mind by AO, the presumption should be open for rebuttal. More so since the question of inquiry is a factual aspect. The Explanation therefore can be interpreted to raise a rebuttable presumption. The rebuttal can be made before the higher authorities contesting the validity of action with reference to the actual record. The possibility of rebuttal can also be supported with the power of revision being a quasi judicial act subjected to judicial review.
9.6 The law that prevailed all along with reference to the application of mind by AO or adopting a permissible course of action in law cannot be understood to have been disturbed. Since the Income-tax Act gives exclusive jurisdiction of assessment to the Assessing Officer, the act of assessment is perceived as an independent quasi judicial act. The Commissioner under the provisions of revision could not substitute his judgment over the Assessing Officer about the manner in which the assessment or inquiry or a particular view to be adopted. The said amendment nowhere makes a departure from the above position by the phraseology or the contextual meaning.
9.7 The Explanatory Memorandum with reference to the said amendment refers to the intention behind the said amendment. In view of that, the interpretation of ‘erroneous in so far as prejudicial to the interest of the revenue’ was a contentious issue. In order to provide clarity on the issue, an amendment has been brought in by way of an Explanation. Considering the law explained by Courts with reference to the expression used in the amendment, there does not appear to be any deviation from the principles evolved. It broadly defines the scope of ‘erroneous in so far as prejudicial to the interest of the revenue’ and provides support to the main section. Reading the main provision along with the Explanation, the Scheme of revision with reference to the principles laid down, remains the same.
9.8 In the first situation, the words used are ‘if the order is passed with making inquiries or verification which should have been done’. The expression ‘which should have been done’ suggests an objective test to be applied so as to highlight necessity of making appropriate inquiry for assessing the correct income and absence of which may cause prejudice to the revenue. The condition of ‘prejudice to the interest of the revenue’ also cannot be said to have toned down or understood to have impliedly complied with formation of an opinion.
10. Conclusion:
The amendment by way of an Explanation to section 263 may give rise to extreme interpretations or an impression that the power of revision is at the whims of Commissioner. The Department is likely to adopt such interpretation and use the same causing to revision of the orders passed by the Assessing Officers at the sweet will of the Commissioners. However, considering the law laid down and on proper interpretation of the amendment, such view is unlikely to be supported by higher judicial forums. Let us hope that the judiciary would make a just interpretation and avoid giving unfettered powers to the Commissioner.
