SECTION 263 OF INCOME TAX ACT – ANALYSIS THROUGH JUDGMENTS

Author of this Article: Sankarshanan VV – Vth Year BCom.,LL.B(Hons.) – SASTRA Deemed to be University – Thanjavur – Tamil Nadu.

INTRODUCTION:

Section 263 of Income tax act, 1961 will apply if the order is, erroneous or in so far as prejudicial to the interest of revenue and, the commissioner cannot substitute the order of the assessing officer simply because he does not agree with the course taken by the Assessing officer.

TWIN CONDITIONS UNDER SECTION 263

It has repeatedly held by courts that this section cannot be invoked to correct each order of the Assessing officer. The order passed by the assessing officer has to necessarily be erroneous in so far as prejudicial to the interests of revenue, an incorrect assumption of facts or an incorrect application of law are the basic requirement of an order being erroneous[1]. However, the normal practice is that whenever any claim of the assesse is accepted, the Assessing Officer may not give any discussion in his order and the discussion is confined only to disallowance made by him. During the assessment if the legal position is in assesse’s favour, then the assessing officer must allow the claim[2].

It has been held that if all the relevant details have been filed by the assesse and the Assessing Officer allows the claim, the decision of the Assessing Officer cannot be held to be erroneous simply because in his order he does not make any elaborate discussion in that regard. As regards the scope and ambit of the expression ‘erroneous’, a Division Bench of the Bombay High Court in CIT v. Gabriel India Ltd held with reference to Black’s Law Dictionary that an ‘erroneous judgment’ means “one rendered according to course and practice of Court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles” and, thus, it is clear that as an order cannot be termed as an ‘erroneous’ one unless it is not in accordance with law[3].

The Madras High court very eloquently explained the application of section 263 in Venkata Krishna Rice Co v. CIT[4], the expression ‘prejudicial to the interests of the revenue must be regarded’ as involving a conception of acts or orders, which are subversive of the administration of revenue. There must be some grievous error in the order passed by the ITO, which might set a bad trend of pattern for similar assessments. The expression ‘prejudicial to the interests of the revenue must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the AO, which might set a bad trend of pattern for similar assessments, which on broad reckoning, the Commissioner might think to be prejudicial to the interests of revenue administration[5].

The words “prejudicial to the interest of the revenue” can only 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 is not realized or cannot be realized. It is trite law that it is quasi-judicial power hedged in with limitation and not an unbridled and unchartered arbitrary power. The exercise of the power is limited to cases where the Commissioner on examining the records concludes that the earlier finding of the ITO was erroneous and prejudicial to the interest of the revenue and that fresh determination of the case is warranted.

There must be material to justify the Commissioner’s finding that the order of the assessment was erroneous insofar as it was prejudicial to the interest of the revenue[6]. In the present case the order passed by the AO is neither erroneous nor prejudicial to the interests of revenue as the order was passed with due considerations and inquiries that ought to be made, so the state does not lose any lawfully taxable income from the assesse.

The question as to whether an order of the ITO is prejudicial to the interest of the revenue would depend upon the facts of each case and there can be no universal formula applicable to finding out any such prejudicial error. It also referred to the following observation in the same case: “It would be seen that the prejudice to the revenue was inferred in that case not from any finding that there was a loss of revenue but from mere fact that the procedure employed was defective. The procedure employed by the assessing officer is good in law as he had followed every method as applicable to the assessment, which has to be made by the assessing officer.

Lack of inquiry and inadequate inquiry by the Assessing Officer

The section does not visualize the substitution of the judgment of the Commissioner for that of the ITO, who passed the order unless the decision is not in accordance with law. Even if the inquiry conducted by the assessing officer is inadequate it would not by itself give occasion to the Commissioner of Income tax to pass an order under section 263 of the Income tax act[7], the order passed by the Assessing officer has to necessarily be erroneous in so far as prejudicial to the interests of revenue.

Commissioner, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the Assessing Officer is erroneous. The Commissioner should have shown that the view taken by the Assessing Officer is unsustainable in law. In the instant case, the Commissioner has failed to do so and has simply expressed the view that the Assessing Officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Commissioner is not in accordance with the mandate of the provisions of section 263.

If while making the assessment, the Assessing Officer examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the Commissioner, while exercising his power under section 263 is not permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer[8].

One has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure, there must be some prima facie material on record to show that tax which was lawfully eligible 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[9]. If a query is raised during assessment proceedings and responded to by the Assesse, the mere fact that it is not been dealt with in the Assessment Order would not lead to a conclusion that there was no application of mind by the assessing officer[10].

The Delhi High Court in the case of CIT v. Anil Kumar Sharma[11] held that there was a distinction between “lack of inquiry” and “inadequate inquiry”. If there were any inquiry, even inadequate that would not by itself give occasion to the Commissioner of Income tax to pass orders under section 263 of the Act merely because he had a different opinion in the matter.

THE COMMISSIONER CANNOT SUBSTITUTE THE ORDER OF THE ASSESSING OFFICER

The commissioner may exercise his revisional authority as a supervisory and a discretionary power and not as matter of right to allow the commissioner cannot revise every single order of the assessing officer in which the commissioner has a different view. In fact, “Setting aside an assessment is no ordinary matter. In fact, in tax laws, as in other laws, certainty and finality are the prerequisites of a good tax administration. The orders of the subordinate authorities should, therefore, not be cancelled or set aside on mere whims and fancies; there must be very compelling reasons for interference by the learned CIT under section 263[12].

“The Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions” which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstances. If this were permitted, litigation would have no end, “except when legal ingenuity is exhausted”. To do so, is to divide one argument into two and to multiply the litigation[13].

Every loss of tax to the Revenue cannot be treated as being “prejudicial to the interest of the Revenue”[14]. Where the Assessing Officer has examined a particular issue and has completed the assessment after taking a possible view, the commissioner is not permitted to assume powers u/s. 263 simply because he does not agree with the view taken by the Assessing Officer[15]. The order of the assessing officer cannot thus be revised just because the commissioner feels that a loss of revenue exist but must show material facts that corroborate that the order is erroneous and prejudicial to interests of revenue.

There must be some prima facie material on record to show that tax lawfully eligible is not imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was imposed[16]. There must be material available on record called for by the CIT to satisfy him prima facie that the previously mentioned two requisites are present, If not he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power.

CONCLUSION:

It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such material (sic) must have materials on record to satisfy it in that regard. It is an important decision and the same cannot be based on the whims or caprice of the revising authority[17]. Only when an order satisfies that it is erroneous or prejudicial to the interest of revenue it can be applicable under this provision.

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[1] Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax [(2000)2SCC718]

[2] Anil Shah Vs. Respondent: Assistant Commissioner of Income Tax, Range 24(1), Mumbai [2007]162TAXMAN39(Mum)

[3] CIT v. Gabriel India Ltd. [1993] 203 ITR 108

[4] 163 ITR 139 (Mad)

[5] CIT v. T. Narayana Pai [1975]98ITR422(KAR)

[6] Commissioner of Income-tax Vs Vikas Polymers [2010] 194 Taxman 57 (Delhi)

[7] CIT v. Anil Kumar Sharma [2010] 194 Taxman 504 (Delhi)

[8] CIT vs Galileo India (P) Ltd. 41 Taxmann.com 34 (Del)

[9] CIT v. Sunbeam Auto Ltd. [IT Appeal No. 1399 of 2006 decided on 11-9-2009]

[10] Idea Cellular Ltd. v. Dy. CIT [2008] 301 ITR 407

[11] [2010] 194 Taxman 504 (Delhi)

[12] Sirpur Paper Mills Ltd. v. ITO 1978 114 ITR 404 AP

[13]Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).

[14] Gee Vee Enterprise vs. Additional Commissioner of Income Tax (07.10.1974 – DELHC) ( 1975 )ILR 1 Delhi 53

[15] Dharam Pal v. Pr. CIT [2017] 82 taxmann.com 83 (Asr. – Trib.)

[16] Dit vs Jyoti Foundation [2013]357ITR388 (Delhi)

[17] Russell Properties Pvt. Ltd. vs. A. Chowdhury, Addl. Commissioner of Income Tax and Ors.[ 1977 ] 109 ITR 22(Cal)