Tuesday, 29 April 2014

Sec-263 a thorough study!!

When cannot section 263 be evoked?

Section 263 cannot be evoked in the following cases:-

 An assessment order can not be re-opened if there is no jurisdictional error in the order.
 The order of the AO can not also be revised if it has been passed after application of mind.
 Merely because the opinion of the CIT is different from that of AO this section cannot be resorted to.

When can section 263 be evoked?



• The power of the Commissioner of Income-tax to initiate suo motu revisional proceeding can be exercised only if the circumstances specified therein exist. Two circumstances must co-exist to enable a Commissioner to exercise power of suo motu revision. These circumstances are : (i) the order must be an erroneous one and (ii) because of being an erroneous order, the order must have become prejudicial to the interests of the Revenue. Unless both these ingredients are present in a given case, it is not legally permissible for a Commissioner to initiate suo motu proceeding under section 263 of the Act.

The expression “erroneous” has not been defined in the Act. However, Black’s Law Dictionary defines the word “erroneous” to mean “involving error ; deviating from the law”. “Erroneous assessment” refers to an assessment that deviates from the law and is, hence, invalid. The erroneous assessment pertains to a defect, which is jurisdictional in nature. It does not refer to the judgment of the Assessing Officer in fixing the amount or valuation of property. “Erroneous judgment” means one rendered according to course and practice of court; but contrary to law, upon a mistaken view of law or upon an erroneous application of legal principles.

An order cannot be termed erroneous unless it can be shown to be an order, which is not in accordance with law. If the Income-tax Officer, acting in accordance with law, makes certain assessment, the same cannot be termed as erroneous by the Commissioner merely because the order, according to the Commissioner, should have been more elaborate in writing. Section 263 of the Income-tax Act does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who makes the assessment, unless the decision of the Income-tax Officer is held to be an erroneous one. It is an established position of law that 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 if it was done by the Commissioner himself, then he would have estimated the income at a figure higher than the one determined by the Income-tax Officer; but such opinion would not vest in the Commissioner the power to re-examine the accounts and determine the same at a higher figure. This court, in Rajendra Singh v. Superintendent of Taxes [1990] 79 STC 10, while examining the provisions of the Tripura Sales Tax Act, which is pari materia, has interpreted the expression “erroneous” as relatable to a jurisdictional error either in making an assessment or in making any other order as distinguished from any other error that may have occurred in determining the extent and quantum of tax.

Powers and duties of the Commissioner (wref to relevant case laws):-

• The commissioner has the discretion to call for and examine the record of any proceeding under this Act.

• The proceedings can only be undertaken by the Commissioner after giving the assessee an opportunity of being heard and after making or causing to be 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.

Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

(a) an order passed on or before or after the 1st day of June, 1988, by the Assessing Officer shall include—

(i) an order of assessment made by the Assistant Commissioner or the Income-tax Officer on the basis of the directions issued by the
Deputy Commissioner under section 144A ;

(ii) an order made by the Deputy Commissioner in exercise of the powers or in the performance of the functions of an Assessing
Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner, of Director
General or Commissioner authorised by the Board in this behalf under section 120 ;

(b) ‘record’ shall include and shall be deemed always to have included all records relating to any proceeding under this Act avail-
able at the time of examination by the Commissioner ;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed
on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided to such appeal.


• Section 263, does not visualise a case of substitution of the judgment of the Commissioner for that of the subordinate authority who passed the order which is sought to be revised. The order passed by a subordinate authority in exercise of its quasi-judicial power vested in him in accordance with law, cannot be termed erroneous merely because the Commissioner does not feel satisfied with the conclusions reached. In this regard, reference may be made to the decision of the Bombay High Court in CIT v. Gabriel India Ltd. [1993] 203 ITR 108, wherein it was held as under (page 115):

“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 figure higher than the one determined by the Income-tax Officer. 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 Income-tax Officer 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 interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz. that the order is erroneous, is absent.”

Reference may also be made to the decision of this High Court in Santalal Mehendi Ratta (HUF) v. Commissioner of Taxes reported in [2006] 143 STC 511 (Gauhati) ; [2002] 1 GLR 197, wherein this High Court while examining section 36 of the Assam General Sales Tax Act, 1993, which is pari materia, held as under (page 516):

“The revisional authority for various good reasons may be inclined to view an assessment order from a negative standpoint. The revi-
sional authority may likewise disagree with the views of the primary authority in its interpretation of the law imposing the liability or the extent or quantum thereof. It may disagree with the primary authority with regard to the determination of the amount of tax to be paid. It may also disagree with the primary authority on matters relating to deductions allowable under the statue. All such situations as aforesaid may render the order of the primary authority wrong or erroneous as commonly understood. Such situations, however, would not be facets of an erroneous decision in so far the meaning of the said expression as appearing in section 36 of the Act is concerned. Judicial opinion is unanimous that the expression as appearing in section 36 must be confined to jurisdiction errors otherwise there would be no distinction between the different aspects of the corrective power conferred by the provisions of the Act for application in different situation. No distinction between the power to reopen an assessment and the appellate or revisional power or the power to rectify would exist. There would be an intermingling of the powers resulting in confusion and uncertainty, a situation definitely not contemplated by any statute.”

In W. P. (C) No. 1416 of 2001, Bongaigaon Refinery and Petrochemicals Ltd. v. Union of India [2006] 287 ITR 120 (Gauhati), decided on September 8, 2006, this High Court held as under (page 130) :

“The above judicial pronouncements therefore adumbrate the essence and extent of the revisional jurisdiction of an authority akin to
the Commissioner of Income-tax under the Act. Not only the exercise of the suo motu power conceptualised therein is hedged by the two conditions of error in the order sought to be revised and the consequential prejudice to the Revenue but no interference is permissible unless the same is afflicted by a jurisdictional error or a patent illegality rendering the same ex facie invalid and non-existent in law. The process to derive the satisfaction that the order is erroneous and is thus prejudicial to the interests of the Revenue, the sine qua non for invocation of the power, thus logically has to be informed with the above limitations.”

From the discussions held above, what emerges is that an order of assessment made by a primary authority may not be agreed to by a revisional authority. Merely, however, for the fact that the revisional authority disagrees with the findings of the primary authority, either in imposing liability or in refusing to impose any liability, such disagreement cannot be made a ground for interference with the order of the primary authority. An erroneous order, as is commonly understood, is not conceived by section 263. There has been unanimity in judicial opinion that the error committed by the primary authority must be an error of jurisdiction, for if the order is not kept confined to jurisdictional error, no distinction would be left between corrective powers or power of rectification conferred on an authority under the provisions of the Act and the revisional power exercisable by another authority. If the distinction between the power to reopen an assessment and the power to rectify is not distinguished from revisional jurisdiction, every incorrect order would become amenable to revisional jurisdiction and the fall out would be that revisional jurisdiction would then become exercisable even in a case where the provisions for initiating a rectification proceeding are attracted. Such an approach would lead to intermingling of powers by various authorities resulting in utter confusion and uncertainty.

• Such a situation, as correctly pointed out in Santalal Mehendi Ratta (HUF) [2006] 143 STC 511 (Gauhati), is not contemplated by any statute. Viewed thus, it is clear that every error cannot be an error of jurisdiction and every error of an assessing authority is not open to exercise of suo motu revisional powers under section 263. Even if a turnover escapes attention, this, in itself, is not enough to attract the revisional jurisdiction unless materials exist to show that the error, which has so crept in, is an error relatable to the exercise of jurisdiction by the assessing authority. If an authority which has the power to assess, makes an assessment and commits a mistake or allows a deduction which ought not to have been allowed, such a mistake, unless it goes to the root of the making of the assessment order, cannot be revised under section 263.

• No wonder, therefore, that in CIT v. Gabriel India Ltd. reported in [1993] 203 ITR 108 (Bom) the court has pointed out that when an assessment made by an Assessing Officer is on the lower side and the Commissioner is of the view that the income ought to have been assessed at a higher figure, such a case is not revisable, for, such a case, which would be regarded as erroneous in other statutes, would not be regarded as erroneous under the provisions of the Act inasmuch as an incorrect order can be rectified if the error is apparent on the face of the record. Moreover, if an error is an error apparent on the face of the record and can be rectified the revision jurisdiction cannot be exercised. While passing an order of assessment, an Assessing Officer may commit an error; but every such error is not revisable under section 263. If an Assessing Officer allows a deduction which could have been allowed under the law, such an error cannot be interfered with by revision, for there is no lack of inherent jurisdiction unless it is shown that the law, in such a case, did not permit the deduction to be allowed at all. Thus, when a deduction is not permissible under the law and such a deduction is allowed, there would be lack of jurisdiction and such an order would be revisable. Considered thus, it is clear that in both the cases, the order can be termed an erroneous order, but while in one case, revisional jurisdiction can be exercised, exercise of such revisional jurisdiction is not possible in the other case inasmuch as in one case, the Assessing Officer has jurisdiction, but commits an error, while exercising jurisdiction; whereas in the other case, he commits an error without jurisdiction.

Merely because of the fact that an Assessing Officer’s order is erroneous, a Commissioner cannot interfere. Similarly, because an order of the Assessing Officer is prejudicial to the interests of the Revenue, it will not attract revisional jurisdiction under section 263. These two elements, namely, that the order is erroneous and it is prejudicial to the interests of the Revenue must co-exist. When an Assessing Officer has several choices and he adopts one of the choices, it cannot be interfered with unless it is shown that the choice of exercise by the Assessing Officer is without application of mind or wholly contrary to the law. The revisional power conferred on the Commissioner is not an appellate power, but a supervisory power. Thus, a Commissioner cannot sit as an appellate authority under section 263 on an order passed by an Assessing Officer. Section 263, it must be borne in mind, gives to the Commissioner a special power, which has almost no parallel in any other statute. It is an extraordinary revisional power. This power cannot be exercised as a jurisdictionally corrective power or as a review of the orders passed by subordinate authorities. This power under section 263 can be invoked only for the purpose of correcting such wrongs, which have taken place because of non-application of law or for a wholly incorrect application of law and when such application or non-application of law causes prejudice to the Revenue. The power under section 263 cannot be equated to, or be regarded as, an appellate jurisdiction or even ordinary revisional jurisdiction. The revisional jurisdiction under section 263 is a unique jurisdiction, which has to be understood in the context of the scheme of the Act. Such a power being exercisable only against orders which are erroneous in the sense that it goes to the root of the jurisdiction and also prejudicial to the interests of the Revenue.

Though section 263 cannot be invoked to correct each and every type of mistake or error committed by an Assessing Officer, the fact remains that an incorrect assessment of facts or an incorrect application of law can be regarded as erroneous. In the same category would fall orders passed without applying the principles of natural justice or without application of mind. Thus, when an order of deduction is passed on incorrect assumption of facts or incorrect application of law, such an order, being erroneous, may be revised if such an order is prejudicial to the interests of the Revenue. Similarly, when a deduction is allowed without application of mind, such
an order can also be revised under section 263 provided that the order is prejudicial to the interests of the Revenue. When an Assessing Officer has jurisdiction but passes in exercise of such jurisdiction, an order which suffers from non-application of mind or incorrect assumption of facts or incorrect application of law, it would amount to an erroneous order within the meaning of section 263. Thus, when a deduction is not permissible yet is allowed either because of non-application of mind or because of incorrect application of law, such an order would be regarded as an erroneous order and can be interfered with in revision under section 263, if it is prejudicial to the interests of the Revenue.

• If after examination of the books of account under section 43B of the Act that the assessing authority has allowed the deduction on account of bonus in exercise of its powers under section 143(3). The Assessing Officer having acted within his jurisdiction in allow-ing the claim of bonus as deduction, it was not open to the Commissioner of Income-tax to consider the said order as erroneous merely because in his view, a certain amount of bonus, allowed as deduction, should have been disallowed, particularly when the impugned order of the Commissioner does not show how the order of assessment can be said to be an order passed without jurisdiction or an order passed beyond jurisdiction or wholly contrary to jurisdiction.

• It needs to be borne in mind that section 154 of the Act vests in an Assessing Officer, the power to initiate proceeding for rectification if there is some mistake in making the assessment and the mistake is apparent from the face of the record. Thus, when a mistake is apparent from the face of the record, it is section 154 which becomes applicable. Section 147 empowers an Assessing Officer to reopen a completed assessment if he has reason to believe that an income of the assessee has escaped assessment. Thus, the power of rectification which is exercisable under section 154, is distinct and separate from the power exercisable under section 147 of the Act. Similarly, the power of suo motu revision under section 263 has to be read as a power outside the purview of section 154 and also section 147, for if in respect of a matter, power under section 154 is exercisable, the power under section 147 cannot be exercised and if, in a matter, power under section 147 is exercisable, the power under section 154 cannot be exercised and when neither the power of rectification vested under section 154, nor the power to reopen the assessment as envisaged under section 147, is attracted to a case, the power under section 263 may become exercisable provided that the error committed by an Assessing Officer, while making an assessment, is, as already indicated above, jurisdictional in nature. Since all these powers, conferred on different authorities, operate in distinctly separate fields, one authority cannot entrench upon the field of power reserved for the other authority.

In other words, the power to reopen an assessment under section 147, the power to rectify an order under section 154 and the power to suo motu revise an assessment under section 263 of the Income-tax Act operate in different and distinct fields. The authorities
prescribed for the exercise of such powers are also different as are the facts and situations which would justify recourse to the provisions. To permit the revisional authority to exercise powers under section 263 of the Act in the instant case, on the ground that excess deduction on account of bonus has been allowed, would amount to permitting the revisional authority to intrude into the powers of the authorities under sections 147 and 154 of the Act.

What may be pointed out is that section 154 of the Act confers power on the Assessing Officer to initiate proceeding for rectification if it is found that there is some mistake apparent from the face of the records. Independent of, and distinct from, this power is the power which section 147 confers on the Assessing Officer making it possible for him to reopen a completed assessment if he has reason to believe that any income of the assessee has escaped assessment. The basis on which the notice under section 263 has been issued and the impugned order has been passed does not come within the purview of section 263, for the Act has conferred juris-
diction on the Assessing Officer specifically to deal with a situation, such as the present one and when the Assessing Officer had already resorted to section 154 to reverify whether there was any mistake in allowing the claim of bonus or not, the revisional authority could not have taken resort to section 263. Reference may be made in this regard to State of Kerala v. K. M. Cheria Abdulla and Co. reported in [1965] 16 STC 875 (SC), wherein the apex court, while describing the contours of power of various authorities,
observed and held as follows (page 886) :

“But the power conferred by rule 14A by the use of the expression ‘making such enquiry as such appellate or revising authority consi-
dered necessary’ must be read subject to the scheme of the Act. It would not invest the revising authority with power to launch upon
inuiries at large so as either to trench upon the powers which are expressly reserved by the Act or by the Rules to other authorities or to ignore the limitations inherent in the exercise of those powers. For instance, the power to reassess escaped turnover is primarily vested by rule 17 in the Assessing Officer and is to be exercised subject to certain limitations, and the revising authority will not be competent to make an enquiry for reassessing a taxpayer. Similarly the power to make a best judgment assessment is vested by section 9(2)(b) in the assessing authority and has to be exercised in the manner provided. It would not be open to the revising authority to assume that power. The revisional power has to be exercised for ascertaining whether the order passed is illegal or improper or the proceeding recorded is irregular and it is in aid of that power that such orders may be passed as the authority may think fit. One of the inquiries in considering the legality or propriety of the orders passed by the subordinate officer which the revising or the appellate authority may make is about the correctness of the tax levied and if after perusing the record the authority is prima facie satisfied about the illegality or impropriety of the order or about the irregularity of the proceeding, it may in passing its order direct an additional enquiry. Neither section 12 nor rule 14-A authorises the revising authority to enter generally upon enquiries which may properly be made by the assessing authorities and to reopen assessments.”

In Santalal Mehendi Ratta (HUF) v. Commissioner of Taxes [2006] 143 STC 511 (Gauhati) ; [2002] 1 GLR 197, a turnover of the assessee was reo-pened due to alleged concealment of facts by the assessee. Exercise of revisional jurisdiction in such a case was interfered with by the court on the ground that a turnover, which escaped assessment due to concealment, can be reopened by taking resort to the power to reopen the assessment and when such a power of reopening the assessment existed, it is not permissible to exercise revisional jurisdiction, for revisional jurisdiction cannot be exercised as an alternative to, or as a substitute of, the power to reopen assessment. The relevant observations made by this High Court, in Santalal Mehendi Ratta (HUF) [2006] 143 STC 511 (Gauhati), read as under (page 517) :

“In the instant case, it is not the stand of the Deputy Commissioner that the primary authority did not have the jurisdiction to make the assessment or had exceeded its jurisdiction. The short and simple case of the Deputy Commissioner is that the turnover of the petitioner has escaped assessment due to concealments made by the assessee. The aforesaid facts, does not render the order infirm on account of any jurisdictional error. If tax has escaped assessment due to concealment, the proper recourse is to reopen the assessment under section 18 of the Act. This is precisely what was attempted to be done but was abandoned subsequently. If on the given facts the power under section 18 was attempted to be exercised but subsequently abandoned, it is not understood how on the same set of facts the power under section 36 can be exercised. The powers under both the aforesaid two provisions of the Act, namely, sections 18 and 36 operate in two different fields and are vested into two different authorities. To permit the revisional authority to exercise power u/s 36 in the facts of the instant case would be to permit the said authority to trench upon the powers of the primary authority under section 18 of the Act. Such a situation has been disapproved of by the apex court in the case of State of Kerala v. K. M. Cheria Abdulla and Co. [1965] 16 STC 875.”

In Bongaigaon Refinery and Petrochemicals Ltd. v. Union of India [2006] 287 ITR 120 (W. P. (C). No. 1416 of 2001), too, this High Court has clearly delineated the contours of powers of the various authorities under the Income-tax Act and has clearly held that the Act envisages compartmentalization in the functioning of the authorities so much so that it would be impermissible to over edge the legislatively reserved frontiers of the other authority. Succinctly describing the contours of the powers of various authorities under the Act, this High Court, in Bongaigaon Refinery and Petrochemicals Ltd. [2006] 287 ITR 120, observed and held as under (page131) :

“Entertainment of a view different from the one adopted by the Assessing Officer, if plausible would not clothe the Commissioner
with the power to interfere therewith under the said provision of the Act. Differently put, an error within the jurisdiction of the Assessing Officer on an evaluation of the materials available would not be exposed to interference in exercise of suo motu revisional powers under section 263 of the Act. The provision though permits the Com-missioner to initiate an enquiry as he may deem necessary does not authorise a roving probe into the facts with the disposition to pick out errors to sustain the eventual interference. This assumes great significance in the context of the statutory framework of the Act outlining the jurisdictional contours of different authorities to adjudicate the issues as legislatively stipulated. The Commissioner in exercise of his revisional powers cannot arrogate to himself a status to surrogate the other authorities and supplant their roles under the Act. The Commissioner is not a substitute for the other statutorily prescribed for a with codified functions dischargeable in terms of the prescribed procedure in the situations comprehended thereby. The Commissioner, therefore has to be rigorously held to the limits of his suo motu revisional jurisdiction lest any transgression of statutorily ordained prerogatives of other authorities under the Act result from an unbridled exercise of such power. The Act envisages a compartmentalization in the functioning of the authorities prescribed who have to dwell within the legally stipulated parameters so much so that it would be impermissible to overreach the legislatively mandated frontiers. Any other approach would be antithetical to the scheme and alignment of the Act.”

From what have been discussed above, it becomes abundantly clear that a revisional authority cannot entrench upon the powers which are expressly reserved by the Act in favour of the other authorities. The Act nowhere authorises the revisional authority to intrude into inquiries properly made by the assessing authority and to reopen an already completed assessment.

While exercising revisional jurisdiction, the revisional authority must bear in mind that the principles of natural justice do not permit the decision of a quasi-judicial authority, such as a Commissioner of Income-tax, to be influenced by any other authority. Thus, the Commissioner, in the present case, could not have initiated a suo motu revisional proceeding on the basis of the said audit report. Had, on the basis of the audit report, the Commissioner came to his own finding that the assessing authority, while making the assessment, or the authority empowered to rectify a turnover, which had escaped assessment, has acted without jurisdiction, revisional jurisdiction could have been exercised. Emphasised the Supreme Court, in the case of Sirpur Paper Mill Ltd. v. CWT [1970] 77 ITR 6, that while exercising power, the Commissioner must have an unbiased mind and decide the dispute according to the procedure which is consistent with the principles of natural justice and cannot permit his mind to be influenced by the dictation of another authority.

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