MARCH 07, 2015

By Kanwal Gupta & Rakhi Agrawal, Deloitte Haskins & Sells LLP

CURRENTLY, section 263 of the Income Tax Act, 1961 (Act) provides that if the Principal Commissioner or Commissioner considers that any order passed by the Assessing Officer (AO) is erroneous insofar as it is prejudicial to the interests of the revenue, he may pass such order 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 interpretation of the expression "erroneous insofar as it is prejudicial to the interests of the revenue" has been a subject matter of dispute. Various authorities at different forums have interpreted the expression differently. An order to be subject to revision under section 263 needs to be both erroneous and prejudicial to the interests of the revenue.

In Himachal Pradesh Financial Corpn [186 Taxman 105 (HP)], the High Court held that an incorrect assumption of fact or an incorrect application of law would satisfy the requirement of the order being erroneous. In Malabar Industrial Co Ltd. 2002-TIOL-491-SC-IT the Supreme Court has observed that orders passed without applying the principle of natural justice or without application of mind could be considered as erroneous.

The Budget 2015 as a rationalisation measure and in order to bring clarity as regards the interpretation of the above expression has proposed to insert a new explanation to section 263. The situations prescribed in the proposed explanation as to when an order can be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue seems to be have been gathered from various rulings pronounced by the Courts. One of the situations draws support to provide that the Commissioner under section 263 could consider revising the order based on the reason that assessments have been concluded without any investigation or verification or inquiry.

The proposed explanation provides that an order passed by the AO 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 be have been made;

•  the order is passed allowing any relief without inquiring into the claim;

•  the order has not been made in accordance with any order, direction or instruction issued by the CBDT under section 119; or

•  the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

However, there is no clarity as to when can it be considered that order has been passed by the AO without making any inquiries or verification which should have been made. There may be cases where the AO makes inquiries to his satisfaction but according to the Commissioner, these inquiries could be inadequate. In such a case, can the Commissioner invoke his/her jurisdiction under section 263 is unclear at present.

Further, it is also not clear at what point of time it should be seen that the order has not been passed by the AO in accordance with any order, direction or instruction issued by the CBDT; or in accordance with anydecision, rendered by the jurisdictional High Court or Supreme Court. Should it be at the time when the AOpasses the order or when the Commissioner invokes his jurisdiction under section 263. It may be possible that the direction of CBDT is provided or decision of the High Court or Supreme Court is pronounced after the order is passed by the AO.

Since the amendment is proposed to be effective from 1 June 2015, it is also not clear whether the explanation could be applied in resolving cases that are pending at various forums. It may be interpreted that the explanation should be applied only in respect of the orders that would be passed by the AO post 31 May 2015 or only in cases where the Principal Commissioner or Commissioner is exercising his/her revisionary powers post 31 May 2015. However, for the pending cases at various forums, it seems that the interpretation of the aforesaid expression will still be debatable.

The above amendment is a welcome step as this provides some clarity to a much debated issue. However, further clarification would be welcomed.