REVISION UNDER SECTION 263 OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Section 263(1) of the Income Tax Act, 1961 (‘Act’ for short) provides revision of order under the Act by the Commissioner where the order is prejudicial to the Revenue.  The said section provides that 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 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 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 canceling the assessment and directing a fresh assessment.

Section 263(2) provides that no such order shall be made after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.  In computing the period of limitation for this purpose, the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded. Section 263(3) provides that an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.

The Division Bench of the High Court of Karanataka in I.T.A. No. 30/2006 held that as per Section 273 the Commissioner gets the jurisdiction to revise any proceedings under the Income Tax Act if he considers that any order passed therein by Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue.   Therefore, it is clear that he cannot exercise the power of revenue solely on the ground that the order passed is erroneous.   He gets jurisdiction only if such erroneous order is prejudicial to the interests of the Revenue.   ‘Prejudicial to the Revenue’ means lawful revenue due to the State has not been realized or cannot be realized.   In other words, by the order of assessing authority if the lawful revenue to the State has not been realized or cannot be realized, as the said order is prejudicial to the interests of the Revenue and also erroneous, he gets jurisdiction to interfere with the said order under Section 263.  Therefore for attracting Section 263, the condition precedent is-

• the order of Assessing Officer sought to be revised is erroneous; and
• it is prejudicial to the interests of the Revenue.

If one  of them is absent the recourse cannot be had to Section 263(1) of the Act.   The satisfaction of both the conditions stipulated in the section is sine qua non for the Commissioner to exercise his jurisdiction under Section 263.

In ‘Commissioner of Income Tax and another V. Fr. Mullers Charitable Institution’ – 2014 (2) TMI 1033 - KARNATAKA HIGH COURT a charitable trust, for the assessment years, 2000-01 and 2001 -02 advanced a sum of Rs.30 lakhs during the assessment year 2000-01 and a sum of Rs.50 lakhs during the assessment year 2001-02 respectively for a company which was running a Kannada daily.   Advancing of such a huge amount was in violation of Section 11(5) and hence he denied the exemption for the amounts.   The Commissioner under Section 263 set aside the assessment order with a direction to the Assessing officer to assess the entire income of the assessee after giving opportunity of hearing.   The Tribunal set aside the revisional orders and restores the order of Assessing Officer.   The Revenue filed appeal before the High Court.   The High Court dismissed the appeal holding that the Commissioner cannot invoke his revisional power to correct each and every type of mistakes committed by the Assessing Officer.

In ‘Ashutosh Bandopadhyay V. Commissioner of Income Tax and others’ – 2014 (5) TMI 374 - Tripura High Court  the assessed filed his returns for the assessment year 2006 – 07 which was scrutinized by the Assessing Officer.   The Assessing Officer found that the petition had not disclosed the existence of a Bank account maintained with SBI.   The said amount was added in the income of the assessee as undisclosed income.   Penalty proceeding was initiated separately.   The assessee deposited the amount assessed by the Assessing Officer.

The Commissioner under Section 263 of the Act sent a communication dated 16.11.2009 proposing for revision.  But in the said communication it was indicated that Assessing Officer’s order is erroneous and prejudicial to the interests of the Revenue and set aside under Section 263 of the Act.   In the High Court the assessee contended that the notice was totally illegal since the Commissioner had actually set aside the order of Assessing Officer even before giving notice to the assessee.   The High Court held that the notice issued by Commissioner is illegal.   No order under Section 263 can be passed without giving the assessee an opportunity of being heard the putting forth his case.   The High Court observed that subsequent developments had taken place.   The assessee in response to the communication appeared before the Commissioner of Income Tax, who gave the assessee a number of opportunities being heard. Written submissions were filed by the assessee and finally the Commissioner of Income Tax passed a detailed order on 12.5.2010.

The High Court held that if the assessee had approached the High Court or any other authority, immediately after the first order had been passed, normally the only order which would have been passed would be to get aside the communication dated 16.11.2009 with liberty reserved to the Income Tax Authorities to take fresh action after giving reasonable opportunity to the assessee. In this case reasonable opportunity has already been given to the assessee.  The High Court rejected the prayer of the assessee.

In ‘Perinthaimanna Service Co-operative Bank Limited V. ITO and another’ 2014 (1) TMI 1324 - ITAT COCHIN the entire controversy involved in this case is with regard to the exact status of the appellant assessee whether it is a  co-operative bank or a primary co-operative credit society.   The question arises in the light of the assessee claiming the benefits under Section 80P.   Once a claim is made under Section 80P of the Act, the Assessing Officer is necessarily required to apply his mind and conduct proper enquiry and verification at the time of assessment.

After referring to the details given by the assessee in the return of income the revised authority issued show cause notice as the order of Assessing Officer was not only erroneous but also prejudicial to the interests of the revenue. The Commissioner held that the Assessing Officer had to reconsider the matter in the light of the order made in the order of revision by which was meant what exactly should be the nature of enquiry to be conducted by the Assessing Officer.   The Tribunal upheld the opinion of the Commissioner.

The High Court dismissed the appeal holding that the reasoning of the Commissioner was not merely based on the name of the assessee but with reference to judicial situation in relation to an enquiry to arrive at a conclusion whether or not the benefits can be extended n the light of Section 80P(4).  As there was no discussion at all by the Assessing Officer from this perspective there was justification for the Commissioner to conclude that the order of the Assessing Officer was not only erroneous but also prejudicial to the interests of the Revenue.   The Assessing Officer has to extend the benefits available and not merely look at the registration certificate by the Kerala Co-Operative Societies Act on the nomenclature.  There was a very detailed discussion by the Commissioner giving reasons why the matter should be reconsidered by the Assessing officer.   The High Court further held that it did not mean that the Assessing Officer had to complete his assessment proceedings after arriving at a conclusion similar to the conclusion arrive by the Commissioner.  The revisional order was an insight into the nature of enquiry or ascertainment of factual situation to be made by the Assessing Officer and nothing more.

In ‘Commissioner of Income Tax V. Usha Kiran Movies Limited’ – 2014 (2) TMI 795 - ANDHRA PRADESH HIGH COURT  the assessee was engaged in developing a film project and while doing so it received rental income which was directly interlinked with the activity.  Since the business had not yet started it filed a NIL return for the assessment year 1995-96. After examining the details, the income returned was accepted. However, the Commissioner under Section 263 of the Act held that the rental income should not have been capitalized and it should have been brought to tax under the head ‘Income from other sources’.   The Tribunal held that income derived had close and direct link with the development activities of the assessee and set aside the Commissioner’s order.

The High Court dismissed the appeal filed by the Revenue.  It held that the lease rentals derived by the assessee was in the nature of capital as it was connected with the main activity.   Thus this could not be said to be income. The Tribunal had taken the correct view that the Commissioner had no jurisdiction to re-open the case one of the two possible views was taken by the Assessing officer and such change of view could not be a ground to re-open the issue under Section 263.   Therefore the Commissioner had passed the order in total illegal exercise of jurisdiction.