Finance Bill 2015- deemed situations about erroneous and prejudicial orders. Observations and suggestions by CA Dev Kumar Kothari

[CA DEV KUMAR KOTHARI]

Proposal in the Finance Bill:

Vide clause 65 it is proposed to amend S. 263 of the Income-tax Act,1961 to provide an explanation according to which in some situations, there will be deeming provision for assuming order passed by the Assessing Officer as erroneous in so far as it is prejudicial to the interests of the revenue.  The proposed explanation is reproduced below with highlights for easy understanding:

Amendment of section 263.

65. In section 263 of the Income-tax Act, in sub-section (1), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted with effect from the 1st day of June, 2015, namely:-

“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.”.

Notes on Clauses:

clause 65of the Bill seeks to amend section 263 of the Income tax Act relating to revision of orders prejudicial to revenue.

The existing provisions contained in sub-section (1) of section 263 provide 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 interest of revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made an enquiry, as he deems necessary, pass an order modifying the assessment made by the assessing officer or cancelling the assessment and directing fresh assessment.

It is proposed to amend sub-section (1) of the aforesaid section to insert an Explanation so as 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.

This amendment will take effect from 1st June, 2015.

Observations and suggestions of the author:

This explanation is given as a declaration and an explanation, therefore, disputes will arise whether it is prospective or retrospective. Though the proposal says it will be w.e.f. 01.06.2015 however, authorities will try to apply it even for earlier periods.

The deeming provision is not good, even in such situations, CIT should examine records properly before an order is passed u/s 263.

Limit: to make revision orders more purposeful it is desirable that There should not be orders u/s 263 where  tax effect is not exceeding likely to exceed  Rs. Ten lakh.

In some of situations  covered by proposed Explanations, there can be deeming provision for mistake apparent from records and the AO can be authorised to make rectification of order u/s 154. The order u/s 154 can further be rectifiable, in case the presently applied law is reversed by the Supreme Court.

Rectification can be better option in some situations:

In some situations rectification can be better option than revision. For example ,a rectification should be permitted based on binding judgment of Tribunal/ High Court. And then such order should again be rectifiable if the order of Tribunal/ High Court now followed is reversed by High Court/ or Supreme Court, as the case may be. This will reduce litigation.