Jigar M. Patel
International Tax Attorney
Revisionary Powers of Commissioner of Income-tax
While a taxpayer enjoys the right to challenge an order passed in his case by the Assessing Officer (AO) by preferring an appeal against the same under Section 246A of the Income-tax Act, Section 263 empowers the Commissioner of Income-tax (CIT) to revise any order passed by an AO, if he considers that such order is erroneous, in so far as it is prejudicial to the interests of the Revenue.
After calling for and examining the records, the CIT can serve a show cause notice to the taxpayer disclosing the grounds on which he desires to revise the order passed by the AO and offer him an opportunity of being heard. Under his revisionary powers, the CIT can pass a final order directing the AO to pass such order as the circumstances of the case justify, including an order enhancing or modifying the assessment or canceling the same and directing a fresh assessment. Such an order is required to be passed within the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
Twin Conditions to be fulfilled before invoking Revision
A CIT can exercise his revisionary powers only if two conditions are satisfied, viz. the order passed by the AO is erroneous and it is prejudicial to the interests of the revenue. An order is considered erroneous if it is passed based on incorrect facts and incorrect application of law or a failure to make necessary inquiries.
An order is considered to be prejudicial to the interests of the revenue if it results in a loss of tax if it results in a loss of tax due to incorrect or incomplete assessment.
Safeguards which protect Taxpayers from unjust Revisions
Several safeguards exist to protect taxpayers from unjust revisions under Section 263. These include the requirement for a reasoned order, the obligation to follow principles of natural justice, and the limitation period for passing the revisional order.
Courts and Appellate Authorities have played a key role in ensuring that the CIT’s powers under Section 263 are not misused. The law on this aspect stands judicially well settled that where two views are possible and the AO has taken one view, the CIT cannot intervene under Section 263, even if he disagrees with the AO’s view.
Recent Noteworthy Decision of ITAT Ahmedabad
In the above regard, a recent decision of the Ahmedabad Bench of the Income-tax Appellate Tribunal (ITAT) delivered in the case of ‘Vitthaldas Nathubhai Shah vs. PCIT,’ deserves a special mention. In the case before the ITAT, the CIT on the basis of an audit objection held that the deduction for donation to a political party allowed under Section 80GGC was required to be disallowed, as pursuant to a search and seizure operation, investigation revealed that the said party was engaged in a bogus donation racket.
The ITAT noted that no material from the said search relatable to the taxpayer’s donation was ever placed before the AO in the course of assessment proceedings. In such circumstances, it was difficult to appreciate what further enquiry the AO could have reasonably undertaken, apart from calling for the details, examining the donation receipts, and verifying the bank statements which were in fact furnished by the taxpayer.
The Tribunal concluded that to hold the order of the AO as erroneous and prejudicial, in absence of any incriminating information directly concerning the taxpayer, would be to set a wrong precedent. The order of the CIT u/s. 263 was, therefore, directed to be quashed.
