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Errors and prejudice
October, 06th 2007

For the Commissioner to revise any order of the Assessing Officer, the phrase prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer.

The Tax Department has no right of appeal to the C.I.T. (Appeals) against any order passed by the Assessing Officer. Therefore, Section 263 of the Income-tax Act, 1961, has been enacted to arm the Commissioner with the power of revising any order of the Assessing Officer where the order is erroneous and the error has resulted in prejudice to the interests of the revenue: the Commissioner must come to a firm conclusion on this point.

The Commissioner may, under this section, pass such orders as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, or any other order to the detriment of the assessee. A minor mistake or omission in the assessment order would not justify the setting aside of the whole order.

The decision of the Supreme Court in C.I.T. v. Amritlal Bhogilal (34 I.T.R. 130, 140-1) establishes that it would be open to the Commissioner to revise an assessment order while an appeal against it is still pending before the C.I.T. (Appeals) because the Assessing Officers order must be regarded as subsisting and effective in law despite the pendency of the appeal.

The power of the Commissioner under this section is quasi-judicial in character; therefore the Commissioner must give reasons in his order, otherwise the order would be vitiated. The assessee must be given an opportunity of being heard before an order can be made under this section.

The apex Court in Malabar Industrial Co. Ltd. v. C.I.T. (243 I.T.R. 83) considered the scope of the revisionary jurisdiction of the Commissioner of Income-tax under section 263 of the Act for revising the orders prejudicial to the revenue and held that a bare reading of this provision makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue.

Twin conditions

The Commissioner has to be satisfied in respect of twin conditions, namely, the order of the Assessing Officer sought to be revised is erroneous and it is prejudicial to the interests of the Revenue. If one of them is absent if the order of the Assessing Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to section 263(1) of the Act.

There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

Interpretation of prejudicial

The phrase prejudicial to the interests of the revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax.

The Calcutta High Court in Dawjee Dadabhoy and Co. v. S. P. Jain (31 I.T.R. 872), the Karnataka High Court in C.I.T. v. T. Narayana Pai (98 I.T.R. 422), the Bombay High Court in C.I.T. v. Gabriel India Ltd. (203 I.T.R. 108) and the Gujarat High Court in C.I.T. v. Smt. Minalben S. Parekh (215 I.T.R. 81) treated loss of tax as prejudicial to the interests of the Revenue.

The phrase prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue.

For example, when an Assessing Officer adopted one of the courses permissible in law and it resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Assessing Officer is unsustainable in law.

Apex court rulings

It has been held by the Supreme Court in Rampyari Devi Saraogi v. C.I.T. (67 I.T.R. 84) and Smt. Tara Devi Agarwal v. C.I.T. (88 I.T.R. 323) that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue.

In C.I.T. v. Pathy Cine Enterprises (292 I.T.R. 495), the assessee derived income from leasing air-conditioners. The income was being assessed as business income. The Commissioner initiated revision proceedings in the assessment year 2000-01 to assess the income as income from other sources. The Tribunal set aside the revision order under section 263.

On appeal, the Madras High Court held that it was clear that what was not prejudicial to the Revenue for two decades could not be construed as prejudicial to the Revenue for the assessment year in question, merely because the lessee happened to be one of the directors of the assessee-company. It was well-settled that the phrase prejudicial to the Revenue must be read in conjunction with an erroneous order.

It must be pointed out that the Commissioner cannot revise an assessment order before it is served on the assessee because the order is not effective till it is served.

A time limit of two years from the end of the financial year in which the order sought to be revised was passed is prescribed for the exercise of revisional power under this section. However, where the Commissioners order, passed within time, is set aside by a higher authority and the Commissioner is directed to pass a fresh order, the time limit of two years does not apply to such fresh order.

H. P. Ranina
(The author, a Mumbai-based advocate specialising in tax laws)
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