Section 263 – Revision Order by CIT (Prejudicial to Revenue)

Section 263 of the Income Tax Act, 1961, grants the Principal Commissioner or Commissioner of Income-tax (CIT) significant powers to revise an order passed by a lower income tax authority if such an order is found to be erroneous and prejudicial to the interests of the revenue. This section serves as a supervisory power to ensure that revenue interests are protected and that orders passed by Assessing Officers (AOs) are legally sound and do not result in a loss to the exchequer.

It's a crucial provision that allows the higher authorities to correct omissions, errors, or non-application of mind by subordinate officers during the assessment process, which might lead to under-assessment of income, excessive refunds, or any other loss to the revenue.

Procedure Under Section 263

The procedure followed by the CIT when initiating revision proceedings under Section 263 is as follows:

1. Examination of Records (Suo Motu Power)

The CIT can initiate revision proceedings suo motu (on their own motion) by calling for and examining the record of any proceeding under the Income Tax Act, where an order has been passed by the Assessing Officer or any other officer subordinate to him. This review is often triggered by audit objections or departmental internal reviews.

2. Show Cause Notice

Before passing a revision order under Section 263, the CIT must issue a show cause notice to the assessee. This notice informs the assessee about the specific points on which the CIT considers the order to be erroneous and prejudicial to the revenue. This step is crucial for adhering to the principles of natural justice, ensuring the assessee gets an opportunity to explain their position.

3. Opportunity of Being Heard

The CIT must give the assessee a reasonable opportunity of being heard. The assessee can present their case through written submissions or a personal hearing (or via video conferencing in faceless proceedings) to explain why the Assessing Officer's order should not be revised.

4. Passing of Order

After considering the assessee's submission, the CIT may pass an order:

• Cancelling the assessment: If the original assessment is completely flawed.
• Modifying the assessment: To the extent it is erroneous and prejudicial to the revenue.
• Directing a fresh assessment: By the Assessing Officer with specific instructions.
• Dropping proceedings: If the CIT is satisfied with the assessee's explanation.

The CIT's order must be a speaking order, meaning it must provide clear reasons for the decision.

Time Limit for Invoking Section 263

An order under Section 263 cannot be passed after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

For example, if an assessment order for AY 2023-24 was passed on December 31, 2024 (i.e., in FY 2024-25), the CIT can initiate proceedings under Section 263 and pass a revision order by March 31, 2027 (two years from the end of FY 2024-25).

Difference from Section 264 (Revision by CIT on Assessee's Application)

While both Section 263 and Section 264 deal with revision powers of the CIT, their objectives and initiation differ significantly:

• Section 263: Initiated by the CIT suo motu to protect revenue interests against orders that are erroneous and prejudicial to the revenue. It's a remedial power for the department.
• Section 264: Initiated on an application by the assessee seeking relief, typically when an appeal is not possible or desirable. The order does not necessarily have to be erroneous or prejudicial to revenue; the CIT can grant relief if deemed just and proper. It's a beneficial power for the taxpayer.

Appeals Against Section 263 Order

An assessee aggrieved by an order passed under Section 263 has the right to file an appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT is the second appellate authority in the income tax hierarchy.

Conclusion

Section 263 is a powerful tool in the hands of the Income Tax Department to ensure the correctness and legality of assessment orders and to prevent revenue leakage. Taxpayers receiving a show cause notice under this section must treat it with utmost seriousness, as it signifies a potential increase in their tax liability. A thorough and reasoned response, along with proper documentation, is essential to successfully defend against such proceedings.