The Commissioner has issued a section 263 notice saying my assessment order does not discuss a deduction the officer allowed. Is a brief order by itself erroneous?
No. The Bombay High Court held that an order is erroneous only if it is not in accordance with law, or was passed without any enquiry in undue haste. Where the officer raised a query, got a written explanation and allowed the claim on it, his order cannot be branded erroneous merely because he did not discuss the matter elaborately or because the Commissioner would have decided differently. And the Commissioner must himself reach a finding that the order is erroneous and prejudicial before he sets it aside; he cannot simply remit the point for the officer to look at again.
Decided by the High Court (Bombay High Court - judgment by Dr B.P. Saraf J) on 1993-04-15, reported as [1993] 203 ITR 108 (Bom). It bears on section 263, section 256(1), section 37(1), section 263(1) of the Income Tax Act 1961, in Revision & Rectification and Assessment & Scrutiny matters.
This is the standard authority against the remand-for-re-examination order under section 263. It draws two lines a practitioner uses constantly. First, between no enquiry and inadequate enquiry: where a query was raised and answered, the order is a conclusion reached in exercise of quasi-judicial power, and section 263 is not a power to substitute the Commissioner's judgment for the officer's. Second, between initiating and disposing: the Commissioner may call for and examine records as an administrative act, but forming the opinion that the order is erroneous and prejudicial is quasi-judicial, must rest on material on the record he called for, and is examinable by the court. It also supplies the working definitions still quoted - erroneous as deviating from the law, and prejudicial to the interests of the Revenue as an order not in accordance with law in consequence of which lawful revenue has not been realised.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 1973-74 Gabriel India Ltd claimed a deduction of Rs 99,326 described as plant re-lay-out expenses. The Income-tax Officer asked what the expenditure was. By letter of 19 September 1975 the company explained that it had two shock absorber plants side by side at its Mulund factory whose lay-out was not conducive to production, that management had decided to merge them and re-lay them out according to the flow of operations, and that this involved relocating facilities and adapting the existing structure and services. It said no new asset and no enduring benefit had come to it. The officer accepted the explanation and allowed the deduction, but his order contained no discussion of the query or the reply. After the assessment was completed the Commissioner issued a notice under section 263, saying the officer had allowed the claim on a presumption that it was revenue expenditure whereas on the principles in Sitalpur Sugar Works Ltd v CIT it was capital. The company objected that there was no error, and that the officer had specifically enquired and been answered. The Commissioner held that the absence of discussion in the order showed non-application of mind and that the claim required examination as revenue or capital; he cancelled the order and directed a fresh assessment on the lines he indicated. The Tribunal set that order aside, holding the Commissioner must first find the order erroneous. The Revenue obtained a reference under section 256(1).
The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs. The Tribunal was right to set aside the section 263 order. Two conditions must both exist before the power is exercised: the order must be erroneous, and by reason of being erroneous it must have caused prejudice to the interests of the Revenue. An order is erroneous when it is not in accordance with law, or has been passed without making any enquiry in undue haste. Here the officer had enquired, received a detailed written explanation which was on the record, and allowed the claim on being satisfied by it; his order could not be called erroneous simply because he did not discuss the point elaborately. Further, the Commissioner, even after initiating the proceedings and hearing the assessee, could not himself say that the expenditure was capital and not revenue - he merely asked the officer to look at it again. Further enquiry or fresh determination can be directed only after the Commissioner has concluded that the officer's finding was erroneous and prejudicial to the interests of the Revenue; without that conclusion he has no power to set aside the assessment.
The Court read section 263(1) as conferring a supervisory power that is not arbitrary or unchartered and can be exercised only if the conditions in the sub-section are met. The Commissioner's consideration that an order is erroneous in so far as it is prejudicial to the Revenue must be based on material on the record of the proceedings called for by him; if no material could reasonably support that conclusion, the very initiation is illegal and without jurisdiction, and section 263 may not be used to start fishing and roving enquiries into concluded matters. The Court invoked the policy of finality in Parashuram Pottery Works and the observation in Sirpur Paper Mills that the department cannot begin fresh litigation because of new views on facts or new versions of the proper inference, since litigation would then end only when legal ingenuity is exhausted. It then defined the two conditions. Taking erroneous from Black's Law Dictionary - involving error, deviating from the law, an erroneous judgment being one contrary to law or on an erroneous application of legal principles - the Court held an order cannot be erroneous unless it is not in accordance with law, and section 263 does not contemplate substituting the Commissioner's judgment for the officer's. Its illustration is the estimate: where the officer examines the accounts, applies his mind and estimates income, the Commissioner's view that the estimate is low may make the order prejudicial in his opinion but does not make it erroneous, and the first condition then fails. Conversely an order that is erroneous but not prejudicial cannot be revised either. For prejudicial to the interests of the Revenue the Court adopted Dawjee Dadabhoy and Co v S.P. Jain, applied in Addl CIT v Mukur Corporation - the order must be one not in accordance with law in consequence of which lawful revenue due to the State has not been or cannot be realised. Finally it distinguished the administrative act of calling for and examining the record from the quasi-judicial act of forming the opinion, which sets the whole machinery of re-examination in motion, must rest on objective material, and is open to examination by the court, citing Russell Properties Pvt Ltd v A. Chowdhury.
An order cannot be termed as erroneous unless it is not in accordance with law.
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Handle my notice → Ask a CA on WhatsAppNo. The Bombay High Court held that an order is erroneous only if it is not in accordance with law, or was passed without any enquiry in undue haste. Where the officer raised a query, got a written explanation and allowed the claim on it, his order cannot be branded erroneous merely because he did not discuss the matter elaborately or because the Commissioner would have decided differently. And the Commissioner must himself reach a finding that the order is erroneous and prejudicial before he sets it aside; he cannot simply remit the point for the officer to look at again. This was decided by the High Court (Bombay High Court - judgment by Dr B.P. Saraf J) and bears on section 263, section 256(1), section 37(1), section 263(1) of the Income Tax Act 1961. It is reported as [1993] 203 ITR 108 (Bom). This is the standard authority against the remand-for-re-examination order under section 263. It draws two lines a practitioner uses constantly. First, between no enquiry and inadequate enquiry: where a query was raised and answered, the order is a conclusion reached in exercise of quasi-judicial power, and section 263 is not a power to substitute the Commissioner's judgment for the officer's. Second, between initiating and disposing: the Commissioner may call for and examine records as an administrative act, but forming the opinion that the order is erroneous and prejudicial is quasi-judicial, must rest on material on the record he called for, and is examinable by the court. It also supplies the working definitions still quoted - erroneous as deviating from the law, and prejudicial to the interests of the Revenue as an order not in accordance with law in consequence of which lawful revenue has not been realised. If it applies to you, the first step is this: Build the assessment record so that it shows the enquiry: keep the officer's written query and your reply on file, because that correspondence is what defeats the non-application-of-mind allegation later.
For assessment year 1973-74 Gabriel India Ltd claimed a deduction of Rs 99,326 described as plant re-lay-out expenses. The Income-tax Officer asked what the expenditure was. By letter of 19 September 1975 the company explained that it had two shock absorber plants side by side at its Mulund factory whose lay-out was not conducive to production, that management had decided to merge them and re-lay them out according to the flow of operations, and that this involved relocating facilities and adapting the existing structure and services. It said no new asset and no enduring benefit had come to it. The officer accepted the explanation and allowed the deduction, but his order contained no discussion of the query or the reply. After the assessment was completed the Commissioner issued a notice under section 263, saying the officer had allowed the claim on a presumption that it was revenue expenditure whereas on the principles in Sitalpur Sugar Works Ltd v CIT it was capital. The company objected that there was no error, and that the officer had specifically enquired and been answered. The Commissioner held that the absence of discussion in the order showed non-application of mind and that the claim required examination as revenue or capital; he cancelled the order and directed a fresh assessment on the lines he indicated. The Tribunal set that order aside, holding the Commissioner must first find the order erroneous. The Revenue obtained a reference under section 256(1). The matter was decided on 1993-04-15 by the High Court (Bombay High Court - judgment by Dr B.P. Saraf J). On those facts the High Court held as follows. The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs. The Tribunal was right to set aside the section 263 order. Two conditions must both exist before the power is exercised: the order must be erroneous, and by reason of being erroneous it must have caused prejudice to the interests of the Revenue. An order is erroneous when it is not in accordance with law, or has been passed without making any enquiry in undue haste. Here the officer had enquired, received a detailed written explanation which was on the record, and allowed the claim on being satisfied by it; his order could not be called erroneous simply because he did not discuss the point elaborately. Further, the Commissioner, even after initiating the proceedings and hearing the assessee, could not himself say that the expenditure was capital and not revenue - he merely asked the officer to look at it again. Further enquiry or fresh determination can be directed only after the Commissioner has concluded that the officer's finding was erroneous and prejudicial to the interests of the Revenue; without that conclusion he has no power to set aside the assessment.
The Court read section 263(1) as conferring a supervisory power that is not arbitrary or unchartered and can be exercised only if the conditions in the sub-section are met. The Commissioner's consideration that an order is erroneous in so far as it is prejudicial to the Revenue must be based on material on the record of the proceedings called for by him; if no material could reasonably support that conclusion, the very initiation is illegal and without jurisdiction, and section 263 may not be used to start fishing and roving enquiries into concluded matters. The Court invoked the policy of finality in Parashuram Pottery Works and the observation in Sirpur Paper Mills that the department cannot begin fresh litigation because of new views on facts or new versions of the proper inference, since litigation would then end only when legal ingenuity is exhausted. It then defined the two conditions. Taking erroneous from Black's Law Dictionary - involving error, deviating from the law, an erroneous judgment being one contrary to law or on an erroneous application of legal principles - the Court held an order cannot be erroneous unless it is not in accordance with law, and section 263 does not contemplate substituting the Commissioner's judgment for the officer's. Its illustration is the estimate: where the officer examines the accounts, applies his mind and estimates income, the Commissioner's view that the estimate is low may make the order prejudicial in his opinion but does not make it erroneous, and the first condition then fails. Conversely an order that is erroneous but not prejudicial cannot be revised either. For prejudicial to the interests of the Revenue the Court adopted Dawjee Dadabhoy and Co v S.P. Jain, applied in Addl CIT v Mukur Corporation - the order must be one not in accordance with law in consequence of which lawful revenue due to the State has not been or cannot be realised. Finally it distinguished the administrative act of calling for and examining the record from the quasi-judicial act of forming the opinion, which sets the whole machinery of re-examination in motion, must rest on objective material, and is open to examination by the court, citing Russell Properties Pvt Ltd v A. Chowdhury. In the words reproduced by the source cited on this page: "An order cannot be termed as erroneous unless it is not in accordance with law."
It was decided by the High Court on 1993-04-15 and is reported as [1993] 203 ITR 108 (Bom). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 263, section 256(1), section 37(1), section 263(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs. The Tribunal was right to set aside the section 263 order. Two conditions must both exist before the power is exercised: the order must be erroneous, and by reason of being erroneous it must have caused prejudice to the interests of the Revenue. An order is erroneous when it is not in accordance with law, or has been passed without making any enquiry in undue haste. Here the officer had enquired, received a detailed written explanation which was on the record, and allowed the claim on being satisfied by it; his order could not be called erroneous simply because he did not discuss the point elaborately. Further, the Commissioner, even after initiating the proceedings and hearing the assessee, could not himself say that the expenditure was capital and not revenue - he merely asked the officer to look at it again. Further enquiry or fresh determination can be directed only after the Commissioner has concluded that the officer's finding was erroneous and prejudicial to the interests of the Revenue; without that conclusion he has no power to set aside the assessment. It arises in Revision & Rectification and Assessment & Scrutiny matters, on section 263, section 256(1), section 37(1), section 263(1) of the Income Tax Act 1961, and was decided by Bombay High Court - judgment by Dr B.P. Saraf J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. In reply to a section 263 notice, press the Commissioner to state his own finding that the order is erroneous and to identify the error; an order that merely directs re-examination is open to attack on this authority. Distinguish no enquiry from what the Commissioner thinks was insufficient enquiry, and be ready for the argument that the two are the same, which is what Explanation 2 to section 263 was later inserted to say. Do not concede that a short assessment order is by itself a defect; the question is whether the record shows the officer applied his mind, not how much he wrote.
Still good law. I read the full judgment to its answer on the reference and checked no later authority in this session. Two later developments a reader must check for himself, which I state from my own knowledge rather than from anything verified here: the Supreme Court in Malabar Industrial Co Ltd v CIT laid down the twin conditions in substantially the same terms, which is why this reasoning has held; and Explanation 2 was inserted in section 263 by the Finance Act 2015, deeming an order erroneous and prejudicial if, among other things, it is passed without making inquiries or verification which should have been made. How far that Explanation displaces the enquiry-made-but-not-discussed reasoning in this judgment is contested, and this record does not resolve it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/cit-v-gabriel-india-lack-of-discussion-is-not-error/, which asked: The Commissioner says my assessment is erroneous because the Assessing Officer did not discuss my claim in the order. Can he set the assessment aside under section 263 on that alone? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The Court did not decide whether the plant re-lay-out expenditure of Rs 99,326 was capital or revenue - only that the Commissioner had not found the officer's view erroneous - so this case is no authority on the merits of that deduction. The harvested page names only Saraf J, so if the Bench had a second judge I cannot give the name. The batch line lists section 143(3), which the judgment does not discuss; the sections here are taken from the judgment. The later statutory and Supreme Court developments noted in the validity field are from my own knowledge and were not checked in this session. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the affirmative, in favour of the assessee and against the Revenue, with no order as to costs. The Tribunal was right to set aside the section 263 order. Two conditions must both exist before the power is exercised: the order must be erroneous, and by reason of being erroneous it must have caused prejudice to the interests of the Revenue. An order is erroneous when it is not in accordance with law, or has been passed without making any enquiry in undue haste. Here the officer had enquired, received a detailed written explanation which was on the record, and allowed the claim on being satisfied by it; his order could not be called erroneous simply because he did not discuss the point elaborately. Further, the Commissioner, even after initiating the proceedings and hearing the assessee, could not himself say that the expenditure was capital and not revenue - he merely asked the officer to look at it again. Further enquiry or fresh determination can be directed only after the Commissioner has concluded that the officer's finding was erroneous and prejudicial to the interests of the Revenue; without that conclusion he has no power to set aside the assessment.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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