What if the law itself was unsettled when the officer decided?
Reported as following the two-views principle — where the provision was capable of more than one interpretation and the officer adopted one of them, revision under s.263 does not lie.
Decided by the Supreme Court (Supreme Court of India — S.H. Kapadia and B. Sudershan Reddy, JJ.) on 2007-11-01, reported as (2007) 295 ITR 282 (SC); [2008] 166 Taxman 188 (SC); (2007) 213 CTR 266 (SC); Civil Appeal Nos. 5555-5556 of 2005. It bears on section 263, section 80HHC of the Income Tax Act 1961, in Revision & Rectification matters.
The natural companion to Malabar Industrial, and useful where the dispute is about an unsettled legal question rather than a factual lapse.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
For assessment year 1992-93 the assessee claimed a deduction under section 80HHC, which the Assessing Officer allowed. The Commissioner took the view that the order was erroneous and prejudicial to the interests of the revenue because, in working out the deduction, a negative profit arising at one stage had been ignored and an excessive deduction thereby allowed; by order dated 5 March 1997 he set aside the assessment under section 263. The Punjab and Haryana High Court decided against the Commissioner. Before the Supreme Court the Revenue argued that the 2005 amendment to section 80HHC, being clarificatory and retrospective, itself showed that the view the Assessing Officer had taken was unsustainable in law.
The Court dismissed the Revenue's appeals. At the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3), and two views existed on the day the Commissioner passed his order under section 263. The 2005 amendment, though retrospective, did not attract section 263, because what matters is the position of the law as it stood on the date the Commissioner exercised the power — 5 March 1997 (paras 1 and 2). The Court expressly declined to express any opinion on the scope of the 2005 amendment (para 1).
The Court took the case as squarely covered by Malabar Industrial Co. Ltd. and by the Calcutta High Court's decision in Russell Properties (P.) Ltd. (para 1). It restated the principle from para 10 of Malabar Industrial: 'prejudicial to the interest of the revenue' must be read in conjunction with 'erroneous', so that not every loss of revenue flowing from an order is prejudicial in that sense. Where the officer adopts one of the courses permissible in law, or where two views are possible and he takes one with which the Commissioner does not agree, the order is not erroneous and prejudicial unless the view taken is unsustainable in law. The Revenue's answer was that the Assessing Officer's view was unsustainable, and that the retrospective 2005 amendment proved as much. The Court found no merit in it: it was not in dispute that two views on the word 'profit' existed when the Commissioner passed his order, section 80HHC had by then been amended eleven times, and the mechanics of the section had become so complicated over the years that two views were inherently possible. A later retrospective amendment therefore could not be used to test an order made in 1997, because the position of the law as it stood on the date of the Commissioner's order is what governs (para 2).
subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 5-3-1997 in purported exercise of his powers under section 263 of the Income-tax Act.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppReported as following the two-views principle — where the provision was capable of more than one interpretation and the officer adopted one of them, revision under s.263 does not lie. This was decided by the Supreme Court (Supreme Court of India — S.H. Kapadia and B. Sudershan Reddy, JJ.) and bears on section 263, section 80HHC of the Income Tax Act 1961. It is reported as (2007) 295 ITR 282 (SC); [2008] 166 Taxman 188 (SC); (2007) 213 CTR 266 (SC); Civil Appeal Nos. 5555-5556 of 2005. The natural companion to Malabar Industrial, and useful where the dispute is about an unsettled legal question rather than a factual lapse. If it applies to you, the first step is this: Show that the position was genuinely debatable at the time of the order.
For assessment year 1992-93 the assessee claimed a deduction under section 80HHC, which the Assessing Officer allowed. The Commissioner took the view that the order was erroneous and prejudicial to the interests of the revenue because, in working out the deduction, a negative profit arising at one stage had been ignored and an excessive deduction thereby allowed; by order dated 5 March 1997 he set aside the assessment under section 263. The Punjab and Haryana High Court decided against the Commissioner. Before the Supreme Court the Revenue argued that the 2005 amendment to section 80HHC, being clarificatory and retrospective, itself showed that the view the Assessing Officer had taken was unsustainable in law. The matter was decided on 2007-11-01 by the Supreme Court (Supreme Court of India — S.H. Kapadia and B. Sudershan Reddy, JJ.). On those facts the Supreme Court held as follows. The Court dismissed the Revenue's appeals. At the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3), and two views existed on the day the Commissioner passed his order under section 263. The 2005 amendment, though retrospective, did not attract section 263, because what matters is the position of the law as it stood on the date the Commissioner exercised the power — 5 March 1997 (paras 1 and 2). The Court expressly declined to express any opinion on the scope of the 2005 amendment (para 1).
The Court took the case as squarely covered by Malabar Industrial Co. Ltd. and by the Calcutta High Court's decision in Russell Properties (P.) Ltd. (para 1). It restated the principle from para 10 of Malabar Industrial: 'prejudicial to the interest of the revenue' must be read in conjunction with 'erroneous', so that not every loss of revenue flowing from an order is prejudicial in that sense. Where the officer adopts one of the courses permissible in law, or where two views are possible and he takes one with which the Commissioner does not agree, the order is not erroneous and prejudicial unless the view taken is unsustainable in law. The Revenue's answer was that the Assessing Officer's view was unsustainable, and that the retrospective 2005 amendment proved as much. The Court found no merit in it: it was not in dispute that two views on the word 'profit' existed when the Commissioner passed his order, section 80HHC had by then been amended eleven times, and the mechanics of the section had become so complicated over the years that two views were inherently possible. A later retrospective amendment therefore could not be used to test an order made in 1997, because the position of the law as it stood on the date of the Commissioner's order is what governs (para 2). In the words reproduced by the source cited on this page: "subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 5-3-1997 in purported exercise of his powers under section 263 of the Income-tax Act." The decision followed or applied Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC); Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 (Cal.).
It was decided by the Supreme Court on 2007-11-01 and is reported as (2007) 295 ITR 282 (SC); [2008] 166 Taxman 188 (SC); (2007) 213 CTR 266 (SC); Civil Appeal Nos. 5555-5556 of 2005. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 263, section 80HHC, 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 Court dismissed the Revenue's appeals. At the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3), and two views existed on the day the Commissioner passed his order under section 263. The 2005 amendment, though retrospective, did not attract section 263, because what matters is the position of the law as it stood on the date the Commissioner exercised the power — 5 March 1997 (paras 1 and 2). The Court expressly declined to express any opinion on the scope of the 2005 amendment (para 1). It arises in Revision & Rectification matters, on section 263, section 80HHC of the Income Tax Act 1961, and was decided by Supreme Court of India — S.H. Kapadia and B. Sudershan Reddy, JJ.. 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. Cite contemporaneous decisions taking the same view as the AO.
Still good law. The two-views principle survives and has been carried forward: commentary on the transition confirms that under s.377 of the Income-tax Act 2025 (which replaces s.263 for tax years from 1 April 2026) revision cannot proceed merely because the revisional authority prefers another view. The material qualification is Explanation 2 to s.263 inserted w.e.f. 1 June 2015, whose categories are now written into s.377(3) itself, deeming an order erroneous if passed without inquiries or verification which should have been made. Tribunals (Narayan Tatu Rane; Arun Kumar Garg HUF) have read that as not conferring unfettered power, but it is the route by which the two-views bar is now routinely bypassed. That finding was checked against a published source, which is linked on this page, on 2026-08-25. 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.
The timing point is the useful one: a retrospective amendment made later does not make the officer's earlier view erroneous, because section 263 is tested against the law as it stood when the Commissioner acted. Two limits are worth keeping in view. The Court expressly expressed no opinion on the scope of the 2005 amendment itself, so nothing here decides how that amendment operates. And the finding that two views were possible rested on the state of section 80HHC — amended eleven times, with mechanics complicated enough that two views were inherently possible — so the argument has to be made on the section in issue, not assumed. Read with Torrent Pharmaceuticals on how far Explanation 2 to section 263 changed this. 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 Court dismissed the Revenue's appeals. At the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3), and two views existed on the day the Commissioner passed his order under section 263. The 2005 amendment, though retrospective, did not attract section 263, because what matters is the position of the law as it stood on the date the Commissioner exercised the power — 5 March 1997 (paras 1 and 2). The Court expressly declined to express any opinion on the scope of the 2005 amendment (para 1).
TaxSphere, “CIT v Max India Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-max-india/ (validity last checked 2026-08-25)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
When I reduce export profits from book profit under section 115JB, do I take the full section 80HHC(3) figure or only the 80 per cent the phase-out allows?
The AO knocked freight and telecom charges out of my export turnover but left them in total turnover. Can he do that?
Our tea company exports. Should the section 80HHC deduction be worked out on the whole composite income before Rule 8 splits it sixty-forty, or only on the forty per cent that is taxable?
I made a profit on exporting my own manufactured goods and a bigger loss on exporting trading goods. Can I claim the deduction on the profit and ignore the loss?
