After Explanation 2 to s.263, can the Commissioner revise simply by saying the enquiry was not thorough enough?
No. Explanation 2 is clarificatory and does not dilute the basic requirements of s.263(1). Revision needs a gross inadequacy of enquiry, or an enquiry the record demanded and which was simply not made.
Decided by the ITAT (Income Tax Appellate Tribunal, Ahmedabad Bench 'B' - Pradip Kumar Kedia (Accountant Member) and Mahavir Prasad (Judicial Member); AY 2014-15) on 2018-08-08, reported as [2018] 97 taxmann.com 671 (Ahmedabad - Trib.) / [2018] 173 ITD 130 (Ahmedabad - Trib.) / 196 TTJ 318 (Ahd.)(Trib.); IT Appeal No. 164 (Ahd.) of 2018; AY 2014-15. It bears on section 263, section 143(3) of the Income Tax Act 1961, in Revision & Rectification matters.
Explanation 2 is the department's standard answer to Malabar Industrial, and it is quoted in almost every s.263 notice. This is the decision that says the Explanation did not rewrite the section — the difference between no enquiry and less enquiry than the Commissioner would have liked still decides the case.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
For assessment year 2014-15 the assessee, a listed pharmaceutical company, returned income of Rs. 584.13 crores and was assessed at Rs. 715.01 crores by an order under s.143(3) dated 26 December 2016 running to 102 pages. The Principal Commissioner issued a show cause notice under s.263 on 18 August 2017 alleging inadequate enquiry on six issues: business advancement expenses of Rs. 55.14 crores on gift articles, of which Rs. 24.32 crores was on items costing more than Rs. 1,000 each, with no enquiry into who received them; the deduction claimed under ss.80-IC and 80-IE for two manufacturing units, where the manufacturing process was said not to have been examined; the exclusion of quality control and regulatory approval costs from research and development expenditure on which weighted deduction was claimed under s.35(2AB); clinical research expenditure; labour, job work, professional, legal and salary expenses treated as part of research and development; and Rs. 9.44 crores on academic and scientific gatherings, Rs. 19.57 crores of sales promotion and Rs. 1.48 crores of overseas business advancement expenses. The assessee replied showing that each had been enquired into. The Principal Commissioner nonetheless set the assessment aside on 15 November 2017 with a direction to reframe it.
The appeal was allowed: the revisional order under s.263 was set aside and cancelled and the assessment order under s.143(3) was restored (paras 10 and 11). Explanation 2 to s.263, inserted by the Finance Act 2015, is clarificatory and does not dilute the basic requirements of s.263(1) (para 9.2). Revision is not available on every inadequacy of enquiry as the Commissioner perceives it; it is only in a very gross case of inadequacy, or where an enquiry was mandated on the record before the Assessing Officer and was not conducted, that the power can be used, and the Commissioner must show that the view the Assessing Officer took is wholly unsustainable in law (para 9.5). On the facts the Assessing Officer had shown appetite for enquiry and verification and had passed a detailed order making several allowances and disallowances, so the foundation for revisional jurisdiction was missing (para 9.5).
The Tribunal started from the width of s.263 but read Explanation 2 against the CBDT circular explaining its introduction, and held that because the Explanation is clarificatory it cannot dilute the basic requirements of s.263(1); revisional action taken on the pretext of inadequacy of enquiry in a plenary and blanket manner must be desisted from. The object of the Explanation is to dissuade an Assessing Officer from passing routine and perfunctory orders, not to fasten an onerous burden on him where the evidence shows no culpability, and the powers under s.263, being extraordinary and drastic, are not uncontrolled (para 9.2). The words 'which should have been made' in clause (a) of the Explanation import a test of reasonableness and context: inadequacy of enquiry must be of a cardinal nature before the power is engaged, otherwise almost every assessment could be undone (para 9.3). Context here meant the scale of the assessee's operations, the several audits its accounts undergo, its position as a listed company in a regulated environment and the fact that it is scrutinised year after year, against the time and capacity constraints on the Assessing Officer (para 9.4). Finally, revisional power cannot be used to direct a fuller enquiry merely to see whether the earlier view was wrong where a view was already taken after enquiry; if it could, every assessment order would become susceptible to s.263 and cause unintended hardship (para 9.5).
The Explanation being clarificatory would not lead to dilution of the basic requirements of Section 263(1) of the 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 WhatsAppNo. Explanation 2 is clarificatory and does not dilute the basic requirements of s.263(1). Revision needs a gross inadequacy of enquiry, or an enquiry the record demanded and which was simply not made. This was decided by the ITAT (Income Tax Appellate Tribunal, Ahmedabad Bench 'B' - Pradip Kumar Kedia (Accountant Member) and Mahavir Prasad (Judicial Member); AY 2014-15) and bears on section 263, section 143(3) of the Income Tax Act 1961. It is reported as [2018] 97 taxmann.com 671 (Ahmedabad - Trib.) / [2018] 173 ITD 130 (Ahmedabad - Trib.) / 196 TTJ 318 (Ahd.)(Trib.); IT Appeal No. 164 (Ahd.) of 2018; AY 2014-15. Explanation 2 is the department's standard answer to Malabar Industrial, and it is quoted in almost every s.263 notice. This is the decision that says the Explanation did not rewrite the section — the difference between no enquiry and less enquiry than the Commissioner would have liked still decides the case. If it applies to you, the first step is this: Produce the assessment record showing what the officer actually asked and what you answered — questionnaires, replies, annexures.
For assessment year 2014-15 the assessee, a listed pharmaceutical company, returned income of Rs. 584.13 crores and was assessed at Rs. 715.01 crores by an order under s.143(3) dated 26 December 2016 running to 102 pages. The Principal Commissioner issued a show cause notice under s.263 on 18 August 2017 alleging inadequate enquiry on six issues: business advancement expenses of Rs. 55.14 crores on gift articles, of which Rs. 24.32 crores was on items costing more than Rs. 1,000 each, with no enquiry into who received them; the deduction claimed under ss.80-IC and 80-IE for two manufacturing units, where the manufacturing process was said not to have been examined; the exclusion of quality control and regulatory approval costs from research and development expenditure on which weighted deduction was claimed under s.35(2AB); clinical research expenditure; labour, job work, professional, legal and salary expenses treated as part of research and development; and Rs. 9.44 crores on academic and scientific gatherings, Rs. 19.57 crores of sales promotion and Rs. 1.48 crores of overseas business advancement expenses. The assessee replied showing that each had been enquired into. The Principal Commissioner nonetheless set the assessment aside on 15 November 2017 with a direction to reframe it. The matter was decided on 2018-08-08 by the ITAT (Income Tax Appellate Tribunal, Ahmedabad Bench 'B' - Pradip Kumar Kedia (Accountant Member) and Mahavir Prasad (Judicial Member); AY 2014-15). On those facts the ITAT held as follows. The appeal was allowed: the revisional order under s.263 was set aside and cancelled and the assessment order under s.143(3) was restored (paras 10 and 11). Explanation 2 to s.263, inserted by the Finance Act 2015, is clarificatory and does not dilute the basic requirements of s.263(1) (para 9.2). Revision is not available on every inadequacy of enquiry as the Commissioner perceives it; it is only in a very gross case of inadequacy, or where an enquiry was mandated on the record before the Assessing Officer and was not conducted, that the power can be used, and the Commissioner must show that the view the Assessing Officer took is wholly unsustainable in law (para 9.5). On the facts the Assessing Officer had shown appetite for enquiry and verification and had passed a detailed order making several allowances and disallowances, so the foundation for revisional jurisdiction was missing (para 9.5).
The Tribunal started from the width of s.263 but read Explanation 2 against the CBDT circular explaining its introduction, and held that because the Explanation is clarificatory it cannot dilute the basic requirements of s.263(1); revisional action taken on the pretext of inadequacy of enquiry in a plenary and blanket manner must be desisted from. The object of the Explanation is to dissuade an Assessing Officer from passing routine and perfunctory orders, not to fasten an onerous burden on him where the evidence shows no culpability, and the powers under s.263, being extraordinary and drastic, are not uncontrolled (para 9.2). The words 'which should have been made' in clause (a) of the Explanation import a test of reasonableness and context: inadequacy of enquiry must be of a cardinal nature before the power is engaged, otherwise almost every assessment could be undone (para 9.3). Context here meant the scale of the assessee's operations, the several audits its accounts undergo, its position as a listed company in a regulated environment and the fact that it is scrutinised year after year, against the time and capacity constraints on the Assessing Officer (para 9.4). Finally, revisional power cannot be used to direct a fuller enquiry merely to see whether the earlier view was wrong where a view was already taken after enquiry; if it could, every assessment order would become susceptible to s.263 and cause unintended hardship (para 9.5). In the words reproduced by the source cited on this page: "The Explanation being clarificatory would not lead to dilution of the basic requirements of Section 263(1) of the Act."
It was decided by the ITAT on 2018-08-08 and is reported as [2018] 97 taxmann.com 671 (Ahmedabad - Trib.) / [2018] 173 ITD 130 (Ahmedabad - Trib.) / 196 TTJ 318 (Ahd.)(Trib.); IT Appeal No. 164 (Ahd.) of 2018; AY 2014-15. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 263, section 143(3), 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 appeal was allowed: the revisional order under s.263 was set aside and cancelled and the assessment order under s.143(3) was restored (paras 10 and 11). Explanation 2 to s.263, inserted by the Finance Act 2015, is clarificatory and does not dilute the basic requirements of s.263(1) (para 9.2). Revision is not available on every inadequacy of enquiry as the Commissioner perceives it; it is only in a very gross case of inadequacy, or where an enquiry was mandated on the record before the Assessing Officer and was not conducted, that the power can be used, and the Commissioner must show that the view the Assessing Officer took is wholly unsustainable in law (para 9.5). On the facts the Assessing Officer had shown appetite for enquiry and verification and had passed a detailed order making several allowances and disallowances, so the foundation for revisional jurisdiction was missing (para 9.5). It arises in Revision & Rectification matters, on section 263, section 143(3) of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, Ahmedabad Bench 'B' - Pradip Kumar Kedia (Accountant Member) and Mahavir Prasad (Judicial Member); AY 2014-15. 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. Frame the response around the distinction: enquiry made and a view taken, versus enquiry omitted altogether. Where two views were possible on the issue, say so expressly and identify the second view.
Still good law. Applied by a later Bench. In Agrani Buildestate v. Pr. CIT [2023] 153 taxmann.com 300 / [2023] 202 ITD 231 (Jaipur - Trib.), decided 3 July 2023 (Sandeep Gosain JM and Rathod Kamlesh Jayantbhai AM, IT Appeal No. 205 (JP) of 2023, AY 2018-19), the Tribunal held that where the assessment had been completed on exhaustive enquiries, Explanation 2 to s.263 cannot override the basic requirements of sub-section (1), and said in terms that it drew strength from this decision, listing it first among the authorities relied on. It quashed the revisional order. The same passage lists Eveready Industries India Ltd. v. Pr. CIT [2020] 114 taxmann.com 610 / 181 ITD 528 (Kol. - Trib.), Amira Pure Foods (P.) Ltd. v. Pr. CIT (IT Appeal No. 3205 (Delhi) of 2017) and Narayan Tatu Rane v. ITO [2016] 70 taxmann.com 227 (Mum. - Trib.) as being to the same effect. Section 263 is carried into the Income-tax Act 2025 as s.260, and no amendment to the revision power or to Explanation 2 was found. 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.
The order has been read in full: ITAT Ahmedabad Bench 'B', Pradip Kumar Kedia (Accountant Member) and Mahavir Prasad (Judicial Member), IT Appeal No. 164 (Ahd.) of 2018, assessment year 2014-15, decided 8 August 2018, reported at [2018] 97 taxmann.com 671 / [2018] 173 ITD 130. Two points of use. The reasoning is contextual, not absolute: the Tribunal weighed the scale of this assessee's operations, the audits its accounts undergo, its position as a listed company and the fact that it is scrutinised every year against the time and capacity constraints on the Assessing Officer, and it accepted that a very gross inadequacy of enquiry, or a failure to make an enquiry the record plainly called for, would still support revision. A client whose assessment record is thin cannot expect the same answer. And the second of the six issues was the deduction claimed under ss.80-IC and 80-IE for two manufacturing units, not an allocation of expenses between units. An Indian Kanoon listing shows a Torrent Pharmaceuticals order of 14 November 2018 which is a separate appeal. The reasoning is contextual and turns on the scale of this assessee's operations and the detail of the assessment order, so it does not translate automatically to a thinner record; the Tribunal accepted that a very gross inadequacy of enquiry, or a failure to enquire where the record plainly required it, would still support revision. Whether your own High Court has taken a narrower view of Explanation 2 should be checked. 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 appeal was allowed: the revisional order under s.263 was set aside and cancelled and the assessment order under s.143(3) was restored (paras 10 and 11). Explanation 2 to s.263, inserted by the Finance Act 2015, is clarificatory and does not dilute the basic requirements of s.263(1) (para 9.2). Revision is not available on every inadequacy of enquiry as the Commissioner perceives it; it is only in a very gross case of inadequacy, or where an enquiry was mandated on the record before the Assessing Officer and was not conducted, that the power can be used, and the Commissioner must show that the view the Assessing Officer took is wholly unsustainable in law (para 9.5). On the facts the Assessing Officer had shown appetite for enquiry and verification and had passed a detailed order making several allowances and disallowances, so the foundation for revisional jurisdiction was missing (para 9.5).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
My return was only processed under 143(1). Does that stop the department reopening it later?
A reassessment was done in between. Does the two-year clock for s.263 restart from it?
Can the Commissioner revise on a ground that was not in the show cause notice?