Section 263

Section 263 — the law in short

What the courts have decided on section 263, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Paville Projects Pvt Ltd Supreme CourtHelps departmentValidity unconfirmed
  The Assessing Officer allowed a deduction. Does the fact that a view was taken protect the assessment from section 263?
  Only if the view taken is one of two views genuinely open on the law. Where the Supreme Court is satisfied the assessment is both erroneous and prejudicial, the Commissioner's revision stands and the Tribunal and High Court orders setting it aside go.
• CIT v Amitabh Bachchan Supreme CourtHelps departmentValidity unconfirmed
  Can the Commissioner revise on a ground that was not in the show cause notice?
  Yes. Section 263 requires an opportunity of hearing, not a formal show cause notice, and the Commissioner is not confined to the issues listed in any notice. What he must give you is a full chance to answer before he finalises.
• CIT v Vatika Township P Ltd Supreme CourtHelps taxpayer
  An amendment adds a new levy. Does it reach back to earlier years?
  Not unless the statute says so. Legislation is presumed not to operate retrospectively, and that presumption applies with full force where the amendment imposes a new burden. Only clarificatory or beneficial amendments may be read back.
• CIT v Greenworld Corporation Supreme CourtCuts both waysValidity unconfirmed
  The Assessing Officer passed the assessment after being told what to do by the Commissioner. What happens to that assessment, and to a later section 263 order on it?
  An assessment passed on the dictates of a higher authority is without jurisdiction and a nullity. And a Commissioner exercising section 263 cannot use that order to direct reopening of other assessment years; his revisional jurisdiction is confined to the year before him.
• CIT v Max India Ltd Supreme CourtHelps taxpayer
  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.
• CIT v Alagendran Finance Ltd Supreme CourtHelps taxpayer
  A reassessment was done in between. Does the two-year clock for s.263 restart from it?
  Not for an item the reassessment never touched. For that item, limitation runs from the ORIGINAL assessment order, because the doctrine of merger does not apply where the subject matter is different.
• Sakthi Trading Co v CIT Supreme CourtHelps taxpayer
  Our firm dissolved when a partner died, but the remaining partners carried on the same business. Must the closing stock on the date of dissolution be revalued at market price?
  No. The Supreme Court held that where a firm is dissolved but the business is not discontinued, there is no warrant for revaluing the closing stock at market rate. The ordinary rule, cost or market price whichever is lower, continues to apply. Valuing stock at a market value higher than cost would tax notional profits the assessee has never realised. A.L.A. Firm and G.R. Ramachari, which required market valuation, were cases where the business itself came to an end. The Commissioner's order under section 263 was wrong and the question was answered for the assessee.
• Malabar Industrial Co Ltd v CIT Supreme CourtHelps department
  The Commissioner wants to revise my assessment. What does he actually have to establish?
  Both things, not one. The order must be erroneous AND prejudicial to the revenue. If the officer took one of two possible views, that is not an error.
• Aditanar Educational Institution v Addl CIT Supreme CourtHelps taxpayer
  My society runs a college and ended the year with a surplus. Does that surplus mean we no longer exist solely for educational purposes and not for profit?
  No. The Supreme Court held that if a surplus results incidentally, after meeting expenditure, from an activity lawfully carried on by an educational institution, the institution does not cease to exist solely for educational purposes, because its object is not to make profit. The decisive test is whether, on an overall view, the object is to make profit. The Court also held that a society or trust running an educational institution solely for educational purposes and not for profit is itself an other educational institution, and rejected as unreal and hyper-technical the argument that such a body is merely a financing body.
• Punjab State Industrial Development Corporation Ltd v CIT Supreme CourtHelps department
  I paid the Registrar of Companies a filing fee to increase my authorised share capital. Is that fee deductible as revenue expenditure?
  No. The Supreme Court held that the fee paid to the Registrar of Companies for expansion of a company's capital base is capital expenditure. Although the enlarged capital incidentally helps the business and may help it earn profits, the outgoing was directly related to the expansion of the capital base and keeps that character. Deciding a conflict between the High Courts on a reference made directly to it under section 257, the Court preferred the line of decisions in favour of the Revenue over the Madras view in Kisenchand Chellaram. The question was answered against the assessee.
• Tara Devi Aggarwal v CIT Supreme CourtHelps department
  Can an assessment be revised where the officer taxed income that was never yours?
  Yes. An assessment made merely because the assessee wanted the amount taxed in her hands, to help someone else escape a larger assessment, can be erroneous and prejudicial to the revenue — and may be cancelled in revision.
• CIT v Electro House Supreme CourtHelps department
  The Commissioner's show cause notice before revising my assessment was defective. Does that knock out his jurisdiction to revise at all?
  No. The Supreme Court held that the revision section, unlike the reassessment section, prescribes no notice at all. It requires only that the Commissioner give the assessee an opportunity of being heard before he reaches his decision, not before he begins the enquiry. That requirement belongs to natural justice, not to jurisdiction. A breach of it may make the resulting order illegal, but it does not take away the Commissioner's power to proceed. Since no notice was a condition precedent, the question what the notice should have contained did not arise. The Calcutta High Court's contrary view was set aside.
• Raj Kumar Singh Hukam Chandji v CIT Supreme CourtHelps taxpayer
  I am the karta and my family's funds bought the shares that qualified me to be managing director. Is my managing director's salary my own income or the family's?
  Your own, on these facts. The Supreme Court held that the managing director's remuneration received by Raj Kumar Singh was assessable as his individual income and not as the income of his Hindu undivided family. The broad test is whether the remuneration was in substance a return to the family for the investment of its funds in the business, or compensation for the services of the individual coparcener. Here he was elected managing director by the board, was paid for personal services, and was not appointed as a result of any outlay or detriment to family property. The office was one of personal responsibility and ability.
• Rampyari Devi Saraogi v CIT Supreme CourtHelps department
  The Commissioner set aside my assessments in revision relying on enquiries he never showed me. Is his order bad for want of a fair opportunity?
  No, on these facts. The Supreme Court dismissed the appeal. The Commissioner had used material from his own enquiries which was never put to the assessee, but the Court held that this was supporting material and not the basic ground of the order. On the face of the record the assessments were prejudicial to the revenue: a new assessee had filed nine years' voluntary returns at once, her own declaration about initial capital, marriage ornaments and gifts should have put any officer on his guard, no books or bank account existed, and short stereotyped orders followed within days without any enquiry.
• Mirum Digital Pvt Ltd v PCIT High CourtHelps taxpayerValidity unconfirmed
  The assessee did not appear before the Commissioner in the revision proceedings. Does that alone justify the revision order?
  No. Non-appearance before the Commissioner does not convert an assessment made after specific queries and full replies into an order passed without enquiry. The Commissioner still has to make his own enquiry and satisfy both conditions, and prejudice to the revenue must actually exist.
• CIT v Eastman Exports Global Clothing Pvt Ltd High CourtHelps taxpayerValidity unconfirmed
  The Commissioner has issued a s.263 notice saying the transferor companies had not been in business for three years, so the losses we took over cannot be carried forward. Our arrangement was a demerger, not an amalgamation. Does the three-year condition apply?
  No. The three-year condition is in s.72A(2), which governs amalgamation. A demerger is governed by s.72A(4), which contains no such condition. The Madras High Court held that a revision order built on the wrong sub-section, and which merely remitted the matter to the assessing officer for enquiry, did not satisfy the requirement that the order sought to be revised be erroneous.
• PCIT v Rajkot Lodhika Sahakari Kharid Vechan Sangh High CourtHelps taxpayerValidity unconfirmed
  The PCIT revised my assessment saying a co-operative bank is not a co-operative society. Is that right?
  Not on the Gujarat view. A co-operative bank is itself a co-operative society registered under the State Co-operative Societies Act, so it falls within 'any other co-operative society' in s.80P(2)(d); the interest was deductible and the s.263 revision was set aside.
• PCIT v Sangeeta Jain High CourtCuts both waysValidity unconfirmed
  The Commissioner says my assessment was made without any inquiry. Is that by itself enough to revise it under s.263?
  It depends on which side of the line the file falls. The Delhi High Court restored a revision because the officer had accepted the claim that the land sold was agricultural without verifying it at all. The twin conditions still have to be met, but a complete absence of inquiry satisfies the first of them; an inquiry the Commissioner merely thinks was too thin does not.
• PCIT v Mohak Real Estate Pvt Ltd High CourtHelps taxpayerValidity unconfirmed
  How much work must the Commissioner do before he can hold an assessment erroneous and prejudicial?
  At least a minimal enquiry, and he must record the reasons for his conclusion. A revision order that does not engage with the reply to the show cause notice and does not record why the assessment is erroneous is not sustainable in law.
• ACIT v Satish Kumar Keshri High CourtHelps taxpayerValidity unconfirmed
  The search on me turned up nothing but the AO still made additions for an old year. Can he?
  Where the assessment for a year stood completed before the search and nothing was pending to abate, an order under s.153A cannot simply reopen it. A completed assessment can be reassessed under s.153A only on incriminating material found in the search having some nexus to undisclosed income - and the Court left that route open, upholding a remand to the Assessing Officer to reassess if such material exists.
• PCIT v Shreeji Prints Pvt Ltd High CourtHelps taxpayer
  The Commissioner did not mention Explanation 2 in the show cause notice but relied on it in the revision order. Does that matter?
  Yes. The Tribunal held, and the High Court and Supreme Court left undisturbed, that invoking Explanation 2 in the order without having put it to the assessee in the show cause notice is not appropriate or sustainable in law. On the merits, the Assessing Officer had made full inquiries into the loans and taken a plausible view, so there was nothing to revise.
• M/s. Indira Industries v Principal Commissioner of Income Tax High CourtHelps taxpayer
  The Commissioner has issued a section 263 notice raising issues the reassessment never touched. Does the two-year limit run from the reassessment order or from the original assessment, and can I challenge the notice itself?
  From the original assessment, and yes. The Madras High Court held that where a section 263 notice raises issues that were not the subject matter of the reassessment, the two years in section 263(2) run from the end of the financial year in which the original assessment was passed, not the reassessment. Here scrutiny assessment was made on 25 February 2015, so time ran from 31 March 2015, and the notice of 16 August 2017 was out of time. Being barred by law, the notice suffered from lack of jurisdiction, and the settled principles allow a show cause notice to be assailed on that ground. The writ appeal was allowed and the notice quashed.
• Rajmandir Estates P Ltd v PCIT High CourtHelps departmentValidity unconfirmed
  Can the officer look past my subscriber at where the subscriber's own subscribers got their money?
  It depends on what the file shows. This is the decision the department relies on for going up the chain. Upholding a revision under s.263, the Calcutta High Court quoted the Special Bench in Sophia Finance for the width of the words 'any sum found credited in the books' and held that the officer is not precluded from enquiring into the true nature and source of a credit even where it is entered as share application money; it recorded that the submission that the source of the source is irrelevant did not appear to be correct. What it decides is that the enquiry could be directed on this file, not that the credits were bogus.
• CIT v Fr. Mullers Charitable Institutions High CourtHelps taxpayer
  One deposit of ours breaks the s.11(5) modes. Will the department tax the trust's entire income?
  No. Only the income from the investment or deposit made in violation of s.11(5) is taxed; a breach of s.13(1)(d) does not take the trust's total income out of s.11. On that footing the s.263 revision was held unsustainable.
• DIT v Jyoti Foundation High CourtHelps taxpayerValidity unconfirmed
  The Commissioner says the Assessing Officer's inquiry was not deep enough. Can he set the assessment aside and tell the officer to inquire further?
  No. Where inquiry was made but the Commissioner thinks it insufficient, the Commissioner must conduct the inquiry himself and record a finding that the order is erroneous. He cannot remit the question of whether the order is erroneous to the Assessing Officer.
• CIT v D.G. Housing Projects Ltd High CourtHelps taxpayerValidity unconfirmed
  The Commissioner has set aside my assessment under section 263 saying the Assessing Officer did not examine an issue properly — can he do that without deciding the issue himself?
  No. The Delhi High Court held that a finding that the assessment order is erroneous is a jurisdictional precondition for section 263. Where the Assessing Officer has made an enquiry but the Commissioner thinks it inadequate, the Commissioner must himself examine or verify the matter and record a clear finding, supported by reasons, that the order is erroneous and unsustainable in law. He cannot remit the matter for the Assessing Officer to find out whether the order was erroneous. The revision order here, which said only that the point had not been properly examined, was rightly cancelled and the Revenue's appeal was dismissed.
• Paul Mathews and Sons v CIT High CourtHelps taxpayer
  Can the officer treat what I said during a survey as sworn evidence against me?
  No. The officer conducting a s.133A survey has no power to administer an oath or record a sworn statement, so the statement is not given evidentiary value and cannot by itself found an addition. Section 132(4), by contrast, expressly allows a search statement to be used as evidence.
• CIT v Sardari Lal & Co High CourtHelps taxpayerValidity unconfirmed
  Can the CIT(A) enhance my assessment by taxing a source the AO never looked at?
  No. The power of enhancement is confined to the subject matter of the assessment under appeal — the items the AO considered, expressly or by necessary implication. A new source has to be brought to tax by reassessment or by revision, each of which carries its own safeguards and time limits.
• Commissioner of Income-Tax v Shambhu Investment Pvt Ltd High CourtHelps department
  I let furnished table space with security, electricity, water and common amenities for a single monthly charge. Is that business income or income from house property?
  Income from house property, on these facts. The Calcutta High Court held that the mere attachment of income to immovable property is not by itself decisive; what must be seen is the assessee's primary object in exploiting the property. If the main intention is to let the property or a portion of it, the receipt is rental income; if it is to exploit the property by way of complex commercial activities, it is business income. Here there was no separate charge or agreement for furniture, fixtures or services, the monthly rent was comprehensive, and interest-free security advances of Rs 4,25,000 had already recovered the whole cost of the let portion. Applying the Sultan Brothers tests, the letting was inseparable and the object was letting.
• Indwell Constructions v CIT High CourtHelps taxpayer
  The officer rejected my firm's books and estimated the profit. Can he then also add back the interest and remuneration the firm paid its partners?
  No. Once the books are rejected and the profit is estimated, the estimate stands in substitution for a computation under s.29, and every deduction that s.29 brings in is deemed to have been taken into account in arriving at it. The Court added that the embargo in s.40 is taken into account in the same way. To add back one specific item out of the profit and loss account is to rely on the very books that have been rejected, which the officer cannot do. The separate addition of Rs 63,859 for interest and remuneration paid to partners was held not permissible, and the reference was answered in the negative and in favour of the assessee. Read the reasoning carefully before relying on it, because it cuts both ways: the same sentence that stops the Revenue adding an item back is the sentence the Revenue uses to resist a further deduction claimed on top of an estimate.
• CIT v Sophia Finance Ltd High CourtHelps department
  My company received share application money. Can the Assessing Officer use section 68 on it at all, or is share capital simply a capital receipt he cannot touch?
  He can. The Delhi High Court, sitting as a Full Bench, held that section 68 is widely worded - it covers any sum found credited in the books, whatever colour the assessee gives it - so the officer has jurisdiction, and indeed a duty, to enquire whether the alleged shareholders actually exist. If they are identified and shown to have invested, the money is a capital receipt and nothing more happens. If they do not exist, there is no valid issue of share capital, because shares cannot be issued to non-existent persons, and the credit may be charged as the company's income.
• CIT v Gabriel India Ltd High CourtHelps taxpayer
  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.
• CIT v Union Tyres High CourtCuts both ways
  If the CIT(A) spots an untaxed source of income, what is the correct route to bring it to tax?
  The Delhi High Court held that the first appellate authority cannot use the enhancement power to reach a source of income the Assessing Officer never considered. Where such a source surfaces, the statutory route is reassessment under s.147/148 or revision under s.263, not enhancement in the pending appeal.
• Pankil Garg v PCIT ITATHelps taxpayer
  I received money from my HUF. Is it taxable because an HUF is not my 'relative'?
  No. A sum received by a member from his HUF, even out of its capital or estate, is a capital receipt in his hands and not income, and s.10(2) was also available. The s.263 revision built on the contrary view was set aside.
• Torrent Pharmaceuticals Ltd v DCIT ITATHelps taxpayer
  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.
• Subodh Gupta (HUF) v Pr CIT ITATCuts both waysValidity unconfirmed
  My mother gifted shares to my HUF. Is she a 'relative' of the HUF?
  No. For a Hindu undivided family the Explanation makes only a member of that family a 'relative'. The karta's mother was not a member - the gift deed itself recited that the gift was to the family of her son - so 75,000 shares gifted by her were chargeable under s.56(2)(vii), and the list of relatives that applies to an individual does not travel across to a receipt in the family's hands. The decision has a second limb: the Principal Commissioner's valuation by reference to a later sale price was rejected, fair market value has to be computed under Rule 11UA, and the computation was restored to the Assessing Officer, so the amount was never determined. The appeal was partly allowed.
• Brahma Center Development P Ltd v PCIT ITATHelps taxpayerValidity unconfirmed
  The Commissioner has revised my assessment saying no inquiry was made, but the officer did ask about the very item. Is that revision good?
  No, on this Tribunal's view. The Delhi Bench set the revision aside because the Assessing Officer had put a specific question on the interest adjusted against project expenditure, the company had explained it and the officer had accepted the explanation - so there was an inquiry, and the Principal Commissioner was not justified in invoking s.263. The TaxGuru note of the order also records a prospectivity point on Explanation 2, but it records it as the observation of a Mumbai Bench that the order noticed, not as this Bench's own holding.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.