Insertion of Explanation to Section 263 of the Income Tax Act, 1961

Section 263 of the Income Tax Act, 1961 confers the power upon the Commissioner to cancel the assessment and directing the assessing officer to make fresh assessment. Such powers includes power to call for and examine the records of a proceedings under the Act and revise any order if the Commissioner considers the same to be erroneous and prejudicial to the interest of the revenue.

Finance Act 2015 inserted Explanation 2 to the said section wherein deeming definition has been provided to the power of Commissioner to declare an assessment order as erroneous in so far as it is prejudicial to the interest of Revenue.

Basic Intent of Section 263:

The basic intent of Section 263 is to give powers to the Principal Commissioner or Commissioner to call for and examine the assessment records and verify the records to see whether the records reveal that the order passed by the Assessing Officer is erroneous in so far as prejudicial to the interest of revenue. The phrase erroneous in so far as prejudicial to the interest of revenue has been legal battle between the Assessee and Revenue and have been interpreted by various courts and tribunals.

The hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 has well interpreted the phrase erroneous in so far as prejudicial to the interest of revenue and that too in favour of Revenue.

Even there the legal battle between the Assessee and Revenue could not stop and various courts and tribunal continued to give various pronouncement either in favour of the assessee or revenue based on facts and circumstances of the each case.