Section 263 of the Income Tax Act, 1961: Revision of Orders Prejudicial to Revenue

Section 263 empowers the Income Tax Commissioner with the authority to revise certain orders passed by the Income Tax Officer (ITO) if they are deemed to be prejudicial to the revenue of the government. This provision acts as a safeguard against errors or misinterpretations by the ITO that might lead to a loss of legitimate tax collection.

Revisionery Power u/s 263

Who can initiate revision under Section 263? 

• The Income Tax Commissioner (CIT) is authorized to initiate revision proceedings under this section.

• The CIT is a senior officer in the Income Tax department who supervises the work of ITOs.

What orders can be revised?

The Commissioner can revise any order passed by the ITO under the Income Tax Act, including:

• Assessment orders: These determine the amount of taxable income and tax liability of an assessee (taxpayer).

• Refund orders: These direct the department to refund taxes paid in excess by an assessee.

• Penalty orders: These impose penalties on assessee’s for various offenses under the Act.

• Other orders: This category encompasses any other orders passed by the ITO under the Act.

What makes an order "prejudicial to the revenue"?

An order is considered prejudicial to the revenue if, in the Commissioner's opinion, it:

• Leads to an underassessment of tax: This occurs when the ITO calculates the tax liability to be lower than what is legally due.

• Grants an excessive tax refund: This happens when the ITO approves a refund that is larger than the amount actually paid in excess by the taxpayer.

• Fails to impose a penalty: The ITO might have overlooked imposing a penalty for an offense committed by the taxpayer.

• Otherwise results in a loss of revenue: This includes any situation where the government's tax collection is negatively affected due to the ITO's order.
  

Revisionery Power u/s 263

What are the steps involved in revision?

1. Initiation: The Commissioner can initiate revision proceedings on their own motion or based on a complaint filed by another taxpayer or a departmental authority.

2. Examination of records: The Commissioner can call for and examine the records of the proceedings conducted by the ITO, including the assessment order, supporting documents, and any relevant communication with the assessee.

3. Opportunity of being heard: The Commissioner must provide the assessee with a reasonable opportunity to be heard before passing any revised order. This includes giving the assessee a chance to present their arguments and evidence to counter the Commissioner's concerns about the original order.

4. Passing a revised order: After examining the records and giving the assessee a hearing, the Commissioner can pass a revised order. This order can take various forms, including:

• Confirming the original order: If the Commissioner finds no errors or issues, the original order is upheld.

• Modifying the original order: The Commissioner might adjust specific aspects of the original order, such as increasing the tax liability, reducing a refund, or imposing a penalty.

• Cancelling the original order: In exceptional cases, the Commissioner might declare the entire original order invalid and direct a fresh assessment by the ITO.

Important points to remember:

• The Commissioner cannot revise an order after two years from the end of the relevant financial year. This time limit ensures finality in tax assessments.

• The Commissioner's power to revise orders under Section 263 is subject to judicial review. This means that an assessee can challenge the Commissioner's revised order in court if they believe it is incorrect or unfair.

• Section 263 also clarifies that the Commissioner's revision power extends to orders passed by other authorities acting in the capacity of an ITO.

• The section defines what constitutes a "record" for the purposes of revision.

• It also clarifies that the Commissioner's revision power applies even if the order has already been appealed, but only to matters not considered in the appeal.

In conclusion, Section 263 of the Income Tax Act empowers the Income Tax Commissioner to revise orders if they are prejudicial to government revenue. This provision ensures tax assessments are accurate and fair. The process involves examination of records, providing the taxpayer with a chance to be heard, and passing a revised order. While there is a time limit of two years for revision, the Commissioner's decisions are subject to judicial review, ensuring transparency and accountability in tax administration.