Nov 15, 2021

Explanation 2 to Section 263 – Pandora’s Box

Section 263 of the IT Act empowers the Principal Commissioner of Income-tax (‘PCIT’) to revise assessment orders which are “erroneous” in so far as they are prejudicial to the interests of the Revenue. To expand the term “erroneous” in Section 263 of the IT Act, Explanation 2 was inserted by way of the Finance Act, 2015 with effect from June 01, 2015. The rationale for inserting this Explanation, as stated,[1] was to bring clarity to the meaning of the expression “erroneous”, given that Courts had, so far, interpreted the expression in a narrow manner.[2] With the insertion of this Explanation, specifically clause (a), an assessment order passed without making inquiries or verification, which should have been made/conducted by the Assessing Officer, would also be amenable to exercise of jurisdiction under Section 263 of the IT Act. The intention of this insertion seems to be to overcome the judgements of Courts which distinguished between no enquiry and inadequate enquiry during the course of the assessment.

Historically, explanations have always been understood to only explain the meaning and intent of the provision, so as to clarify any obscurity or vagueness in the main enactment or to explain the dominant object of the provision.[3] Hence, there is a presumption of retrospective applicability of such an explanation. However, where an explanation tends to widen the scope of the main section, there can be no presumption of retrospective applicability, irrespective of the language it may use. Given that this Explanation to Section 263 tends to expand the scope of the main provision, in our view, it cannot be applied retrospectively and would be applicable only with effect from June 01, 2015,[4] i.e., would not be applicable to assessments framed prior to such date.

As has been repeatedly held by Courts the sanctity of completed assessments should be maintained and for that reason safeguards were built in by the Courts to prevent arbitrary exercise of powers under this provision. The insertion of the Explanation and the consequential expansion of the term “erroneous” leaves open the possibility of an abuse of such powers as every assessment would be prone to such proceedings. Repeatedly the Courts have held that the provisions of Section 263 are not to be resorted to correct each and every mistake in the assessment. The Tribunal has, in various decisions, held that the applicability of this Explanation cannot be de hors the main provision, and for assuming jurisdiction under Section 263, the principal conditions, including the condition of the assessment order being erroneous, would still need to be satisfied.

Further, there has been incessant litigation as to whether the law which stood settled in terms of Supreme Court and High Court decisions[5], as to what qualifies as “erroneous”, now stands diluted in light of this Explanation. Various benches of the Tribunal[6] have time and again held that even post the insertion of the Explanation, the same does not lead to abrogation of settled law. Courts have held that if such an interpretation was to be adopted (i.e., inadequate enquiries/verifications would render the order erroneous), it would lead to the PCIT enjoying unfettered powers finding faults in each and every assessment.[7]


[1]  Memorandum and Notes to Clauses to Finance Bill, 2015 and Circular No. 19/2015 dated November 27, 2015

[2]  Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83 (Supreme Court), DIT v. Jyoti Foundation, (2013) 357 ITR 388 (Delhi High Court) and CIT v. Sunbeam Auto Limited, (2010) 332 ITR 167 (Delhi High Court).

[3]  Sundaram Pillai v. Pattabiraman, (1985) 1 SCC 591 (Supreme Court).

[4]  Jayanth Murthy v. DCIT, order dated May 20, 2016 in ITA No. 870/Ahd/2014 (ITAT Ahmedabad).

[5]  Supra note 3.

[6]  Narayan Tatu Rane v. ITO, order dated May 6, 2016 in ITA No. 2690/Mum/2016 (ITAT Mumbai), Torrent Pharmaceuticals Ltd. v. DCIT, order dated August 8, 2018 in ITA 164/Ahd/2018 (ITAT Ahmedabad) and Amira Pure Foods Pvt. Ltd. v. PCIT, order dated November 29, 2017 in ITA No. 3205/Del/2017 (ITAT Delhi).

[7]  PCIT v. Shreeji Prints Pvt. Ltd., [2021] 130 294 (Supreme Court) and [2021] 130 293 (Gujarat High Court).




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