Section 263 of the IT Act empowers senior tax authorities (including the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner) to examine the record of any proceedings where an order passed by the AO is considered both erroneous and prejudicial to the interests of the revenue. The application of this provision has been the subject of significant judicial scrutiny, with numerous queries raised by both taxpayers and the Revenue authorities, leading to several landmark decisions by the High Courts and the Supreme Court.

Twin Conditions for Invocation

For Section 263 of the IT Act to be validly invoked, two conditions must be satisfied concurrently:

1. The order must be erroneous; and
2. The order must be prejudicial to the interests of the Revenue.

If either of these conditions is absent, the invocation of Section 263 of the IT Act is unsustainable in law. Furthermore, the satisfaction of these conditions must be objectively justifiable and cannot rest solely on the subjective opinion of the tax authority.

The Supreme Court has provided significant guidance on the interpretation and application of Section 263 of the IT Act, through several important decisions:

1. Malabar Industrial Co. Ltd v. CIT^[1] – The Supreme Court clarified that both the “erroneous” and “prejudicial” conditions must be met for Section 263 of the IT Act to apply. An order of the AO that results in a loss of tax revenue may be considered prejudicial to the interests of the Revenue, but only if it is also erroneous. Importantly, if the AO adopts a legally permissible course of action or chooses between two tenable interpretations of law, the order cannot be deemed erroneous and prejudicial merely because the Commissioner holds a different view, unless the view adopted by the AO is unsustainable in law.
2. CIT Amitabh Bachchan^[2] – Reaffirming the twin conditions, the Supreme Court held that the Commissioner is not required to issue a show cause notice but must confine their review to the matters set out in such notice. The Court emphasized the necessity of providing the assessee with an opportunity to be heard, in accordance with the principles of natural justice. The Commissioner should not invoke revisional powers simply because another plausible view exists; the power under Section 263 of the IT Act is not appellate in nature and should not be exercised where the AO’s view is a tenable one.
3. CIT Paville Projects (P.) Ltd^[3] – The Supreme Court reiterated that where two plausible views are possible, the mere existence of an alternative view does not justify revision under Section 263 of the IT Act, unless the view adopted by the AO results in a loss to the Revenue and is legally unsustainable.

In a recent decision, the Supreme Court in PCIT v. V-Con Integrated Solutions Pvt. Ltd.^[4] further clarified the scope of Section 263 of the IT Act. The Court held that the power under Section 263 of the IT Act must be exercised by the tax authority on the merits of the case, resulting in an addition or disallowance, rather than by remanding the matter. The Court distinguished between a lack of investigation and a wrong decision or conclusion, holding that only the latter can be corrected by the Commissioner through a decision on merits. While the Supreme Court has reiterated that a wrong decision or conclusion can be corrected by the Commissioner under Section 263 of the IT Act, such correction is permissible only if the twin conditions—erroneous and prejudicial to the interests of the revenue—are satisfied. Although the recent judgment does not depart from established precedent, it arguably expands the practical scope of Section 263 of the IT Act. In effect, where two plausible views exist, the view more favourable to the Revenue may be upheld by the Commissioner, provided the statutory conditions are met.

Conclusion

The jurisprudence surrounding Section 263 of the IT Act continues to evolve, with the Supreme Court consistently emphasizing the necessity of satisfying both the “erroneous” and “prejudicial” conditions. Taxpayers and practitioners should be mindful that the revisional powers under Section 263 of the IT Act are not unfettered and must be exercised within the boundaries set by judicial precedent. However, recent developments suggest a broader interpretation of the Commissioner’s powers, particularly where the view adopted by the AO is not the most beneficial to the Revenue. Careful consideration of the facts and legal position in each case remains essential.

[1]               [2000] 243 ITR 83 (Supreme Court).

[2]               [2016] 384 ITR 200 (Supreme Court).

[3]               [2023] 453 ITR 447 (Supreme Court).

[4]               PCIT v. V-Con Integrated Solutions Pvt. Ltd., Order dated 04.04.2025 in Special Leave Petition (Civil) (Supreme Court).