Revision under Section 263: “Erroneous and Prejudicial” and the Problem of Enquiry

Advocate Aaditya Bhatt — Sat, 14 Nov 2026 08:20:57 +0000

A power to correct an officer’s mistakes, or a second opinion on his judgment? Fifty years of case law on a single conjunction.

A partnership firm files its return. The Assessing Officer takes the case up for scrutiny and issues a notice under section 142(1) of the Income-tax Act, 1961 asking, among other things, for particulars of the unsecured loans appearing in the balance sheet. The firm files confirmations from each lender, their permanent account numbers, their returns of income and their bank statements. The Officer raises no further query and passes an assessment order that accepts the returned income. The order says nothing at all about the loans.

Two years later the Principal Commissioner issues a notice under section 263. The Officer, he says, accepted the loans without examining the creditworthiness of the lenders or the source of the funds in their accounts; the assessment is therefore erroneous and prejudicial to the interests of the Revenue and must be set aside for a fresh assessment. The firm’s answer is that the enquiry was made, the material was furnished, and the Officer formed a view on it – and that the Commissioner is simply substituting his own judgment about how much enquiry was enough.

Which of them is right is the subject of this article, and the honest answer is that it depends on facts the two accounts above deliberately leave out. The question lies at the heart of revision under Section 263 of the Income-tax Act, 1961, where the Commissioner must establish that an assessment order is both erroneous and prejudicial to the interests of the Revenue. The framework within which the question is decided is well settled, but its application continues to generate substantial litigation.

The Provision, And The Conjunction That Governs It

Section 263(1) permits the Principal Commissioner or Commissioner to call for and examine the record of any proceeding under the Act and, if he considers that an order passed by the Assessing Officer is “erroneous in so far as it is prejudicial to the interests of the revenue”, to pass such order as the circumstances justify – enhancing or modifying the assessment, or cancelling it and directing a fresh one – after giving the assessee an opportunity of being heard and after making, or causing to be made, such enquiry as he deems necessary. The power is supervisory: it does not lie against the assessee’s return but against the officer’s order.

Everything turns on the phrase “erroneous in so far as it is prejudicial”. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) the Supreme Court held that the two limbs are cumulative and must co-exist: an order that is erroneous but causes no loss of revenue cannot be revised, and an order that costs the Revenue money but is legally sound cannot be revised either. The Court added the sentence that has since done most of the work in this field – that “every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue”, and that where two views are possible on the material and the Officer has taken one of them, the order is not erroneous merely because the Commissioner prefers the other. In CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) the Court supplied the temporal rule that follows from this: the plausibility of the Officer’s view is to be judged as at the date of his order, so that a later retrospective amendment cannot make a then-tenable view retrospectively erroneous.

Lack of Enquiry vs Inadequate Enquiry under Section 263

Most section 263 orders in practice do not allege that the Officer applied the wrong law. They allege that he did not look hard enough. The courts have long insisted on a distinction here which is easier to state than to apply. In CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom) the Bombay High Court held that an order is erroneous where it proceeds on an incorrect assumption of fact or an incorrect application of law, or is passed without applying the mind at all – but not where the Officer, having applied his mind, reaches a conclusion the Commissioner would not have reached. The absence of an elaborate discussion in the assessment order does not by itself establish absence of enquiry; what matters is the record. The Delhi High Court put the same idea in the form that is now most often quoted, in CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Del): there is a difference between “lack of enquiry” and “inadequate enquiry”, and only the former opens the door to section 263.

The Gujarat High Court has been consistent to the same effect. In CIT v. Arvind Jewellers [2003] 259 ITR 502 (Guj) the assessee had produced material in answer to notices under sections 142(1) and 143(2) and the Officer had reached a definite conclusion on it; the Court held that a view that a better assessment could have been framed on the same material does not found revision. In CIT v. Amit Corporation [2012] 21 taxmann.com 64 (Guj) the Court held that where the Officer had access to and perused the records and framed the assessment, the assessment cannot be reopened under section 263 merely to make further enquiries. And in PCIT v. Shreeji Prints (P.) Ltd. [2021] 130 taxmann.com 293 (Guj), on facts very close to the illustration with which this article opened, the Court quashed a revision order where the Officer had specifically called for unsecured-loan details and the assessee had complied; the Revenue’s special leave petition was dismissed, [2021] 130 taxmann.com 294 / 282 Taxman 464 (SC).

The difficulty is that the line between an enquiry that was inadequate and an enquiry that was never really made is one of degree, and the two descriptions can often be applied to the same file. That is precisely why the provision generates so much litigation.

“Prejudicial”, And The Two-Views Rule

The second limb is less contested but not trivial. Prejudice means prejudice to the lawful revenue – not merely a smaller demand than the Commissioner would have raised. The Gujarat High Court’s decision in CIT v. Nirma Chemicals Works (P.) Ltd. [2009] 309 ITR 67 (Guj) is a useful illustration of both limbs working together: the Court held that where the Officer had, after due enquiry, adopted one of two available views and granted partial relief, the Commissioner taking a different view was not enough for section 263. That case is also the leading Gujarat authority on merger, to which this article returns below.

It is worth being candid about the limits of the two-views rule. It protects a view that was available on the law as it stood; it does not protect a view for which there was no material at all, and it does not convert every arguable position into an unassailable one. The Revenue is entitled to point out that if the rule were applied at the level of generality at which it is sometimes urged, section 263 would be a dead letter, since almost any assessment can be said to reflect some view.

Explanation 2 to Section 263: Impact of the Finance Act 2015

Parliament was evidently dissatisfied with the judicial line, and by the Finance Act 2015, with effect from 1 June 2015, inserted Explanation 2 to section 263. It declares that an order shall be deemed to be erroneous in so far as it is prejudicial to the interests of the Revenue if, in the opinion of the Principal Commissioner or Commissioner, (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

Clause (a) is the operative one, and the Revenue’s reading of it is straightforward: the deeming is triggered by the Commissioner’s opinion, and it captures precisely the case of an enquiry that was made but was not the enquiry that should have been made – thereby displacing Sunbeam Auto. On that reading the lack-of-enquiry versus inadequate-enquiry distinction has been legislated away for orders passed after 1 June 2015.

The answer that has prevailed at Tribunal level is that clause (a) does not say “which the Commissioner would have made” but “which should have been made”, and that those words import an objective standard. In Shri Narayan Tatu Rane v. ITO [2016] 70 taxmann.com 227 (Mum. Trib.) the Tribunal held that the test is whether the Officer made the enquiries a prudent officer would have made on the material before him. In Bodhisattva Chattopadhyay v. CIT (ITAT Kolkata, 15 November 2019) the Tribunal held that Explanation 2 is a deeming provision to be strictly construed, that it cannot be read as conferring unfettered power, and that an Explanation cannot override the main provision it explains. The Ahmedabad Bench took a similar line in Torrent Pharmaceuticals Ltd. v. DCIT (2018) 173 ITD 130 (Ahd. Trib.), holding that the omitted enquiry must have an important bearing on the issue and that the Commissioner should himself make some enquiry before proposing revision. Whether Explanation 2 operates retrospectively remains genuinely unsettled – the Board’s own explanatory material treats it as clarificatory, several Tribunal decisions treat it as prospective, and there is no Supreme Court ruling on the point.

It should be said plainly that this restrictive line is Tribunal law. It is consistent with the High Court authority that preceded the amendment, and Shreeji Prints (which concerned assessment year 2013-14 but in which Explanation 2 was pressed) is consistent with it, but a practitioner should not describe it as settled at the level of the High Courts, still less the Supreme Court.

The Revenue’s Authorities, Fairly Stated

It would be a poor account of revision under Section 263 of the Income-tax Act that presented only the assessee’s cases. Where the Assessing Officer has made no enquiry at all, the position is and always has been the other way. In Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC), the Income-tax Officer had accepted the assessee’s initial capital, a gift, a jewellery sale and business income without any enquiry or evidence whatsoever, and revision was upheld. In Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), the Court held that an assessment of income neither earned nor assessable, made in order to shield another person, was erroneous and prejudicial and could be cancelled. Both are decisions under section 33B of the 1922 Act, but the language and the principle are the same.

On procedure, CIT v. Amitabh Bachchan [2016] 384 ITR 200 (SC) is important and frequently over-read. What it decides is that section 263 requires an opportunity of being heard rather than a show-cause notice in any particular form; that the Commissioner is not confined to the grounds set out in whatever notice he chooses to issue and may consider other issues, subject to natural justice; and that he may make, or cause to be made, his own enquiry. It is not authority for the proposition that inadequate enquiry alone sustains revision, and it should not be cited for that. As to the material the Commissioner may look at, CIT v. Shree Manjunathesware Packing Products [1998] 231 ITR 53 (SC) holds that “record” is not frozen as at the date of the Officer’s order but includes what is available when the Commissioner examines the case – a position now reinforced by the statutory definition in Explanation 1(b).

The most recent Supreme Court authority on revision under Section 263 is CIT v. Paville Projects (P.) Ltd. [2023] 453 ITR 447 (SC), where a payment made to shareholders to clear encumbrances on a property had been allowed by the Officer as cost of improvement in the capital-gains computation. The Court restored the Commissioner’s revision order. It is worth noting what Paville Projects does and does not do: it applies the erroneous and prejudicial test under Section 263 to a set of facts on which the assessment was found to be both erroneous and productive of a loss of revenue. It does not dilute Malabar, and it is not a charter for revision wherever the Commissioner disagrees.

Limitation, And The Doctrine Of Merger

The two-year limitation under Section 263(2) requires the revision order to be made within two years from the end of the financial year in which the order sought to be revised was passed. The Explanation to that sub-section excludes the time taken in giving an opportunity of rehearing under the proviso to section 129 and any period during which proceedings were stayed by a court. Where the officer’s order was itself passed to give effect to a finding or direction of the Tribunal, the High Court or the Supreme Court, section 263(3) permits revision at any time.

The limitation point that matters most in practice concerns reassessments. In CIT v. Alagendran Finance Ltd. [2007] 293 ITR 1 (SC) the Supreme Court held that where the issue sought to be revised was not the subject matter of the reassessment, there is no merger of the original order into the reassessment on that issue, and the two-year period runs from the original assessment. A Commissioner who waits for a reassessment on an unrelated point and then revises the original issue will usually be out of time.

Merger cuts the other way as well. Explanation 1(c) to section 263(1) preserves the Commissioner’s power over “such matters as had not been considered and decided” in an appeal – which means, by necessary implication, that matters that were considered and decided in appeal are beyond revision. Nirma Chemicals Works is the Gujarat authority on this: because the quantum of the section 80-I deduction had been carried in appeal, eligibility under section 80-I(2) was held to have been very much the subject matter of that appeal, and revision was barred.

The Position By Period

The applicable provisions of Section 263 of the Income-tax Act depend on when the assessment order sought to be revised was passed, particularly in light of the amendments introduced by the Finance Act 2015 and the subsequent enactment of the Income-tax Act, 2025.

Order sought to be revised	Governing text	Practical effect
Passed on or before 31 May 2015	Section 263(1) with Explanation 1 only; no Explanation 2	The judicial gloss governs unaided: lack of enquiry founds revision, inadequate enquiry does not (Gabriel India; Sunbeam Auto; Arvind Jewellers).
Passed on or after 1 June 2015	Section 263(1) with Explanation 2 (Finance Act 2015)	The Revenue may invoke the deeming in clause (a). The Tribunal has read “which should have been made” as an objective, prudent-officer standard rather than a matter of the Commissioner’s preference; the point is not settled at High Court or Supreme Court level.
Passed under the Income-tax Act, 2025 (in force 1 April 2026)	Section 377 (revision prejudicial to revenue); section 378 (revision of other orders, the successor to section 264)	The scheme is carried forward substantially unchanged, with the two-year limitation retained and an express minimum residual period after exclusions.

Where The Doctrine Stands

Section 263 sits at an awkward junction. It exists because assessments are made in volume, under time pressure, by officers who cannot examine everything, and because some of those assessments are simply wrong in the Revenue’s favour being overlooked. It is checked because an assessment is an adjudication, and an adjudication that can be undone whenever a superior officer would have decided differently is not an adjudication at all. The twin-condition test in Malabar is the compromise, and it has held for a quarter of a century.

What Explanation 2 changed, on the reading that has so far prevailed, is less than its language suggests: it makes explicit that an assessment passed without the enquiries that ought to have been made is erroneous, which was already the law, while leaving the courts to decide what ought to have been made. What it may yet change, if a High Court reads clause (a) as the Revenue urges, is the burden – requiring the assessee to show that the enquiry actually conducted was one a reasonable officer could have been satisfied with, rather than requiring the Commissioner to show that no enquiry was made. That question is open, and it is the one to watch.

For the practitioner the discipline is unglamorous and consists mostly in the record. An assessment order that discusses the issue is far harder to revise than one that does not, even though the law says the order is not the only evidence of application of mind. A file that contains the notice, the reply and the material is what makes Arvind Jewellers and Shreeji Prints available. And on the Revenue’s side, a revision order that identifies the specific enquiry that was not made, and why it mattered, will survive appeal far more often than one that recites Explanation 2 and directs a fresh assessment at large.

Frequently Asked Questions

Can an assessment order be revised under Section 263 if the Assessing Officer does not discuss the issue? Not by itself. Gabriel India and the Gujarat line hold that the test is application of mind on the record, not the length of the order; where a notice was issued, a reply filed and material furnished, silence in the order is not proof of absence of enquiry. But the record must actually show the enquiry – the argument fails where the file is empty.

Does Explanation 2 mean that any enquiry the Commissioner considers insufficient will now sustain revision? That is the Revenue’s reading, and it is arguable. The answer that has so far prevailed at Tribunal level is that the words “which should have been made” set an objective standard – the enquiries a prudent officer would have made – and that a deeming Explanation cannot be read to enlarge the main provision. There is no Supreme Court ruling, and the retrospectivity of the Explanation is itself unsettled.

From when does the two-year limitation run where the assessment has been reassessed? From the end of the financial year in which the order actually containing the issue was passed. Under Alagendran Finance, where the issue revised was not the subject matter of the reassessment there is no merger on that issue and time runs from the original assessment, not from the reassessment.

Sources & Citations

Income-tax Act, 1961, s.263(1) with Explanation 1 and Explanation 2 (Explanation 2 inserted by the Finance Act 2015, w.e.f. 1-6-2015); s.263(2) and the Explanation thereto; s.263(3).
Income-tax Act, 2025 (in force 1 April 2026), s.377 (revision of orders prejudicial to revenue) and s.378 (revision of other orders).
Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC).
Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).
CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom).
CIT v. Shree Manjunathesware Packing Products & Camphor Works [1998] 231 ITR 53 (SC).
Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC), decided 10 February 2000.
CIT v. Arvind Jewellers [2003] 259 ITR 502 (Guj).
CIT v. Alagendran Finance Ltd. [2007] 293 ITR 1 (SC), decided 27 July 2007.
CIT v. Max India Ltd. [2007] 295 ITR 282 (SC), decided 1 November 2007.
CIT v. Nirma Chemicals Works (P.) Ltd. [2009] 309 ITR 67 (Guj).
CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Del).
CIT v. Amit Corporation [2012] 21 taxmann.com 64 (Guj).
CIT v. Amitabh Bachchan [2016] 384 ITR 200 (SC), decided 11 May 2016.
Shri Narayan Tatu Rane v. ITO [2016] 70 taxmann.com 227 (Mum. Trib.).
Torrent Pharmaceuticals Ltd. v. DCIT (2018) 173 ITD 130 (Ahd. Trib.).
Bodhisattva Chattopadhyay v. CIT, ITA 1314/Kol/2019 (ITAT Kolkata, 15 November 2019).
PCIT v. Shreeji Prints (P.) Ltd. [2021] 130 taxmann.com 293 (Guj); SLP of the Revenue dismissed, [2021] 130 taxmann.com 294 / 282 Taxman 464 (SC).
CIT v. Paville Projects (P.) Ltd. [2023] 453 ITR 447 (SC), 2023 INSC 325, decided 6 April 2023.

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