s.263 — Revision of orders prejudicial to revenue
The Commissioner's power to revise an order erroneous in so far as it is prejudicial to the revenue, the two-year limit, and the deeming clauses that changed the ground of attack.
Explanation 2, which deems four categories of order to be erroneous in so far as prejudicial to the interests of the revenue, was inserted by the Finance Act 2015 with effect from 1 June 2015. The most recent consolidated edition of the section served by the Department carries Year 2018 and no later amendment to it was traced. Sub-section (1) as there published names the Principal Commissioner or Commissioner, while sub-section (1) of section 264 names the Principal Chief Commissioner and the Chief Commissioner as well; section 377 of the Income-tax Act, 2025 resolves the difference by defining a single Competent Authority covering all four.
Income-tax Act, 1961
s.263
Income-tax Act, 2025
s.377
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 263 of the Income-tax Act, 1961 empowers 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, after giving the assessee an opportunity of being heard and making or causing such inquiry as he deems necessary. The order may enhance or modify the assessment, or cancel it and direct a fresh assessment. Explanation 1 to sub-section (1) defines the orders reached, provides that the record includes all records relating to any proceeding available at the time of examination, and extends the power to matters not considered and decided in an appeal. Explanation 2, inserted by the Finance Act 2015, deems an order erroneous in so far as prejudicial to the interests of the revenue where it is passed without making inquiries or verification which should have been made, where relief is allowed without inquiring into the claim, where the order is not made in accordance with an order, direction or instruction of the Board under section 119, or where it is not passed in accordance with a decision prejudicial to the assessee of the jurisdictional High Court or the Supreme Court. Sub-section (2) bars an order after two years from the end of the financial year in which the order sought to be revised was passed, and sub-section (3) lifts that bar where the order gives effect to a finding or direction of the Appellate Tribunal, the High Court or the Supreme Court. The Explanation that follows excludes from the computation the time taken in giving the assessee an opportunity to be reheard under the proviso to section 129 and any period of stay by a court. An order under section 263 is appealable to the Appellate Tribunal. The corresponding provision in the Income-tax Act, 2025 is section 377, which restructures the same scheme: the deeming clauses move from Explanation 2 into sub-section (3), the two-year period sits in sub-section (4), the override in sub-section (5) and the exclusions in sub-section (6), a new sub-section (7) extends to sixty days whatever is left after an exclusion, the order of a Transfer Pricing Officer is brought expressly within the power, and sub-section (8) defines the Competent Authority as the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner.
What the provision does
Allows the revenue to reopen a completed order in its own favour, within two years of the end of the financial year in which that order was passed, on the ground that it is both erroneous and prejudicial to the interests of the revenue. Since 2015 the second limb can be satisfied by deeming, where the ground is a failure to inquire or verify, so the fight is now usually about whether an inquiry was made at all rather than about whether the view taken was right.
Threshold questions
- Is the order sought to be revised one passed by the Assessing Officer, and is it within two years of the end of the financial year in which it was passed
- Is the ground relied on the ordinary test of error and prejudice, or one of the four deeming clauses in Explanation 2
- Was an opportunity of being heard given, and was the ground on which the order was finally revised the ground put to the assessee in the notice
- Had the matter been considered and decided in an appeal, which takes it outside the power under Explanation 1(c)
- Does the order under revision cancel the assessment and direct a fresh one, or substitute a finding, because the consequences for the assessee differ
In practice
The recurring disputes.
No inquiry against inadequate inquiry
Before 2015 the settled line was that where the Assessing Officer had made an inquiry and taken a view, the Commissioner could not revise merely because he would have inquired further or taken a different view. Explanation 2(a) now deems an order erroneous if passed without making inquiries or verification which should have been made. The revenue reads that as covering an inquiry that was inadequate. The answer is that the clause speaks of inquiries not made, that it cannot convert a possible view into an error, and that reading it otherwise would make every assessment revisable. The distinction is the single most important one on this section.
Whether the ground must be put to the assessee
Sub-section (1) requires an opportunity of being heard. Where the revisional order rests on a ground not set out in the notice, the argument is that the opportunity was illusory and the order cannot stand. The revenue answers that the requirement attaches to the proceeding and not to each ground, and that the assessee can meet the new ground in the fresh assessment.
How far Explanation 1(c) protects what went through appeal
The clause extends the power to matters not considered and decided in an appeal, which carries the converse: a matter considered and decided is outside the power. The dispute is over what counts as considered and decided, and in particular whether a ground raised and abandoned, or one covered by a general observation, has been decided for this purpose.
Which order starts the two-year clock
The period runs from the end of the financial year in which the order sought to be revised was passed. Where an order under section 154, or an order giving effect to appellate directions, has intervened, the revenue will say the later order is the order sought to be revised and the clock restarts. The assessee will say that the later order cannot be used to reopen what it did not deal with, and that the period for the original order has gone.