CHAPTER XX — APPEALS AND REVISION | E.—Revision by the Principal Commissioner or Commissioner
CHAPTER XX — APPEALS AND REVISION | E.—Revision by the Principal Commissioner or Commissioner
Section 263 — Revision of Orders Prejudicial to Revenue
Case Laws & Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026) — bharattax.co Treatise
Status: Live. The Commissioner's suo motu revisional power to revise an assessment order that is erroneous in so far as it is prejudicial to the interests of the revenue; widened by Explanation 2 (Finance Act, 2015) on lack of inquiry.
Finance Act, 2026: No amendment. The Finance Act, 2026 does not touch section 263.
Nature / mechanism: Revisional power exercisable only on satisfaction of two cumulative conditions — the order is (i) erroneous and (ii) prejudicial to the interests of the revenue — after giving the assessee an opportunity of being heard.
Litigation profile: Among the most litigated provisions of the Act — the twin conditions, the 'two views' bar, lack versus inadequacy of inquiry (and Explanation 2), the meaning of 'record', and the doctrine of merger.
A. COMMENTARY
The twin conditions: erroneous AND prejudicial
Section 263 can be invoked only if both limbs are satisfied: the order must be erroneous, and the error must be prejudicial to the revenue. The locus classicus is Malabar Industrial — if either limb is absent (an order erroneous but not prejudicial, or prejudicial but not erroneous), section 263 is unavailable. An order is 'erroneous' if it is contrary to law, or proceeds on an incorrect assumption of fact, or is passed without the inquiry the circumstances warranted; it is 'prejudicial' if it is not in accordance with law and results in a loss to the revenue.
The 'two views' bar and plausibility
Where the Assessing Officer adopts one of two legally permissible views, the order is not erroneous merely because the Commissioner prefers the other (Max India). But the protection is for a plausible view reached after due application of mind; where the view taken is unsustainable in law, revision is competent and the 'two views' shield does not apply — as the Supreme Court reiterated in Paville Projects, restoring the Commissioner's order where the AO's view was not a possible one.
Lack of inquiry versus inadequate inquiry; Explanation 2
The pre-2015 line (Gabriel India) distinguished a total lack of inquiry (revisable) from an inquiry the Commissioner considers inadequate (not, by itself, revisable). Explanation 2 to section 263 (Finance Act, 2015) provides that an order passed without making inquiries or verification which should have been made is deemed erroneous and prejudicial. Explanation 2 expands the lack-of-inquiry category, but the Commissioner must still record why the inquiry that should have been made was not made; it does not license revision merely because a fuller inquiry was conceivable.
'Record', merger and opportunity
'Record' includes all material available to the Commissioner at the time of examination, not merely what was before the AO (Shree Manjunathesware Packing Products). By the Explanation (doctrine of merger), the Commissioner cannot revise matters considered and decided in an appeal — those merge in the appellate order — but may revise issues not so considered. An opportunity of hearing is mandatory, though the Supreme Court in Amitabh Bachchan held that a formal show-cause on every point is not indispensable so long as a fair opportunity is given and the assessee is not taken by surprise.
B. STATUTORY TEXT (verbatim)
Reproduced verbatim from the Income-tax Act, 1961 (as amended up to the Finance Act, 2025); the Finance Act, 2026 makes no change to this section. Inline numerals in square brackets are the bare Act's amendment-footnote markers.
Revision of orders prejudicial to revenue.
263. (1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer or the Transfer Pricing Officer, as the case may be, is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including,—
(i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or
(ii) an order modifying the order under section 92CA; or
(iii) an order cancelling the order under section 92CA and directing a fresh order under the said section.
Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall include—
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer or the Transfer Pricing Officer, as the case may be, conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;
(iii) an order under section 92CA by the Transfer Pricing Officer;
(b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, 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 Chief Commissioner or Chief Commissioner or 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.
Explanation 3.—For the purposes of this section, "Transfer Pricing Officer" shall have the same meaning as assigned to it in the Explanation to section 92CA.
(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.
Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and 86[the period commencing on the date on which stay on any proceeding under this section was granted by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by the jurisdictional Principal Commissioner or Commissioner] shall be excluded. injunction of any court" by Act No. 7 of 2025, w.e.f. 1-4-2025.
C. AUTHORITIES
The clusters track the twin conditions, the two-views bar, the inquiry question and Explanation 2, the meaning of 'record', and the opportunity requirement.
Holding Section 263 requires both that the order is erroneous and that it is prejudicial to the revenue; absence of either condition ousts the power. Not every loss of revenue is 'prejudicial'.
Relevance The foundational statement of the section 263 jurisdiction.
CIT v. Gabriel India Ltd., (1993) 203 ITR 108 (Bom)
Holding 'Erroneous' means an order not in accordance with law; where the AO made inquiries and took a view on the material, the order is not erroneous merely because reasons are not elaborately recorded — distinguishing lack of inquiry from inadequacy of inquiry.
Relevance The leading High Court exposition of 'erroneous' and the inquiry distinction.
Cluster 2 — The 'two views' bar and plausibility
CIT v. Max India Ltd., (2007) 295 ITR 282 (SC)
Holding Where two views are possible and the AO adopts one, the order is not prejudicial within section 263; a subsequent (even retrospective) change of law does not make the then-possible view erroneous.
Relevance Defines the protection for a plausible view.
Holding The 'two views' shield applies only where the AO's view is a plausible/possible one; where the view is unsustainable and has caused loss to the revenue, the order is erroneous and prejudicial, and revision under section 263 is justified.
Relevance Recent reaffirmation marking the limit of the two-views protection.
Cluster 3 — Lack of inquiry, no application of mind, Explanation 2
Rampyari Devi Saraogi v. CIT, (1968) 67 ITR 84 (SC)
Holding Where the AO made the assessment in undue haste without inquiry into matters that called for investigation, the order is erroneous and prejudicial and revision is justified.
Relevance Classic authority on no-inquiry assessments.
Tara Devi Aggarwal v. CIT, (1973) 88 ITR 323 (SC)
Holding An assessment made without inquiry, even accepting income offered, can be erroneous and prejudicial where it was made to serve a collateral purpose; revision lies.
Relevance Extends the no-inquiry principle.
Explanation 2 to section 263 (Finance Act, 2015, w.e.f. 1-6-2015)
Effect An order made without inquiries/verification that should have been made, or allowing relief without inquiry, is deemed erroneous in so far as prejudicial to the revenue.
Caution Tribunals have read Explanation 2 as not converting every perceived inadequacy into a lack of inquiry; the Commissioner must show the inquiry that ought to have been made.
Cluster 4 — 'Record', merger and opportunity of hearing
Holding 'Record' in section 263 includes all records relating to the proceeding available to the Commissioner at the time of examination, not merely the material before the AO at assessment.
Relevance Defines the material the Commissioner may consider.
CIT v. Amitabh Bachchan, (2016) 384 ITR 200 (SC)
Holding The Commissioner must give the assessee an opportunity of being heard, but is not bound to confine himself to a formal show-cause on each issue; where the AO dropped a matter without inquiry after the assessee withdrew a claim, revision was justified. Failure to give any opportunity, however, vitiates the order.
Relevance Governs the procedural fairness content of section 263.
CHAPTER XX — APPEALS AND REVISION | E.—Revision by the Principal Commissioner or Commissioner
Section 263 — Revision of Orders Prejudicial to Revenue
Case Laws & Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026) — bharattax.co Treatise
Status: Live. The Commissioner's suo motu revisional power to revise an assessment order that is erroneous in so far as it is prejudicial to the interests of the revenue; widened by Explanation 2 (Finance Act, 2015) on lack of inquiry.
Finance Act, 2026: No amendment. The Finance Act, 2026 does not touch section 263.
Nature / mechanism: Revisional power exercisable only on satisfaction of two cumulative conditions — the order is (i) erroneous and (ii) prejudicial to the interests of the revenue — after giving the assessee an opportunity of being heard.
Litigation profile: Among the most litigated provisions of the Act — the twin conditions, the 'two views' bar, lack versus inadequacy of inquiry (and Explanation 2), the meaning of 'record', and the doctrine of merger.
A. COMMENTARY
The twin conditions: erroneous AND prejudicial
Section 263 can be invoked only if both limbs are satisfied: the order must be erroneous, and the error must be prejudicial to the revenue. The locus classicus is Malabar Industrial — if either limb is absent (an order erroneous but not prejudicial, or prejudicial but not erroneous), section 263 is unavailable. An order is 'erroneous' if it is contrary to law, or proceeds on an incorrect assumption of fact, or is passed without the inquiry the circumstances warranted; it is 'prejudicial' if it is not in accordance with law and results in a loss to the revenue.
The 'two views' bar and plausibility
Where the Assessing Officer adopts one of two legally permissible views, the order is not erroneous merely because the Commissioner prefers the other (Max India). But the protection is for a plausible view reached after due application of mind; where the view taken is unsustainable in law, revision is competent and the 'two views' shield does not apply — as the Supreme Court reiterated in Paville Projects, restoring the Commissioner's order where the AO's view was not a possible one.
Lack of inquiry versus inadequate inquiry; Explanation 2
The pre-2015 line (Gabriel India) distinguished a total lack of inquiry (revisable) from an inquiry the Commissioner considers inadequate (not, by itself, revisable). Explanation 2 to section 263 (Finance Act, 2015) provides that an order passed without making inquiries or verification which should have been made is deemed erroneous and prejudicial. Explanation 2 expands the lack-of-inquiry category, but the Commissioner must still record why the inquiry that should have been made was not made; it does not license revision merely because a fuller inquiry was conceivable.
'Record', merger and opportunity
'Record' includes all material available to the Commissioner at the time of examination, not merely what was before the AO (Shree Manjunathesware Packing Products). By the Explanation (doctrine of merger), the Commissioner cannot revise matters considered and decided in an appeal — those merge in the appellate order — but may revise issues not so considered. An opportunity of hearing is mandatory, though the Supreme Court in Amitabh Bachchan held that a formal show-cause on every point is not indispensable so long as a fair opportunity is given and the assessee is not taken by surprise.
B. STATUTORY TEXT (verbatim)
Reproduced verbatim from the Income-tax Act, 1961 (as amended up to the Finance Act, 2025); the Finance Act, 2026 makes no change to this section. Inline numerals in square brackets are the bare Act's amendment-footnote markers.
Revision of orders prejudicial to revenue.
263. (1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer or the Transfer Pricing Officer, as the case may be, is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including,—
(i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or
(ii) an order modifying the order under section 92CA; or
(iii) an order cancelling the order under section 92CA and directing a fresh order under the said section.
Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall include—
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer or the Transfer Pricing Officer, as the case may be, conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;
(iii) an order under section 92CA by the Transfer Pricing Officer;
(b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, 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 Chief Commissioner or Chief Commissioner or 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.
Explanation 3.—For the purposes of this section, "Transfer Pricing Officer" shall have the same meaning as assigned to it in the Explanation to section 92CA.
(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.
Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and 86[the period commencing on the date on which stay on any proceeding under this section was granted by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by the jurisdictional Principal Commissioner or Commissioner] shall be excluded. injunction of any court" by Act No. 7 of 2025, w.e.f. 1-4-2025.
C. AUTHORITIES
The clusters track the twin conditions, the two-views bar, the inquiry question and Explanation 2, the meaning of 'record', and the opportunity requirement.
Cluster 1 — The twin conditions
Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83 (SC)
Holding Section 263 requires both that the order is erroneous and that it is prejudicial to the revenue; absence of either condition ousts the power. Not every loss of revenue is 'prejudicial'.
Relevance The foundational statement of the section 263 jurisdiction.
CIT v. Gabriel India Ltd., (1993) 203 ITR 108 (Bom)
Holding 'Erroneous' means an order not in accordance with law; where the AO made inquiries and took a view on the material, the order is not erroneous merely because reasons are not elaborately recorded — distinguishing lack of inquiry from inadequacy of inquiry.
Relevance The leading High Court exposition of 'erroneous' and the inquiry distinction.
Cluster 2 — The 'two views' bar and plausibility
CIT v. Max India Ltd., (2007) 295 ITR 282 (SC)
Holding Where two views are possible and the AO adopts one, the order is not prejudicial within section 263; a subsequent (even retrospective) change of law does not make the then-possible view erroneous.
Relevance Defines the protection for a plausible view.
PCIT v. Paville Projects (P) Ltd., (2023) 453 ITR 447 (SC)
Holding The 'two views' shield applies only where the AO's view is a plausible/possible one; where the view is unsustainable and has caused loss to the revenue, the order is erroneous and prejudicial, and revision under section 263 is justified.
Relevance Recent reaffirmation marking the limit of the two-views protection.
Cluster 3 — Lack of inquiry, no application of mind, Explanation 2
Rampyari Devi Saraogi v. CIT, (1968) 67 ITR 84 (SC)
Holding Where the AO made the assessment in undue haste without inquiry into matters that called for investigation, the order is erroneous and prejudicial and revision is justified.
Relevance Classic authority on no-inquiry assessments.
Tara Devi Aggarwal v. CIT, (1973) 88 ITR 323 (SC)
Holding An assessment made without inquiry, even accepting income offered, can be erroneous and prejudicial where it was made to serve a collateral purpose; revision lies.
Relevance Extends the no-inquiry principle.
Explanation 2 to section 263 (Finance Act, 2015, w.e.f. 1-6-2015)
Effect An order made without inquiries/verification that should have been made, or allowing relief without inquiry, is deemed erroneous in so far as prejudicial to the revenue.
Caution Tribunals have read Explanation 2 as not converting every perceived inadequacy into a lack of inquiry; the Commissioner must show the inquiry that ought to have been made.
Cluster 4 — 'Record', merger and opportunity of hearing
CIT v. Shree Manjunathesware Packing Products & Camphor Works, (1998) 231 ITR 53 (SC)
Holding 'Record' in section 263 includes all records relating to the proceeding available to the Commissioner at the time of examination, not merely the material before the AO at assessment.
Relevance Defines the material the Commissioner may consider.
CIT v. Amitabh Bachchan, (2016) 384 ITR 200 (SC)
Holding The Commissioner must give the assessee an opportunity of being heard, but is not bound to confine himself to a formal show-cause on each issue; where the AO dropped a matter without inquiry after the assessee withdrew a claim, revision was justified. Failure to give any opportunity, however, vitiates the order.
Relevance Governs the procedural fairness content of section 263.