BharatTax Research·Published 19 September 2026
Every section 263 notice turns on the same fight — was there no inquiry, or merely an inquiry the Commissioner would have conducted differently. Here is the test, the 2015 amendment that shifted it, and what the Tribunal is actually doing with both.
The rule
The Commissioner may revise an assessment under section 263 only where the order is both erroneous and prejudicial to the interests of the revenue. If either condition is absent — an order that is erroneous but not prejudicial, or prejudicial but not erroneous — the revisionary jurisdiction does not arise.
Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) put it in terms that assessees have been quoting back at Commissioners ever since:
The Commissioner has to be satisfied of twin conditions, namely, (1) the order of the Assessing Officer sought to be revised is erroneous; and (2) it is prejudicial to the interests of the revenue. If one of them is absent — if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue — recourse cannot be had to section 263(1).
It is relied on in 2,803 judgments on BharatTax, the fourth most-cited authority in the corpus, and was last applied on 15 April 2026.
Is it still good law? Yes — but read it with Explanation 2
The twin-condition test is intact and continues to be applied daily. Two things have happened around it, and an argument built on Malabar alone will meet both.
Max India narrowed “erroneous” in the assessee’s favour. CIT v. Max India Ltd. (2007) 295 ITR 282 (SC) — itself cited 1,162 times — holds that where two views are possible and the Assessing Officer has taken one of them, the order does not become erroneous merely because the Commissioner prefers the other. In practice this and Malabar are pleaded together in almost every reply.
Explanation 2 pushed back the other way. Inserted by the Finance Act 2015 with effect from 1 June 2015, it declares an order deemed erroneous in so far as it is prejudicial to the revenue where, in the Principal Commissioner’s or Commissioner’s opinion, it was passed (a) without making inquiries or verification which should have been made; (b) allowing any relief without inquiring into the claim; © otherwise than in accordance with an order, direction or instruction issued by the Board under section 119; or (d) otherwise than in accordance with a decision prejudicial to the assessee rendered by the jurisdictional High Court or the Supreme Court, in the assessee’s case or that of any other person.
Note that “application of mind” is a judicial gloss on clause (a), not statutory language — the phrase does not appear in Explanation 2. Tribunals nonetheless use it constantly, as one order in our corpus does:
An order is erroneous not only when it is passed on an incorrect assumption of facts or incorrect application of law, but also when it is passed without making inquiries or verification which should have been made, or without proper application of mind.
Explanation 2 has not displaced Malabar — the twin conditions still have to be satisfied — but it lowered the bar on the first of them for orders passed after June 2015. The counterweight is Narayan Tatu Rane v. ITO (2016) 70 Taxmann.com 227 (ITAT Mum), which reads Explanation 2 restrictively and is cited 216 times: it does not confer unfettered power, and the distinction between a total absence of inquiry and an inquiry the Commissioner considers inadequate survives it.
The problem it solved
Before Malabar, the two limbs of section 263(1) were often collapsed into one, with a loss of revenue treated as establishing both error and prejudice. The Court contributed the insistence that they are separate findings, each of which must be made. That is why so many revision orders are quashed not on the merits of the underlying issue but because the Commissioner never addressed one limb.
How the Tribunal actually applies it
The battleground is almost always the same: no inquiry, or inadequate inquiry. Recent orders citing Malabar, and how they came out:
| Bench | Date | What the AO had done | Outcome |
|---|---|---|---|
| Delhi | 10 Apr 2026 | Added 12.5% of disputed purchases, a view supported by precedent; GST authorities had accepted the purchases and documentation was on record | 263 quashed |
| Delhi | 18 Mar 2026 | Had conducted inquiries and applied his mind; PCIT conclusion not substantiated | 263 quashed |
| Surat | 6 Apr 2026 | Rejected books under s.145 and estimated; PCIT said the method was “convenient” and inquiry into cash sales inadequate | Not recorded on file; assessee argued substitution of opinion |
| Hyderabad | 27 Mar 2026 | Failed to verify reversal of provision for an onerous contract and amortisation charges at all | 263 upheld |
The Hyderabad order is the useful one, because it is the case the Revenue won. Where the Assessing Officer simply did not look at an issue, Explanation 2 does its work and Malabar does not save the assessment.
One line from a Tribunal order in the corpus is worth keeping for replies to show-cause notices:
When due enquiries have been made by the AO in the course of assessment proceedings, merely because the fact of making enquiries was not recorded by him in the assessment order, the order of the AO does not become erroneous… he is not expected to write a thesis in the assessment order.
That is the answer to the most common form of 263 notice: one that infers absence of inquiry from silence in the assessment order. The record of the proceedings — questionnaires under s.142(1), replies filed, documents produced — is what rebuts it, and it is worth building that record with a future 263 notice in mind.
When it will not help
The distinction is inquiry versus no inquiry, not thorough versus thin. Malabar and Max India protect a considered view. Neither protects an issue the Assessing Officer never reached.
Where there was genuinely no inquiry. Explanation 2 is designed for exactly this, and the Hyderabad order above shows it working.
Where the order is contrary to jurisdictional High Court or Supreme Court authority. Clause (d) of Explanation 2 covers this separately, where the decision not followed is one prejudicial to the assessee; the two-possible-views argument does not survive a binding decision against the view taken.
Where the assessment is silent and the record is also empty. The “no need to write a thesis” argument depends on there being a record of inquiry to point to. Without it, silence is the only evidence and it runs against you.
Where the Commissioner has made both findings properly. Malabar is a jurisdictional objection. Once both limbs are made out on reasoned grounds, the argument shifts to the merits.
Related provisions
Section 263 sits alongside revision proceedings generally and should be read with section 264, the assessee own revision route, and with s.147 where the Department has a choice between reopening and revision. The assessments most often revised are those under s.143(3), which accounts for 22,960 judgments in the corpus.
On the authorities, Max India and Narayan Tatu Rane are the two to have alongside Malabar. Behind them sit CIT v. Sunbeam Auto Ltd. (2011) 332 ITR 167 on the inadequate-inquiry distinction and CIT v. Amitabh Bachchan (2016) 384 ITR 200 (SC), which holds that what section 263 requires before revision is an opportunity of hearing rather than a show-cause notice specifying every ground.
Where the citation figures come from
Citation figures come from an analysis of 292,668 ITAT, High Court and Supreme Court judgments on BharatTax.net. Malabar Industrial is relied on in 2,803 of them. “Cited” counts judgments mentioning the authority and does not distinguish a case followed from one distinguished.