Court clarifies requirements for Commissioner of Income Tax to invoke revision power under section 263

The court ruled that for the Commissioner of Income Tax to invoke revision power under section 263, an assessment order must be both erroneous and prejudicial to Revenue. As the order in question was found to be erroneous but not prejudicial to the assessee, the Commissioner could not correct it. Consequently, the notices and final order based on the assessment were quashed, with each party bearing their own costs.

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Issues involved: Assessment order made by ITO without following mandatory requirements of s. 144B of the Income-tax Act, 1961, validity of suo motu revision by CIT u/s 263 of the Act, and the contention regarding the infructuous nature of the writ petition challenging the show-cause notice.

Assessment Order by ITO:
The petitioner filed a return for the assessment year 1975-76, disclosing a net income. The ITO completed the assessment without following the mandatory requirements of s. 144B, enhancing the declared income. The petitioner appealed before the AAC challenging the order. The CIT proposed to suo motu revise the assessment order under s. 263 of the Act, which was challenged in a writ petition under art. 226 of the Constitution.

Validity of Suo Motu Revision by CIT:
The petitioner contended that the order made by the ITO, though erroneous, was not prejudicial to the interests of the Revenue, hence the CIT could not exercise suo motu power of revision under s. 263. The CIT argued that the writ petition challenging the show-cause notice had become infructuous after passing the final order. The court rejected this contention, stating that the notice's validity needed examination regardless of the final order.

Requirements for CIT's Revision Power:
Both parties agreed that the ITO's assessment order contravened s. 144B, making it erroneous. However, the order was not prejudicial to the assessee and was favorable to the Revenue. The court emphasized that for the CIT to invoke s. 263, the order must be both erroneous and prejudicial to Revenue. The Commissioner cannot correct every error without both factors co-existing simultaneously.

Legal Precedent and Decision:
Referring to legal precedents, the court held that an order must be both erroneous and prejudicial to Revenue for CIT's revision power under s. 263. The court agreed that the ITO's order, not prejudicial to Revenue, could not be corrected by the CIT. Consequently, the impugned notices and final order based on them were quashed. The court directed the parties to bear their own costs, making the rule absolute.

Separate Judgment:
No separate judgment was delivered by the judge in this case.

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