(2000) 243 ITR 83 (SC)
Revision of orders by the Principal Commissioner or Commissioner
Both conditions must be satisfied cumulatively. The order must be erroneous and prejudicial to the interests of the Revenue. Where the officer has taken one of two views permissible in law, the order is not erroneous merely because the Commissioner prefers the other.
What must be established before an assessment order may be revised — is it enough that the order is erroneous, or that it is prejudicial to the Revenue?
The Assessing Officer had accepted the assessee's treatment of a receipt after considering the matter in the assessment. The Commissioner, taking a different view of the character of the receipt, invoked the revisionary power, set aside the assessment and directed that the amount be brought to tax. The assessee contended that the officer's view was a legally permissible one reached after enquiry, and that a difference of opinion does not make an order erroneous.
The Tribunal and the High Court differed in their approach to the revisionary power. The Supreme Court settled the test to be applied.
For the assessee
The revisionary power requires two conditions, each of which must be independently satisfied. An order passed after enquiry, adopting a view that the law permits, is not erroneous. If it were otherwise, the Commissioner could substitute his opinion for that of the officer in every case and the power would become one of general supervision.
For the Revenue
The receipt was taxable and the officer's failure to tax it caused a loss to the exchequer. An order that results in tax not being collected that ought to have been collected is both erroneous and prejudicial.
The Court held that the revisionary power is conditioned on the satisfaction of two requirements which must co-exist: the order must be erroneous, and it must be prejudicial to the interests of the Revenue. An order is not erroneous merely because it results in a lower tax, and it is not open to revision merely because the Commissioner would have reached a different conclusion. The Court identified the situations in which an order will be erroneous — where it proceeds on an incorrect assumption of fact or an incorrect application of law, where it is passed without applying the mind, or where it is made in breach of the principles of natural justice. Crucially, it held that where two views are possible on the point and the Assessing Officer has adopted one of them after due consideration, the order cannot be treated as erroneous simply because the Commissioner prefers the other view. As to prejudice, the Court explained that the expression means prejudice to the interests of the Revenue in the sense of a lawful loss of tax; every loss of revenue is not prejudicial if the officer's view is sustainable in law.
Revision is dealt with in Section 377 of the IT Act 2025. The twin-condition test is the first line of defence in every revision proceeding, and the two-views principle is the most frequently invoked limb. Note that the statute has since been supplemented by a deeming explanation treating certain orders passed without enquiry as erroneous, so the current provision must be read alongside this decision rather than in place of it.