Court’s decision
The Kerala High Court delivered a detailed and consequential ruling concerning the scope of revisional jurisdiction under Section 263 of the Income Tax Act, specifically examining whether the revenue could revise an assessment on the allegation of “lack of inquiry” when the Assessing Officer had actually undertaken a detailed examination of the claim. The Court emphatically held that the deduction claimed by the assessee under Section 32AC had indeed been subjected to inquiry, and the materials showed that the Assessing Officer had called for clarifications and received responses, including statutory explanations regarding the installation of new assets.
Central to the Court’s conclusion was its reliance on the Supreme Court’s dictum that “the assessee does not have control over the pen of the Assessing Officer.” This meant that once the Assessing Officer conducted an investigation and did not make an addition, it must be presumed that he accepted the assessee’s explanation. Consequently, the Court held that the Commissioner could not exercise Section 263 jurisdiction on the sole ground that the Assessing Officer’s order did not contain reasons in detail.
The Court further held that even if the Commissioner disagreed with the manner in which the Assessing Officer applied Section 32AC or its provisos, the revisional authority should have corrected the issue on merits rather than remanding it for fresh inquiry under the pretext of “non-enquiry.”
On this basis, the Tribunal’s decision confirming the exercise of Section 263 jurisdiction was set aside. The matter was remitted to the Principal Commissioner for fresh consideration strictly on merits, after giving the assessee a proper opportunity of hearing.
Facts
The appellant, a company assessed under the Income Tax Act, claimed deduction under Section 32AC for new assets acquired and installed during the relevant financial year. The Assessing Officer issued detailed queries regarding the eligibility for the deduction, particularly concerning the dates of acquisition and installation of machinery. The assessee submitted written explanations supported by statutory references, asserting that although certain assets were purchased before the cut-off date of 01.04.2013, their installation occurred during the relevant assessment period, making them eligible under Section 32AC and its proviso.
The assessment order accepted the claim and completed the assessment under Section 143(3). Years later, the revisional authority invoked Section 263, stating that the assessment order was “erroneous and prejudicial to revenue” because the Assessing Officer allegedly failed to inquire into the timing of asset purchases. The assessee opposed the revision, pointing out that the Assessing Officer had raised precise queries, received clarifications, and consciously allowed the deduction. Despite the explanations, the revisional authority set aside the assessment and remanded the matter.
The Tribunal upheld the revisional order. The assessee then approached the High Court challenging both the assumption of Section 263 jurisdiction and the Tribunal’s endorsement of the revisional reasoning.
Issues
Whether the Tribunal was justified in holding that the Commissioner validly exercised revisional powers under Section 263 on the ground that the Assessing Officer failed to conduct sufficient inquiry.
Whether there was material to support the finding that the assessment order suffered from non-application of mind, warranting revision under Section 263.
Whether the Assessing Officer’s acceptance of the Section 32AC claim, after seeking clarifications, precludes the Commissioner from remanding the matter for de novo investigation.
Petitioner’s arguments
The appellant contended that the revisional authority wrongly assumed that there was no inquiry by the Assessing Officer. It was argued that letters dated 12.12.2017 and 15.12.2017 contained detailed explanations regarding eligibility under Section 32AC, with specific references to the relevant provisos concerning installation-based eligibility. The appellant asserted that the Assessing Officer considered these materials and accepted the claim consciously, which meant there was no justification for invoking Section 263. The appellant further argued that Section 263 could not be used to substitute the Commissioner’s opinion for that of the Assessing Officer when the latter had conducted inquiry. It was also urged that if the Commissioner disagreed with the allowance of deduction, he should have recorded a finding on merits rather than directing a remand on the vague ground of “lack of inquiry.”
Respondent’s arguments
The revenue argued that the Assessing Officer failed to consider the crucial fact that a substantial portion of the assets had been purchased before 01.04.2013, thereby rendering the Section 32AC deduction impermissible. The revisional authority took the position that the assessment order did not reflect any meaningful inquiry, and therefore, it was both erroneous and prejudicial to the interests of revenue. It was contended that the Assessing Officer’s failure to record comprehensive reasoning or examine purchase invoices justified invocation of Section 263. The respondent argued that the Commissioner was entitled to correct the error and that the Tribunal rightly upheld this conclusion.
Analysis of the law
Section 263 allows revision only when the order is both “erroneous” and “prejudicial to the interests of revenue.” Judicial precedents have repeatedly held that an order cannot be termed erroneous merely because it is brief or lacks detailed reasoning, provided the Assessing Officer conducted inquiry and applied his mind. The Court examined the nature of inquiry undertaken, the correspondence exchanged, and the statutory scheme of Section 32AC, especially the cut-off dates and proviso concerning installation. It held that the Assessing Officer’s acceptance of the claim demonstrated application of mind. The Court emphasised that the distinction between “lack of inquiry” and “inadequate inquiry” is fundamental, and only total absence of inquiry warrants exercise of Section 263.
Precedent analysis
The Court relied heavily on the Supreme Court’s ruling in V-con Integrated Solutions Pvt. Ltd., where it was held that an assessee cannot control how the Assessing Officer drafts the final order. Once investigation is conducted, the order cannot be revised merely because the Assessing Officer did not record each analytical step. The Supreme Court also clarified that if the Commissioner believes the Assessing Officer’s conclusion is wrong, he must correct it by deciding the issue on merits rather than remanding.
Court’s reasoning
The Court noted that Annexure C demonstrated a detailed inquiry made by the Assessing Officer regarding Section 32AC. The assessee’s explanations addressed statutory requirements and provided specific details of installations. Thus, the finding of the revisional authority that there was “no inquiry” was incorrect. The Court observed that even the Tribunal acknowledged the relevance of the proviso to Section 32AC(1A) but failed to apply it properly. The Court reiterated that power under Section 263 cannot be exercised where inquiry is conducted, even if the Commissioner disagrees with the conclusion. The Court therefore held that the revisional order lacked jurisdictional foundation.
Conclusion
The High Court concluded that the exercise of Section 263 jurisdiction was unjustified. It set aside the Tribunal’s order and remitted the matter to the revisional authority for a fresh decision strictly on merits, after giving the assessee full opportunity of hearing. The Court’s decision fortifies the legal principle that the revisional power cannot be used to order a fishing inquiry when the Assessing Officer has already applied his mind.
Implications
This judgment significantly impacts tax administration by reinforcing the limits of Section 263 revision. It clarifies that revenue authorities cannot invalidate assessments merely because they are not elaborately reasoned. The decision protects taxpayers from arbitrary remands and ensures that revisional authorities decide disputed issues on merits rather than procedural grounds. It also strengthens the interpretative approach to Section 32AC, particularly concerning installation-based eligibility and the role of provisos. The ruling further highlights judicial disapproval of over-expansive revisionary jurisdiction, ensuring balance between revenue protection and taxpayer rights.