Court’s decision
The Kerala High Court allowed the writ petition and quashed the revisional order passed by the Principal Commissioner under Section 263 of the Income Tax Act. The Court held that the power of revision cannot be exercised merely because the Commissioner holds a different opinion on the same set of facts. It reiterated that for invoking Section 263, the assessment order must be both erroneous and prejudicial to the interests of the Revenue, and such twin conditions must coexist.
The Court found that the Assessing Officer had conducted enquiries, applied his mind to the material on record, and adopted one of the permissible views. In such circumstances, the revisional authority could not substitute its own view under the guise of correcting an error. The Court therefore held that the assumption of jurisdiction under Section 263 was legally unsustainable.
Accordingly, the revisional order was set aside in entirety and the original assessment order was restored.
Facts
The assessee was an individual assessee whose return of income was selected for scrutiny. During assessment proceedings, the Assessing Officer examined specific issues relating to certain credits and transactions reflected in the books of accounts. Explanations and supporting documents were called for and furnished by the assessee.
After considering the material placed on record, the Assessing Officer completed the assessment by accepting the assessee’s explanations on the disputed issues. Subsequently, the Principal Commissioner issued a show cause notice under Section 263 proposing to revise the assessment on the ground that the Assessing Officer failed to make adequate enquiry and that the assessment order was erroneous and prejudicial to the interests of the Revenue.
Despite objections raised by the assessee pointing out that detailed enquiries were in fact conducted, the Principal Commissioner passed a revisional order setting aside the assessment and directing fresh enquiry. Aggrieved, the assessee approached the High Court challenging the revisional proceedings.
Issues
Whether the revisional jurisdiction under Section 263 can be exercised merely because the Commissioner holds a different view.
Whether an assessment order can be termed erroneous when the Assessing Officer has conducted enquiry and adopted a permissible view.
Whether lack of “adequate enquiry” can justify revision when some enquiry has in fact been made.
Whether the twin conditions of “error” and “prejudice” were satisfied in the present case.
Petitioner’s Arguments
The assessee contended that the Assessing Officer had conducted enquiries on the issues raised by the revisional authority and had taken a conscious decision based on the material available. It was argued that Section 263 does not permit revision merely on the ground that the Commissioner believes a more detailed enquiry should have been undertaken.
The assessee submitted that the revisional order did not demonstrate how the assessment was erroneous in law or how it caused prejudice to the Revenue. It was argued that disagreement with the conclusion reached by the Assessing Officer cannot confer jurisdiction under Section 263.
The assessee relied on settled jurisprudence holding that where two views are possible and the Assessing Officer has adopted one, the order cannot be revised.
Respondent’s Arguments
The Revenue argued that the Assessing Officer had failed to conduct proper and adequate enquiry into certain transactions, rendering the assessment order erroneous. It was contended that superficial enquiry or acceptance of explanations without deep verification causes prejudice to the Revenue.
The Department submitted that Section 263 empowers the Commissioner to correct assessments where the Assessing Officer fails to conduct proper enquiry. It was argued that the revisional order merely directed fresh examination and did not conclude the issue against the assessee.
The Revenue therefore sought to justify the exercise of revisional jurisdiction as lawful and within statutory limits.
Analysis of the law
The High Court examined the scope and limits of Section 263 and reiterated the well-settled principle that the provision can be invoked only when the assessment order is both erroneous and prejudicial to the interests of the Revenue. The Court clarified that an order is erroneous only if it is unsustainable in law or based on incorrect application of legal principles.
The Court distinguished between “lack of enquiry” and “inadequate enquiry”, holding that while total absence of enquiry may justify revision, mere inadequacy does not. Once some enquiry is conducted and a view is taken, the revisional authority cannot step in to conduct a roving or fishing enquiry.
The Court emphasised that Section 263 is not meant to be an appellate provision and cannot be used to substitute the Commissioner’s judgment for that of the Assessing Officer.
Precedent Analysis
The Court relied on binding Supreme Court and High Court decisions explaining the contours of Section 263. Precedents holding that adoption of one of the possible views bars revision were applied.
Judgments clarifying that “prejudice” must be real and not merely hypothetical were also relied upon. The Court noted that revisional power cannot be exercised on debatable issues or on change of opinion.
These precedents decisively supported the assessee’s challenge to the revisional order.
Court’s Reasoning
The Court found that the revisional order did not demonstrate absence of enquiry but merely expressed dissatisfaction with the manner in which the Assessing Officer evaluated the material. Such dissatisfaction, the Court held, cannot clothe the Commissioner with revisional jurisdiction.
The Court also noted that the revisional authority failed to record any finding as to how the assessment order caused prejudice to the Revenue. The direction for fresh enquiry, without establishing error, was held to be legally impermissible.
Accordingly, the Court concluded that the assumption of jurisdiction under Section 263 was invalid and liable to be quashed.
Conclusion
The High Court allowed the writ petition and set aside the revisional order passed under Section 263. The original assessment order was restored.
Implications
This judgment reinforces the jurisdictional safeguards surrounding Section 263 and protects taxpayers from arbitrary revision of completed assessments. It reiterates that revision cannot be used as a tool for redoing assessments on debatable issues.
The ruling provides clarity to both taxpayers and tax administrators on the fine distinction between lack of enquiry and inadequate enquiry.