Improper enquiry into income characterisation justified revision where partners' remuneration depended on the correct head of income.

Revision under section 263 was considered in relation to an Assessing Officer's failure to examine whether unaccounted advances were assessable as business income or as deemed income, and whether that characterisation affected partners' remuneration under section 40(b)(v). The assessment record showed treatment of the disclosure as business income, but no adequate enquiry into the proper head of income or its impact on book profit and deduction claims. In the absence of material showing due enquiry, the order was treated as erroneous and prejudicial to the Revenue, and the revisionary order was upheld.

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Issues: Whether revision under section 263 of the Income-tax Act, 1961 was justified on the ground that the Assessing Officer had not examined whether the amount of unaccounted advances was assessable as business income or as deemed income, and consequently whether the partners' remuneration was correctly computed under section 40(b)(v).

Analysis: The assessment record showed that the Assessing Officer had treated the disclosure relating to unaccounted advances as business income, but there was no material to show that the specific character of that income had been examined with reference to its assessability under the proper head. The Commissioner found that, if the amount was excluded from book profit, the remuneration claimed to partners would stand reduced, making the original assessment prejudicial to the Revenue. The Tribunal noted that the assessee did not produce material establishing due enquiry by the Assessing Officer and accepted the view that the issue had not been properly examined. The Tribunal also accepted the distinction drawn from the authorities relied upon by the assessee and upheld the Commissioner's reliance on the scheme governing deemed incomes and the consequences for deductions linked to heads of income.

Conclusion: The revisionary order under section 263 was upheld and the assessee's challenge failed.

Ratio Decidendi: An assessment order is liable to revision under section 263 where the Assessing Officer fails to conduct a proper enquiry into the nature and assessability of income and such failure makes the order both erroneous and prejudicial to the interests of the Revenue.

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