Section 263 revision fails where the Commissioner omits inquiry into the assessee's explanation on development fees and capital expenditure.

Section 263 revision was unsustainable where the Commissioner did not consider the assessee's explanation or make the inquiry needed before treating the assessment as erroneous and prejudicial to Revenue. The assessment under section 143(3) had accepted the returned income, but the revisional authority proceeded on the assumption that development fees were taxable revenue income without examining the assessee's case on capital expenditure and application of income. On the record, those factors could alter the tax result, so the necessary factual inquiry was absent and the revision failed.

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Issues: Whether the order passed under section 263 of the Income-tax Act, 1961 was sustainable when the revisional authority did not consider the assessee's explanation or undertake an inquiry into the treatment of development fees and capital expenditure while holding the assessment order to be erroneous and prejudicial to the interests of Revenue.

Analysis: The assessment had been completed under section 143(3) of the Income-tax Act, 1961 accepting the returned income. In the revisional proceedings, the Commissioner proceeded on the footing that development fees formed taxable revenue income under section 11(1) but did not examine the assessee's reply or the effect of the capital expenditure and application of income shown by the assessee. The appellate record showed that if the capital expenditure and the accumulation available to the assessee were taken into account, the taxable result would not support the revisional finding. The revisional order was therefore passed without the inquiry necessary to sustain action under section 263.

Conclusion: The revisional order was unsustainable in law and the assessee succeeded.

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