Revision for lack of inquiry: assessment without required verification of cash deposits was held liable to correction under section 263.

An assessment order passed in scrutiny without enquiries or verifications that the facts reasonably required is erroneous and prejudicial to the interests of the Revenue, making revision under section 263 of the Income-tax Act, 1961 valid. The lack of inquiry into large cash deposits, the source of alleged loan repayments, the lending activity, supporting books and records, and related explanations showed a failure to verify material facts. Explanation 2(a) to section 263 reinforces that an order passed without required inquiry or verification is deemed erroneous and prejudicial.

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Issues: Whether the Commissioner was justified in revising the assessment under section 263 of the Income-tax Act, 1961 on the ground that the Assessing Officer had passed the assessment order without making the enquiries and verifications that were warranted in relation to large cash deposits in the assessee's bank account.

Analysis: The assessment was selected for scrutiny to examine the source of substantial cash deposits, yet the assessment order accepted the returned income without meaningful enquiry into the source, the persons from whom the alleged loans were received back, the manner of lending, the earning of interest or commission, or the existence of any supporting books or records. The absence of books of account, the acceptance of explanations based merely on memory, and the lack of verification of the deposits or the stated money-lending activity showed a failure to conduct the enquiry expected in scrutiny assessment. Such omission rendered the assessment order erroneous and prejudicial to the interests of the Revenue. The insertion of Explanation 2(a) to section 263 reinforced that an order passed without making inquiries or verification which should have been made is deemed erroneous insofar as it is prejudicial to the interests of the Revenue.

Conclusion: The revision under section 263 was valid and the assessee's challenge failed.

Ratio Decidendi: An assessment order passed without making the enquiries or verifications that the facts and circumstances reasonably require is erroneous and prejudicial to the interests of the Revenue and is liable to revision under section 263 of the Income-tax Act, 1961.

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