Section 263 revision sustained where non-resident TDS non-compliance and section 40(a)(i) disallowance were not examined.

A payment to a non-resident attracted the obligation to deduct tax at source under section 195, but no tax was deducted or remitted. The expenditure was claimed for the first time as work-in-progress in the year under appeal, and the assessment record did not show that the Assessing Officer examined the resulting disallowance under section 40(a)(i). On that basis, the assessment order was treated as suffering from non-examination of a material issue causing prejudice to the Revenue, so the precondition for revision under section 263 was satisfied and the disallowance was upheld.

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Issues: Whether the Principal Commissioner was justified in invoking revisional jurisdiction under section 263 on the ground that the Assessing Officer had not examined the disallowance arising from non-deduction of tax at source on payment made to a non-resident, and whether the expenditure was hit by section 40(a)(i) for the year in which it was claimed.

Analysis: The payment to the non-resident attracted the obligation to deduct tax at source under section 195, and the assessee had neither deducted nor remitted the tax to the Government. The expenditure was claimed for the first time in the year under appeal as work-in-progress, and the assessment record did not show examination of this issue by the Assessing Officer. Since section 40(a)(i) restricts allowance of such expenditure until tax is deducted and paid, the assessment order suffered from non-examination of a material issue causing prejudice to the Revenue. The precondition for revision under section 263 was therefore satisfied.

Conclusion: The revision under section 263 was valid and the disallowance under section 40(a)(i) was rightly directed; the finding is against the assessee.

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