Section 263 revision needs independent material, while deemed application under section 11(1) was satisfied by written disclosure.

Revision under section 263 cannot rest solely on a revenue audit objection; it requires independent material showing the assessment is both erroneous and prejudicial to the revenue, and scrutiny queries already answered by the assessee will not support revisional interference. For deemed application under section 11(1), the later prescribed form requirement did not apply to the relevant year, and disclosure in the return, computation and audit report was sufficient written communication of the option. On these principles, the revisional order was unsustainable and the assessee's exemption claim was upheld.

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Issues: (i) whether revisionary jurisdiction under section 263 could be sustained when the assessment was alleged to be erroneous and prejudicial to the interests of the revenue merely on the basis of a revenue audit objection; (ii) whether, for the relevant assessment year, compliance with the option for deemed application under section 11(1) required a prescribed form or whether disclosure in the return of income, computation and audit report was sufficient.

Issue (i): whether revisionary jurisdiction under section 263 could be sustained when the assessment was alleged to be erroneous and prejudicial to the interests of the revenue merely on the basis of a revenue audit objection.

Analysis: The revisional power can be invoked only when the assessment order is both erroneous and prejudicial to the interests of the revenue. The assessment records showed that specific queries were raised in the scrutiny proceedings and the assessee had furnished the relevant documents and explanations. The conclusion reached in the original assessment was based on consideration of the material on record. The revisional action, however, was founded on an audit objection and not on independent material demonstrating error in the assessment. A revisional authority must act with an unbiased mind and cannot allow its decision to be dictated by another agency. In the absence of concrete material, the foundational requirements for revision were not satisfied.

Conclusion: The revision under section 263 was not sustainable and was rightly quashed in favour of the assessee.

Issue (ii): whether, for the relevant assessment year, compliance with the option for deemed application under section 11(1) required a prescribed form or whether disclosure in the return of income, computation and audit report was sufficient.

Analysis: The prescribed form requirement under the relevant rule came into force from a later assessment year and was not applicable to the year under consideration. For the relevant year, there was no prescribed form governing the manner of exercising the option. The assessee had disclosed the relevant details in the computation of income, the return of income and Form 10B filed during the assessment proceedings. Those disclosures constituted sufficient communication of the option in writing for the relevant year. The procedural requirement could not be applied retrospectively so as to deny the exemption claim.

Conclusion: The assessee had complied with the applicable requirement under section 11(1), and the disallowance based on absence of a separate prescribed form was not justified.

Final Conclusion: The appeal succeeded and the revisional order was set aside, leaving the assessee entitled to the claimed relief.

Ratio Decidendi: Revision under section 263 cannot be sustained unless the assessment is shown to be both erroneous and prejudicial to the revenue on the basis of independent material, and a later prescribed procedural form for exercising an option under section 11(1) cannot be applied to an earlier year where contemporaneous written disclosure otherwise establishes compliance.

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