Revision for lack of inquiry upheld where tax treatment of fair value adjustments was not properly examined

A revision under section 263 was held justified where the Assessing Officer accepted foreign exchange and fair value adjustments without proper enquiry into their tax impact and revenue recognition consequences. The record showed only a preliminary query and reply, so the assessment order was treated as passed without adequate application of mind and as contrary to binding precedent. Withdrawal of the section 43AA reference did not require a fresh notice because the core revisional issue remained the tax treatment of the adjustments and the assessee had a fair opportunity to answer the substance of the objection. The challenge to the revision therefore failed.

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Issues: Whether the revisionary order under section 263 was valid where the Assessing Officer had accepted the assessee's treatment of foreign exchange and fair value adjustments without further enquiry, and whether the withdrawal of the reference to section 43AA required a fresh notice before completing revision.

Analysis: The assessee had claimed deductions in the normal computation on account of fair value measurement of operating financial assets and fair value gains on financial instruments, while not making corresponding adjustments in the book-profit computation under section 115JB. The assessment record showed only an initial query and a reply; no further enquiry was made into the impact of the new accounting treatment on revenue recognition. The revisional authority concluded that the assessment order was passed without adequate inquiry and was also contrary to binding precedent, bringing it within section 263 and Explanation 2 thereto. The withdrawal of the section 43AA reference did not alter the substance of the revision, since the core issue remained the tax treatment of the adjustments and the assessee had a full opportunity to respond.

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

Ratio Decidendi: An assessment order is revisable under section 263 where a material issue affecting taxability is not subjected to proper inquiry or application of mind, and the Commissioner is not confined to a technical defect in the notice when the assessee has had a fair opportunity to meet the substance of the revisional ground.

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