Section 263 revision requires a clear finding of error and prejudice; a remand for further inquiry alone is insufficient.

Revision under section 263 was held unsustainable because the Principal Commissioner must himself record a clear finding that the assessment order is both erroneous and prejudicial to the interests of the Revenue before exercising revisional power. A mere direction for fresh inquiry, without deciding the issue on the material already on record, was insufficient. The note also applies the distinction between lack of inquiry and inadequate inquiry: revision may lie where inquiry was wholly absent, but not where the revisional authority simply remands the matter without reaching its own reasoned conclusion. On the facts, the payments related to purchase of capital assets and, in that context, the CBDT circular indicated that section 40A(3) did not apply. The revision order was set aside and the assessment restored.

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Issues: Whether revision under section 263 of the Income-tax Act, 1961 was sustainable when the Principal Commissioner set aside the assessment order on the footing that cash payments attracted section 40A(3) and the Assessing Officer had allegedly not examined the issue.

Analysis: The assessment could be revised under section 263 only if the order was shown to be both erroneous and prejudicial to the interests of the Revenue. A mere direction for fresh inquiry was not enough; the revisional authority had to record a clear finding that the assessment order was erroneous. The record showed that the payments were for purchase of capital assets and, in that context, the CBDT circular relating to section 40A(3) indicated that such payments were outside the mischief of the provision. The reasoning also applied the settled distinction between lack of inquiry and inadequate inquiry: where inquiry was absent, revision may lie, but the Commissioner could not remand the matter without first deciding the issue himself on the basis of material on record.

Conclusion: The assumption of revisionary jurisdiction under section 263 was not justified, and the order revising the assessment could not stand.

Final Conclusion: The assessment order was restored and the assessee succeeded in the appeal.

Ratio Decidendi: Revision under section 263 cannot be sustained by merely directing further inquiry; the revisional authority must itself record a clear, reasoned finding that the assessment order is erroneous and prejudicial to the interests of the Revenue, particularly where the controversy turns on the distinction between lack of inquiry and inadequate inquiry.

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