Deemed error under Explanation 2 affirmed where lack of AO inquiry into interest classification justified revision being upheld.

Explanation 2 to Section 263 treats an AO order as erroneous and prejudicial where required inquiries or verifications were not made; applied here to find no adequate inquiry into whether interest receipts were business income or income from other sources and no verification of nexus for claimed expenses. Because the AO issued only a single questionnaire and accepted returned income without further verification, the statutory condition in Explanation 2 was engaged and revision under Section 263 was sustainable; the revision was therefore upheld in favour of the revenue.

---

---

Issues: (i) Whether the Principal Commissioner of Income-tax was justified in invoking revision under Section 263 of the Income-tax Act, 1961 on the ground that the assessment order was erroneous and prejudicial to the interests of the revenue for failure to make necessary inquiries/verification regarding classification of interest income.

Analysis: Explanation 2 to Section 263 (effective 01.06.2015) provides that an order of the Assessing Officer shall be deemed erroneous and prejudicial to the interests of the revenue if it is passed without making inquiries or verification which should have been made. The assessee reported interest receipts and claimed substantial business expenses against the same, but the assessment proceedings did not contain evidence of enquiries to determine whether the interest qualified as business income or was assessable under income from other sources, nor was there adequate verification of the claimed nexus between the expenses and the interest receipts. The material on record shows that the Assessing Officer issued a single questionnaire and accepted the returned income without further inquiry into the classification and allowability of expenses; therefore the statutory condition in Explanation 2 is engaged and permits revision under Section 263.

Conclusion: In favour of Revenue. The revision under Section 263 is upheld and the grounds of appeal are dismissed.

---