Overriding title and section 263 revision: income diverted at source could not be taxed, so the revision failed.

Section 263 revision is sustainable only when the assessment order is both erroneous and prejudicial to the interests of the Revenue. Where the assessee's interest income was claimed to have been diverted at source by overriding title in favour of DICGCI, the income was treated as never reaching the assessee and therefore not taxable in its hands. Because that contention was not dealt with by the revisionary authority, the assessment could not be regarded as prejudicial to the Revenue for revision purposes. The revisionary order was quashed and the interference with the assessments was set aside.

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Issues: Whether the revisionary order under section 263 of the Income-tax Act, 1961 was valid when the interest income of the liquidated co-operative bank was claimed to have been diverted at source by overriding title in favour of DICGCI, and consequently whether the assessment order could be treated as erroneous and prejudicial to the interests of the Revenue.

Analysis: The jurisdiction under section 263 can be exercised only when both conditions are satisfied, namely, that the assessment order is erroneous and that it is prejudicial to the interests of the Revenue. The assessee had specifically raised before the revisionary authority that the income stood diverted by overriding title in favour of DICGCI, but that contention was not dealt with. In such a situation, the income never reaches the assessee and cannot be taxed in its hands. If the amount is not assessable as income, its treatment in the assessment order does not cause prejudice to the Revenue for the purposes of revision.

Conclusion: The revision under section 263 was not sustainable and the order of the Principal Commissioner was quashed; the issue was decided in favour of the assessee.

Final Conclusion: Both appeals succeeded, and the revisionary interference with the assessments was set aside.

Ratio Decidendi: Income diverted at source by an overriding title does not accrue to the assessee, and an assessment order cannot be revised under section 263 unless it is shown to be both erroneous and prejudicial to the interests of the Revenue.

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