Section 263 revision upheld for lack of inquiry, but merits findings were vacated after remand for fresh assessment.

An assessment order passed without any inquiry into a material issue, including the taxability of an opening Foreign Currency Translation Reserve and the effect of CBDT Circular No. 10/2017, is erroneous and prejudicial to the interests of the revenue and may be revised under section 263. However, when the matter is remitted for fresh adjudication, the revisional authority should not record conclusive adverse findings on merits, because substantive issues must remain open for the Assessing Officer's de novo consideration. The assessment was therefore remitted for fresh decision with the merits-based observations vacated, and the appeal succeeded only to that limited extent.

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Issues: (i) Whether the revision under section 263 of the Income-tax Act, 1961 was justified on the ground that the assessment order had been passed without inquiry into the taxability of the opening Foreign Currency Translation Reserve and the applicability of Circular No. 10/2017; (ii) whether the Principal Commissioner could record adverse findings on merits while setting aside the assessment for fresh adjudication.

Issue (i): Whether the revision under section 263 of the Income-tax Act, 1961 was justified on the ground that the assessment order had been passed without inquiry into the taxability of the opening Foreign Currency Translation Reserve and the applicability of Circular No. 10/2017.

Analysis: The assessment record showed no inquiry by the Assessing Officer on the taxability of the Foreign Currency Translation Reserve or the effect of the CBDT circular. The absence of even a basic examination on a material issue rendered the assessment order erroneous and prejudicial to the interests of the revenue for the purpose of revisional jurisdiction.

Conclusion: The revision was justified to the extent of non-examination of the issue.

Issue (ii): Whether the Principal Commissioner could record adverse findings on merits while setting aside the assessment for fresh adjudication.

Analysis: Once the matter was remitted for de novo consideration, merits were required to be left open for the Assessing Officer. Observations on the substantive tax issue would prejudice a fresh adjudication and were therefore unsustainable.

Conclusion: The adverse observations on merits were vacated and the issue was left open for fresh decision by the Assessing Officer.

Final Conclusion: The assessment was remitted for fresh adjudication after deleting the merits-based observations, and the appeal succeeded only to that limited extent.

Ratio Decidendi: An assessment order passed without inquiry on a material issue can be revised under section 263 as erroneous and prejudicial to the interests of the revenue, but once the matter is remanded for fresh consideration, the revisional authority should not pre-empt the fresh adjudication by recording conclusive merits findings.

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