Section 263 revision requires existing-record error and prejudice; prior-year deductions and appellate matters could not be reopened absent fresh material.
Section 263 revision is sustainable only where the assessment order is erroneous and prejudicial to the Revenue on the existing record. For the newly set up units claiming section 80-IA deduction, the Assessing Officer had made no enquiry into eligibility conditions, so revision was valid on that limited issue. For deductions under sections 80HH, 80HHA and 80-I relating to earlier-year units, the formation and manufacturing character had already been accepted and no fresh material existed, so revision was not permitted. The assessment also merged with the appellate order on bank interest and miscellaneous income to the extent those matters had been considered in appeal, barring revision on that aspect.
Issues: (i) Whether the Commissioner could validly invoke section 263 of the Income-tax Act, 1961, in respect of the deduction claimed under section 80-IA for the two units set up during the year under consideration; (ii) Whether the Commissioner could revise the assessment under section 263 in respect of deductions under sections 80HH, 80HHA and 80-I relating to units set up in earlier years on the ground that they were formed by reconstruction or splitting up of an existing business or that the assessee's bidi-making activity was not manufacture or production; (iii) Whether the Commissioner could invoke section 263 in relation to bank interest and other miscellaneous income on the ground that the assessment order had not merged with the appellate order.
Issue (i): Whether the Commissioner could validly invoke section 263 of the Income-tax Act, 1961, in respect of the deduction claimed under section 80-IA for the two units set up during the year under consideration.
Analysis: The assessment record showed that no enquiry had been made by the Assessing Officer regarding the eligibility conditions for the newly started units, and no material had been furnished before either authority to support the claim. Where the Assessing Officer omits to make enquiries that the law requires, the order becomes erroneous and prejudicial to the interests of the revenue. The revisional jurisdiction was therefore attracted on this limited aspect.
Conclusion: The revision under section 263 was valid for the two units set up during the year under consideration and was against the assessee on this issue.
Issue (ii): Whether the Commissioner could revise the assessment under section 263 in respect of deductions under sections 80HH, 80HHA and 80-I relating to units set up in earlier years on the ground that they were formed by reconstruction or splitting up of an existing business or that the assessee's bidi-making activity was not manufacture or production.
Analysis: The conditions relating to formation of the undertaking and the character of the manufacturing activity had already been accepted in earlier years, and the record showed no fresh material justifying a departure. The legal position emphasised finality and consistency where a fundamental aspect had been settled and had not been disturbed in the initial years. In the absence of fresh facts, the assessment for the year under consideration could not be treated as erroneous on these grounds.
Conclusion: The Commissioner had no jurisdiction under section 263 on these grounds, and this issue was in favour of the assessee.
Issue (iii): Whether the Commissioner could invoke section 263 in relation to bank interest and other miscellaneous income on the ground that the assessment order had not merged with the appellate order.
Analysis: The controversy concerning inclusion of dividend income, interest income and allied receipts formed part of the subject matter considered in appeal. To that extent, the assessment order merged with the appellate order, and the revisional power could not be exercised over matters already considered and decided in appeal.
Conclusion: The invocation of section 263 on this aspect was not permissible, and the issue was in favour of the assessee.
Final Conclusion: The revisional order was sustained only to the limited extent of the deduction claim relating to the newly set up units for the year under consideration, while the remaining revision was quashed.
Ratio Decidendi: A revision under section 263 can be sustained only where the assessment order is shown, on the existing record, to be erroneous and prejudicial to the revenue; issues settled in earlier years without fresh material cannot be reopened, and matters already considered in appeal are protected by merger to that extent.