s.263 revision set aside where assessing officer made specific inquiries and reasonably accepted depreciation and rental treatment

ITAT PUNE (AT) held that PCIT's invocation of jurisdiction u/s. 263 was improper because the AO made specific enquiries about depreciation on partly let properties, considered the assessee's detailed replies and took a legally permissible view. The Tribunal found no lack or inadequacy of inquiry and upheld the AO's acceptance that rental income was offered for the let period while depreciation was validly claimed for the period the properties were used for business. Appeal allowed; revision order under s.263 set aside.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the Commissioner's revisionary jurisdiction under section 263 can be validly exercised where the Assessing Officer has made specific enquiries into a claim (depreciation on immovable properties) and taken a legally permissible view thereon.

2. Whether an Assessing Officer's acceptance of depreciation claimed on immovable properties that were partly let out and partly used for business (with depreciation computed pro rata or on the basis of actual period of business use) amounts to an erroneous order prejudicial to the revenue warranting revision under section 263.

3. On the merits, whether depreciation under section 32 is allowable where assets were let out for part of the year and used for business for the remaining part, having regard to statutory conditions (including period of use in the previous year).

ISSUE-WISE DETAILED ANALYSIS - Exercise of Section 263 Jurisdiction

Legal framework: Section 263 empowers the Commissioner to call for and examine records and, if an order by the Assessing Officer is "erroneous insofar as it is prejudicial to the interests of the revenue", to make inquiry and pass consequential orders including setting aside the assessment; procedural safeguards include issuance of show cause and opportunity to be heard.

Precedent treatment: Jurisprudence establishes that section 263 is not a tool to correct every mistake; it applies only where the AO's order is erroneous (e.g., incorrect application of law, lack of application of mind, or an order not in accordance with law). Where the AO has conducted enquiries (even if arguably inadequate) and adopted one of two plausible views, revision is inappropriate. Distinctions are drawn between "lack of enquiry" (may justify revision) and "inadequate enquiry" (generally not).

Interpretation and reasoning: The Tribunal examined the assessment record and found that the AO had raised specific queries about the heightened depreciation claim, issued a show cause during assessment proceedings, obtained detailed explanations and documentary material from the taxpayer, and accepted the taxpayer's explanation in the assessment order. These facts demonstrate that the AO applied his mind and made inquiries on the issue.

Ratio vs. Obiter: Ratio - where the AO has specific enquiries on an issue and takes a legally permissible view after considering the replies and supporting material, the Commissioner cannot substitute his judgment by invoking section 263. Obiter - observations on the four-stage description of section 263's operation as an administrative framework.

Conclusion: Revision under section 263 was not justified. The Commissioner's assumption of jurisdiction on an issue thoroughly examined by the AO and decided by him (a debatable/plausible view) amounted to impermissible re-examination; the section cannot be used to initiate a roving or fishing inquiry or to substitute the Commissioner's opinion for that of the AO absent an unsustainable or legally indefensible view by the AO. The tribunal quashed the revision order on this ground.

ISSUE-WISE DETAILED ANALYSIS - Whether AO's Order Was Erroneous and Prejudicial

Legal framework: The dual condition for section 263 is that the AO's order must be (i) erroneous and (ii) prejudicial to revenue; mere loss of revenue is insufficient unless the AO's view is untenable in law or there is absence of application of mind.

Precedent treatment: Authorities hold that an assessment cannot be branded erroneous merely because the Commissioner would have reached a different conclusion; there must be prima facie material showing non-imposition of tax lawfully exigible or an incorrect application of statutory provisions. Where the AO has examined documents and recorded that evidence was kept on file, it evidences application of mind.

Interpretation and reasoning: The AO had specifically queried the large depreciation, required proof of business use, and recorded acceptance of the taxpayer's evidence (purchase deeds, tenancy details, bank entries, confirmations, affidavit). That constitutes enquiry; there is no material showing the AO's conclusion was legally unsustainable. The Commissioner did not bring fresh material proving the AO's conclusion was erroneous.

Ratio vs. Obiter: Ratio - an order is not "erroneous" for the purposes of section 263 where the AO, after enquiries, adopts a plausible view supported by material on record; absence of fresh prima facie material by the revising authority precludes revision. Obiter - discussion of administrative limits and finality principles underlying section 263.

Conclusion: The AO's order could not be characterised as erroneous and prejudicial to revenue; therefore exercise of revisionary powers was unjustified and set aside.

ISSUE-WISE DETAILED ANALYSIS - Merits: Allowability of Depreciation for Properties Partly Let and Partly Used for Business

Legal framework: Depreciation under section 32 is allowable where the asset is owned by the assessee and used for the purposes of business or profession during the previous year; statutory rules address apportionment/restriction where asset is used for less than 180 days in the previous year.

Precedent treatment: Authorities recognise allowance of depreciation for the period an asset is used for business; a change in use during the year (from letting to business use) can justify pro rata depreciation for business-use period, subject to statutory thresholds and proper verification.

Interpretation and reasoning: The taxpayer's submissions, supported by tenancy agreements, communication with tenants, bank entries, tenant confirmations and affidavit, showed that properties were let for part of the year and subsequently taken into business use. The depreciation claimed related to the period of business use and was computed in accordance with the statutory provisions governing period of use and rate application.

Ratio vs. Obiter: Ratio - depreciation is allowable in respect of the period an asset is genuinely used for business even if the same asset was let out for part of the year; where records substantiate the change in use and the AO has accepted such material, the claim is maintainable. Obiter - remarks on the specific numerical breakdown of depreciation and rent received as corroborative facts.

Conclusion: On merits, the depreciation claim was sustainable: assets were used for business for the requisite period and the claim fell within section 32's scheme. The Tribunal found no infirmity in allowing depreciation on the facts and evidence before the AO.

OVERALL CONCLUSION

The Commissioner's revisional order under section 263 was quashed because (a) the Assessing Officer had made specific enquiries on the depreciation claim, (b) the assessee furnished detailed supporting material which the AO accepted, and (c) the AO's conclusion represented a legally permissible view. Consequently, there was no demonstrable error in law or lack of enquiry to justify section 263 intervention. On merits, the depreciation allowance for properties partly let and partly used for business was found to be allowable in accordance with statutory provisions and evidence on record; the assessment order was restored.

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