Section 263 revision fails without a specific error, and demerger treatment governs carry forward of losses and depreciation.

Revision under Section 263 requires the assessment order to be both erroneous and prejudicial to the revenue; a mere remand for further enquiry, without identifying a specific error, is insufficient and makes the revision unsustainable. The sanctioned scheme was characterised as a demerger, not an amalgamation, so the demerger provision governed carry forward of losses and unabsorbed depreciation. The amalgamation conditions, including the three-year business requirement, did not apply to the transaction. On that basis, the Commissioner's revisional approach rested on an incorrect legal premise and could not justify disallowance of the claim.

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Issues: (i) Whether the Commissioner was justified in exercising revisional jurisdiction under Section 263 of the Income-tax Act, 1961 when the assessment order was alleged to be erroneous and prejudicial to the interests of the revenue. (ii) Whether the case was governed by Section 72A(2) or Section 72A(4) of the Income-tax Act, 1961, and whether the arrangement was an amalgamation or a demerger for the purpose of carry forward of losses and unabsorbed depreciation.

Issue (i): Whether the Commissioner was justified in exercising revisional jurisdiction under Section 263 of the Income-tax Act, 1961 when the assessment order was alleged to be erroneous and prejudicial to the interests of the revenue.

Analysis: Revision under Section 263 requires the concurrent satisfaction of two conditions: the assessment order must be erroneous and it must be prejudicial to the interests of the revenue. The assessment order did not disclose any consideration of the scheme sanctioned by the Company Court, but the assessee's reply pointed out that the arrangement was a demerger and that the revisional notice had proceeded on a mistaken premise. The revisional order did not identify any specific error in the assessment order and instead remitted the matter for enquiry, which amounted only to a roving exercise.

Conclusion: The conditions for valid revision under Section 263 were not satisfied, and the revision was unsustainable.

Issue (ii): Whether the case was governed by Section 72A(2) or Section 72A(4) of the Income-tax Act, 1961, and whether the arrangement was an amalgamation or a demerger for the purpose of carry forward of losses and unabsorbed depreciation.

Analysis: The sanctioned scheme was one of demerger and not amalgamation. Section 72A(2) applies to amalgamation and contains conditions such as the three-year business requirement, whereas Section 72A(4) applies to demerger and does not impose that condition. Since the arrangement fell within demerger, the basis adopted in the revisional notice was legally misplaced.

Conclusion: Section 72A(4) governed the matter, not Section 72A(2), and the assessee's claim could not be rejected on the ground invoked by the Commissioner.

Final Conclusion: The revisional order could not stand because it was founded on an erroneous characterisation of the transaction and lacked the jurisdictional basis required for Section 263 intervention; the assessee succeeded and the revenue's challenge failed.

Ratio Decidendi: Revisional jurisdiction under Section 263 can be exercised only when a specific error causing prejudice to the revenue is identified, and a transaction sanctioned as a demerger must be tested under the demerger provision rather than the amalgamation provision for purposes of carry forward of losses and depreciation.

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