Revision under section 263 on interest treatment and partner drawings quashed where AO made inquiries and formed plausible view

Revision under section 263 was challenged on whether the order of the assessing officer was erroneous and prejudicial to revenue; the reasoning was that jurisdiction for revision requires a demonstrable error and prejudice, and absent any incorrect fact, misapplication of law, or overlooked material the revisional power cannot be exercised. The assessing officer had made specific inquiries, considered audited financial statements, and taken a plausible view on partner drawings and interest allowability; because the revisional order rested on assumptions and a mere change of opinion, the revision was quashed and the appeal allowed.

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Issues: Whether the order passed by the Principal Commissioner under section 263 setting aside the assessment framed under section 143(3) on the ground that the AO failed to examine non-charging of interest on partner's debit balance was erroneous and prejudicial to the interests of Revenue.

Analysis: Applicable law requires that revision under section 263 can be invoked only if the assessing officer's order is both erroneous and prejudicial to the interests of the Revenue. Where the AO has made specific inquiries, considered explanations, examined audited accounts, ledger extracts and source of funds, and formed a plausible view, mere disagreement by the Commissioner does not establish jurisdiction under section 263. Revision cannot rest on conjecture, suspicion or a change of opinion; the Commissioner must point to incorrect facts, wrong application of law, or non-consideration of material. Here, the assessment record contains notices and detailed replies concerning partners' capital accounts, audited financial statements showing sources of funds, and the AO accepted the explanations without drawing adverse inference. The Principal Commissioner did not produce material to rebut those explanations or demonstrate that the AO's findings were factually incorrect.

Conclusion: The revisionary order under section 263 is quashed and the appeal is allowed in favour of the assessee.

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