Disallowance of expenditure attributable to exempt income and strategic investment exclusion required verification; revisionary powers upheld against taxpayer.

Revision under the tax code challenged an assessing officer's acceptance of an assessee's self computed disallowance for exempt income without testing the computation method or excluding strategic investments; reliance on the Apex Court principle in Maxopp required the AO to verify a third party report, and failure to do so activated deeming provisions, making the disallowance unsustainable. The AO also ignored intelligence indicating receipt of accommodation entries, which mandated inquiry under established precedents requiring meaningful enquiries. Consequence: the revisionary authority's invocation of revisionary powers was upheld and the taxpayer's position was overturned.

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Issues: (i) Whether the assessment order was erroneous and prejudicial to the interests of Revenue for failing to examine and verify the correctness and computation of disallowance under section 14A read with Rule 8D (strategic investments and methodology); (ii) Whether the assessment order was erroneous and prejudicial to the interests of Revenue for failure to examine information suggesting receipt of accommodation entries (Insight Portal / Sankalp Group) and whether the revision under section 263 directing further enquiry was valid.

Issue (i): Whether the AO failed to make inquiries or verification required for determining disallowance under section 14A read with Rule 8D, making the assessment order erroneous and prejudicial to Revenue.

Analysis: The deeming provisions of Explanation 2(a) to section 263 treat an order as erroneous and prejudicial where it is passed without making inquiries or verification which should have been made. The record shows the assessee offered a suo motu disallowance backed by an expert report and the AO accepted the offered figure without further queries or independent application of the Rule 8D methodology, despite large strategic investments and substantial exempt income. Relevant judicial precedent establishes that absence of meaningful inquiry or verification attracts Explanation 2(a).

Conclusion: The AO did not conduct necessary verification of the Rule 8D computation and the assessment order is erroneous and prejudicial to the interests of Revenue on this issue; the revision under section 263 in respect of disallowance is justified.

Issue (ii): Whether the AO failed to examine information indicating receipt of accommodation entries and whether setting aside the assessment for further enquiry under section 263 was permissible.

Analysis: Explanation 2(a) applies where the AO omitted inquiries or verifications which should have been made. Departmental information (Insight Portal / investigation material) identifying potential accommodation entries was available in the record and was not addressed in the assessment. The revisionary direction restores the matter to the AO to examine and verify that material, affording the assessee opportunity of hearing; remand for proper inquiry is an accepted remedy where absence of inquiry precludes a conclusive finding.

Conclusion: The AO failed to make requisite inquiries regarding alleged accommodation entries; the setting aside of the assessment and direction for fresh enquiry under section 263 is valid.

Final Conclusion: Both issues involve lack of requisite inquiry or verification by the AO such that the assessment order is deemed erroneous and prejudicial to Revenue under Explanation 2(a) to section 263; the revisionary order under section 263 is confirmed and the appeal is dismissed, while the matters are remitted to the AO for fresh verification and decision after affording opportunity of hearing to the assessee.

Ratio Decidendi: Where the Assessing Officer accepts the assessee's claim or computation without conducting inquiries or verifications which ought to have been made-particularly regarding Rule 8D computations for strategic investments or available investigative information-Explanation 2(a) to section 263 renders the assessment order erroneous and prejudicial, authorising the Commissioner to set aside the order and direct the AO to conduct fresh enquiries.

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