Revisionary power under s263 cannot disturb assessments where AO made reasoned enquiry; audit-objection-based revisions vitiated.

A revision under section 263 of the Income-tax Act cannot disturb an assessment where the Assessing Officer conducted requisite enquiries, examined records (including Form 56F and audited statements), and recorded a reasoned decision on allocation of R&D expenditure between units eligible for deduction and non eligible units; accordingly the assessment is restored. Further, invocation of revisionary jurisdiction grounded substantially on an audit objection without independent application of mind by the revisionary authority vitiates the exercise of power under section 263; the revisionary order is quashed and the original assessment is reinstated.

---

---

Issues: (i) Whether the order passed under section 263 of the Income-tax Act, 1961 revising the assessment on account of alleged improper allocation of R&D expenditure between units eligible for deduction under section 10AA and non eligible units is valid; (ii) Whether invocation of revisionary jurisdiction based on an audit objection vitiates the exercise of power under section 263 of the Income-tax Act, 1961.

Issue (i): Validity of revision under section 263 qua allocation of R&D expenditure claimed as deduction under section 10AA of the Income-tax Act, 1961.

Analysis: The assessment record shows multiple specific notices under section 142(1) demanding breakup and justification of R&D expenditure and the assessee furnished detailed responses and supporting documents, including Form 56F and audited financial statements. The enquiry recorded in the assessment order demonstrates that the Assessing Officer examined the claims and took a considered decision to allow the deduction on the basis of materials on record and separate books maintained for eligible and non eligible undertakings. The revisionary authority's observations were based on an assumption of possible direct or indirect benefit to eligible units without pointing to evidentiary shortcomings in the AO's enquiry or a specific finding that the apportionment was not on an actual basis.

Conclusion: The revision under section 263 insofar as it seeks to disturb the assessment on account of allocation of R&D expenditure is not sustainable; the assessment order is restored on this issue in favour of the assessee.

Issue (ii): Validity of invoking section 263 where the revisionary action is founded on an audit objection.

Analysis: The record of the order giving effect to the revision shows that the genesis of the revision proceeding on the R&D allocation issue was an audit objection. The revisionary exercise cannot be founded merely on an audit objection without independent application of mind by the revisionary authority. Where the revisionary authority's decision is materially influenced by an audit objection and there is no independent evaluative finding demonstrating lack of proper enquiry by the Assessing Officer, the exercise of section 263 is vitiated.

Conclusion: The exercise of power under section 263 based substantially on the audit objection is vitiated; the impugned order passed under section 263 is quashed and the assessment order is restored in favour of the assessee.

Final Conclusion: The appeal is allowed and the assessment order dated 21.09.2022 is restored; the revisionary order under section 263 of the Income-tax Act, 1961 is quashed.

Ratio Decidendi: A revisionary authority under section 263 of the Income-tax Act, 1961 may not revise an assessment where the Assessing Officer has made the requisite enquiry and recorded a reasoned decision based on materials on record; further, invocation of section 263 cannot be sustained where it is materially founded on an audit objection without independent application of mind by the revisionary authority.

---