Revisional jurisdiction: fresh adjudication required where AO failed to apply mind on proviso to capital gains reinvestment exemption.

Revisional jurisdiction was examined where the Principal Commissioner invoked power to set aside a scrutiny assessment for alleged error prejudicial to revenue because the Assessing Officer did not record any finding or conduct enquiry on the proviso to the capital gains reinvestment exemption. The Tribunal held that an assessment order rendered without application of mind on a material statutory condition can be erroneous and prejudicial, justifying revision; differing interpretations of the proviso were noted but left undecided, and the matter was remitted for fresh adjudication by the Assessing Officer.

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Issues: Whether the Principal Commissioner of Income Tax was justified in invoking the revisional jurisdiction under Section 263 of the Income-tax Act, 1961 to set aside the assessment order under Section 143(3) for alleged error prejudicial to the interests of revenue arising from allowance of deduction under Section 54F(1) when the Assessing Officer had not recorded any finding or conducted enquiry on the applicability of the proviso to Section 54F(1).

Analysis: The Tribunal examined the record of the scrutiny assessment proceedings, including notices issued under Section 142(1), the queries raised by the Assessing Officer, and the assessee's written responses. The Assessing Officer's assessment order under Section 143(3) accepted the returned income without addressing whether the assessee owned more than one residential house at the relevant time as required by the proviso to Section 54F(1). The Tribunal treated the absence of any finding or application of mind by the Assessing Officer on the proviso as a complete lack of enquiry. The Tribunal noted that where no view is recorded by the Assessing Officer and the order is made without application of mind on a material statutory condition, such an order can be erroneous and prejudicial to the revenue, thereby falling within the scope of Section 263. The Tribunal also observed that differing judicial views exist on the substantive interpretation of the proviso to Section 54F(1), but declined to decide that interpretative question on merits because the Assessing Officer had not adjudicated the point; instead the matter required fresh adjudication after proper enquiry.

Conclusion: The assessment order under Section 143(3) is erroneous in so far as prejudicial to the interests of the revenue for lack of enquiry and application of mind regarding the proviso to Section 54F(1); the invocation of Section 263 by the Principal Commissioner is not illegal; the impugned order is modified to the extent of directing fresh adjudication by the Assessing Officer on the merits of the Section 54F(1) claim, and the appeal is allowed for statistical purposes.

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