Failure to examine a first time material claim renders the assessment erroneous; limited fresh examination ordered for specified items.

Failure by the assessing officer to inquire into a first-time, material one time 'Exceptional Item' claim renders the assessment order erroneous and prejudicial to revenue under Explanation 2 to Section 263, requiring the order to be set aside for fresh limited examination; the assessing officer must re-examine only the Exceptional Item of Rs.57.02 crore and the sundry balance write off difference of Rs.9,48,187. A revisional direction to examine additional claimed losses was outside the scope of the revisional notice and is not justified, so the scope of fresh inquiries is restricted accordingly.

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Issues: (i) Whether the assessment order under section 143(3) is erroneous and prejudicial to the interest of revenue for not examining first-time claim of "Exceptional Item" of Rs.57.02 crore and therefore liable to be set aside u/s 263; (ii) Whether the revisional authority's direction to the assessing officer to examine the allowability of losses (in addition to the Exceptional Item and sundry balance difference) was justified.

Issue (i): Whether the assessing officer's failure to examine the one-time "Exceptional Item" claim renders the assessment order erroneous and prejudicial to the interest of revenue under section 263.

Analysis: The claim relates to a one-time refinancing expense treated as exceptional item and explained in the audited accounts (prepayment charges, unamortized borrowing cost, premature termination of derivative contracts). The claim was made for the first time and was not examined by the assessing officer during complete scrutiny assessment. Explanation 2 to Section 263 deems an order passed without necessary inquiries or verifications to be erroneous and prejudicial to revenue where such inquiries should have been made.

Conclusion: The revisional authority's finding that the assessment order was erroneous and prejudicial to the interest of revenue for failing to examine the first-time "Exceptional Item" is upheld; the matter is to be examined afresh by the assessing officer.

Issue (ii): Whether the revisional authority correctly directed the assessing officer to examine the allowability of losses in addition to the Exceptional Item and sundry balance difference.

Analysis: The revisional notice and order only referred to the Exceptional Item and the discrepancy in sundry balance write-off. No show cause was issued under section 263 in respect of the claimed losses, and that issue was not part of the revisional reference.

Conclusion: The direction to examine the allowability of losses is modified and held not justified; the assessing officer's inquiries are to be restricted to the Exceptional Item of Rs.57.02 crore and the sundry balance write-off difference of Rs.9,48,187.

Final Conclusion: The revisional order under section 263 is partly sustained to the extent it sets aside the assessment for failure to examine the first-time Exceptional Item claim, and partly modified by restricting the scope of fresh inquiries to the Exceptional Item and the sundry balance difference; the appeal is otherwise dismissed.

Ratio Decidendi: Where an assessing officer, during a complete scrutiny assessment, fails to make inquiries or verifications into a first-time, material claim (such as a substantial one-time exceptional expense), the order may be held erroneous and prejudicial to the interests of the revenue under Explanation 2 to Section 263 of the Income-tax Act, 1961, warranting set aside for limited fresh examination.

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