Revision under Section 263: not warranted where the Assessing Officer applied his mind and adopted a reasonable valuation, so revision set aside.

Whether revision under Section 263 was justified turned on the statutory twin conditions: the primary legal question was whether the assessment order was both erroneous and prejudicial to revenue and whether the AO failed to make required inquiries (Explanation 2(a)). The tribunal reasoned that where the AO considered circle rates, examined a registered valuer's report, and applied his mind to adopt an estimative fair market value for capital gains computation, a mere post facto preference for a DVO figure does not satisfy Section 263. Outcome: the Section 263 revision was set aside because both statutory conditions were not concurrently met.

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Issues: Whether the order passed by the Principal Commissioner of Income-Tax under Section 263 of the Income-tax Act, 1961 setting aside the assessment order dated 24-12-2018 (passed under Sections 143(3)/254) is justified on the grounds that the assessment was erroneous and prejudicial to the interests of the revenue for having accepted the assessee's valuation (Rs.160 per sq. yard as on 01.04.1981) without appropriate inquiry or referral to the Departmental Valuation Officer.

Analysis: Applicable legal framework includes the twin conditions under Section 263(1) of the Income-tax Act, 1961 (order must be erroneous and prejudicial to revenue), Explanation 2(a) to Section 263 regarding failure to make inquiries or verifications, the ITAT remand direction to compute capital gains under Section 45(2) of the Income-tax Act, 1961 and examine fair market value in accordance with law, and the rules concerning reference to a District/Departmental Valuation Officer when independent verification is required. The facts include that the Assessing Officer, in set-aside proceedings, accepted a registered valuer's report adopting Rs.160 per sq. yard for 01.04.1981 after considering circle rates and the valuer's methodology; the Principal CIT held that the AO ought to have referred the matter to DVO given perceived deficiencies in the valuer's report; subsequently a DVO report assessing a much lower value was obtained during proceedings under Section 263. Competing legal principles were considered: authorities requiring AO to make inquiries when circumstances demand (failure to inquire may render an order erroneous) and authorities protecting an AO's view where inquiries and application of mind have been made. The assessing officer's conduct on the record showed discussion of valuation, consideration of circle rates and reliance on a registered valuer's specific valuation prepared for capital gains computation; these support that the AO applied his mind and adopted one of the possible views on an estimation-based valuation. The tribunal must apply Section 263 only where both error and prejudice coexist; mere disagreement with AO's view or a post-facto preference for DVO's estimate does not satisfy the statutory test if AO had applied his mind and taken a reasonably sustainable view in the set-aside proceedings. The ITAT evaluated the evidentiary basis for the valuer's adoption of Rs.160 (stamp duty/circle rates range, land characteristics, absence or presence of comparables) and concluded that differences between expert estimates do not automatically make the AO's order erroneous when the AO had considered the registered valuer's report and taken a possible view on valuation.

Conclusion: The order under Section 263 is not sustainable because, although the assessment may be prejudicial to revenue, the assessing officer had applied his mind and taken one of the possible, estimative views based on a registered valuer's report; therefore the twin conditions for revision under Section 263 are not both satisfied. The appeals are allowed in favour of the assessee and the Section 263 order is set aside.

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