Revisional power under Section 263 requires demonstrable lack of AO inquiry; enhancement via disallowance for exempt income quashed.

Invocation of revisional power under Section 263 was assessed against the standard that the revisional authority must point to lack of enquiry or produce independent material showing a prima facie error rendering the assessment erroneous and prejudicial to revenue. ITAT found the Assessing Officer had made detailed enquiries, considered the assessee's suo moto computation for disallowance relating to investments yielding exempt income, and accepted the computation for relevant items; the Principal Commissioner did not demonstrate absence of enquiry or a prima facie error. Consequently the enhancement under the disallowance claim was quashed.

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Issues: Whether the Principal Commissioner of Income Tax was justified in invoking revisional powers under Section 263 of the Income-tax Act, 1961 to enhance the assessee's income by disallowing an additional amount under Section 14A read with Rule 8D of the Income-tax Rules, 1962.

Analysis: The Tribunal examined whether the Assessing Officer had made inquiries and verifications concerning investments and exempt income, and whether the Principal Commissioner pointed to material showing a lack of inquiry or a prima facie error rendering the assessment order erroneous and prejudicial to revenue. The Tribunal considered the assessee's suo-moto disallowance computed under Rule 8D in respect of investments that yielded exempt income, the assessment record showing repeated queries and documentary replies, and relevant precedents distinguishing lack of inquiry from merely a differing view. The Tribunal found that the AO had conducted detailed inquiries, accepted the assessee's computation for disallowance of those investments which produced exempt income, and that the Principal Commissioner had not shown that there was no enquiry or produced independent material establishing a prima facie error.

Conclusion: The revisional order passed under Section 263 of the Income-tax Act, 1961 insofar as it enhanced income by disallowance under Section 14A read with Rule 8D of the Income-tax Rules, 1962 is quashed and the appeal is allowed in favour of the assessee.

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