2026 (3) TMI 694 - AT - Income Tax

Revisionary jurisdiction under section 263 requires an AO order to be shown erroneous and prejudicial before interference is permitted.

The note addresses whether a Principal Commissioner properly invoked revisionary jurisdiction under section 263 to overturn an Assessing Officer's ... Revision u/s 263 by CIT - Depreciation on goodwill - allowance on opening written down value - treatment of warranty provision - add-back and claim of actual expense - jurisdictional scope of power u/s 263 Depreciation on goodwill - allowance on opening written down value - Whether the Commissioner was justified in invoking revisionary powers u/s 263 to interfere with the AO's allowance of depreciation on opening WDV of goodwill? - HELD THAT: - The Tribunal found that goodwill was created and brought into the assessee's books pursuant to a scheme of amalgamation in the earlier year and depreciation on that goodwill for the initial year had already been accepted by the Revenue. For the year under consideration there existed an opening written down value on which depreciation was claimed at the prescribed rate; the claim was supported by audited financial statements and tax audit report. Tribunal distinguished the cited decision relied upon by Revenue M/s. Gera Developments Pvt. Ltd. [2025 (12) TMI 853 - ITAT PUNE] on the facts, noting that that case involved impairment to nil in the books while depreciation was claimed, which is not the position here. Where the Assessing Officer had no reason to suspect the genuineness of the opening WDV and the earlier year acceptance stood unchallenged, the order of the Assessing Officer could not be characterised as erroneous and prejudicial to revenue warranting exercise of section 263. [Paras 8, 9] Revision under section 263 could not be sustained on the depreciation-on-goodwill issue and the AO's treatment is upheld. Treatment of warranty provision - add-back and claim of actual expense - HELD THAT: - The Tribunal observed that the assessee had itself disallowed (added back) the provision for warranty in the computation and had only claimed the actual warranty expenses incurred during the year. The Assessing Officer accepted the computation as filed. Given that the provision was already restored to income by the assessee and only the actual incurred expense was claimed, there was no infirmity in the assessment order requiring revision under section 263. [Paras 10] Revision under section 263 could not be sustained on the warranty-expense issue and the Assessing Officer's treatment is upheld. Final Conclusion: The revisionary order passed by the Principal Commissioner under section 263 was quashed insofar as it sought to revisit depreciation on goodwill and warranty expenses; the assessment order stands restored and the appeal is allowed. Issues: (i) Whether the Principal Commissioner of Income Tax rightly exercised revisionary jurisdiction under section 263 of the Income-tax Act, 1961 to interfere with the Assessing Officer's acceptance of depreciation claimed on opening written down value of goodwill for A.Y. 2018-19; (ii) Whether the Principal Commissioner of Income Tax rightly exercised revisionary jurisdiction under section 263 of the Income-tax Act, 1961 to interfere with the Assessing Officer's allowance of actual warranty expenses where the assessee had itself disallowed the warranty provision.Issue (i): Whether revision under section 263 could be sustained in respect of depreciation claimed on opening written down value of goodwill.Analysis: Goodwill was created and depreciation on the goodwill was earlier accepted by revenue in the relevant earlier year; the assessee claimed depreciation on the opening written down value in the year under consideration supported by audited accounts and tax audit report; no impairment or inconsistency in books of account was shown for the year under consideration; if revenue had concerns about creation of goodwill, the appropriate course was reopening the assessment for the year in which goodwill was created rather than invoking section 263 for the later year; reliance on a factual distinction with the cited precedent where goodwill was impaired to nil was noted.Conclusion: Revision under section 263 is not sustainable in respect of the depreciation claimed on goodwill; the Assessing Officer's order on this issue is not erroneous and prejudicial to the interests of revenue. (In favour of assessee)Issue (ii): Whether revision under section 263 could be sustained in respect of warranty expenses where the assessee had itself added back the provision and claimed only actual expenses.Analysis: The assessee had suo motu disallowed the warranty provision in the computation and claimed only the actual warranty expenses incurred during the year; the Assessing Officer accepted the computation; there was no material to show that the acceptance of actual warranty expense was erroneous or prejudicial to revenue; no further inquiry was shown to be necessary for the year under consideration.Conclusion: Revision under section 263 is not sustainable in respect of warranty expenses; the Assessing Officer's order on this issue is not erroneous and prejudicial to the interests of revenue. (In favour of assessee)Final Conclusion: The revisionary order passed by the Principal Commissioner of Income Tax under section 263 of the Income-tax Act, 1961 is quashed and the assessment order dated 30.06.2022 is restored, resulting in allowance of the assessee's appeal.Ratio Decidendi: Section 263 cannot be invoked to revise an assessment unless the Assessing Officer's order is shown to be erroneous in a manner that is prejudicial to the interests of revenue; where the Assessing Officer has accepted claims supported by books of account and prior acceptance in earlier years or where the assessee has itself adjusted provisions in the computation, the Commissioner's revisionary power is not properly exercisable.