Revisionary jurisdiction under section 263 cannot be invoked absent an assessment error prejudicial to revenue; allowance of goodwill depreciation and non-recognition of forfeited deposit upheld.

Revisionary jurisdiction was held inapplicable because the assessment order was not shown to be both erroneous and prejudicial to revenue; earlier adjustments relied on by the revisional authority had been set aside by competent fora, and the assessing officer used the correct opening written down value, so the revision is quashed. Depreciation on goodwill was correctly recognised as arising from the year of acquisition with subsequent years following opening WDV, and therefore the allowance for the relevant year is sustained. Forfeited security deposit, disclosed in audited accounts and later paid toward tax liability, does not constitute assessable income given tax neutrality on payment.

---

---

Issues: (i) Whether the Principal Commissioner of Income Tax validly exercised revisionary jurisdiction under section 263 of the Income-tax Act, 1961 in holding the assessment order erroneous and prejudicial to the interest of revenue; (ii) Whether depreciation on goodwill claimed by the assessee for A.Y. 2020-21 was incorrectly allowed; (iii) Whether forfeited security deposit of Rs. 5,63,032/- constituted income of the assessee.

Issue (i): Whether revision under section 263 was validly invoked by the Principal Commissioner of Income Tax.

Analysis: The revisional power under section 263 requires the assessment order to be both erroneous and prejudicial to the interest of revenue. The assessment in question allowed depreciation on goodwill based on opening WDV carried from earlier years; earlier adjustments relied upon by the revisional authority were deleted by the Coordinate Bench of the Tribunal and a reopening for a related year was quashed by the High Court. The record did not show that the assessing officer had used an incorrect WDV or made an error of law or fact that rendered the assessment prejudicial to revenue.

Conclusion: Revision under section 263 was not validly invoked; the revisional order is quashed in respect of the matters considered.

Issue (ii): Whether the depreciation on goodwill for A.Y. 2020-21 was wrongly allowed by the AO.

Analysis: The goodwill arose on acquisition in earlier years and its quantification belonged to the year of acquisition; once depreciation was allowed in the first year, subsequent years follow the opening WDV. The upward adjustment in the earlier year relied upon by the revisional authority was set aside by the Tribunal and related reopening was quashed by the High Court, undermining the basis for treating the current-year allowance as erroneous.

Conclusion: The allowance of depreciation on goodwill for A.Y. 2020-21 was not erroneous or prejudicial to revenue; the AO's treatment is upheld in favour of the assessee.

Issue (iii): Whether forfeited security deposit of Rs. 5,63,032/- is assessable as income.

Analysis: The amount was forfeited due to non-submission of statutory forms by customers and was deposited with sales tax authorities towards additional sales tax liability; this fact was disclosed in audited accounts. Treatment as income would be tax neutral since an equivalent deduction under section 43B would be available when paid towards tax liabilities.

Conclusion: The forfeited deposit does not constitute income prejudicial to revenue; the AO's omission to treat it as income is upheld in favour of the assessee.

Final Conclusion: The revisional order dated 31.03.2025 under section 263 is quashed and the appeal is allowed, resulting in the assessment order for A.Y. 2020-21 being sustained in respect of the decided issues.

Ratio Decidendi: Section 263 cannot be exercised where the assessing officer has not committed an error rendering the assessment both erroneous and prejudicial to revenue, including situations where earlier adjustments relied upon by the revisional authority have been set aside by competent fora and the assessing officer has followed the correct opening WDV and treatment of tax liabilities.

---