Section 263 revision fails where the Assessing Officer made enquiries and adopted a plausible view on a mutual fund transaction.

Section 263 revision was held unsustainable where the Assessing Officer had examined the reassessment record, called for details and adopted a permissible view on the genuineness of the mutual fund transaction. Mere disagreement by the Principal Commissioner did not satisfy the twin requirements that the order be both erroneous and prejudicial to the Revenue. The article also notes that the investment could not be characterised as a sham without cogent material showing the assessee's conscious participation in any colourable device, and that denial of dividend exemption and capital loss relief was unwarranted where the alleged regulatory breach, if any, lay with the fund. A direction extending to a later assessment year was treated as beyond revisional scope.

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Issues: (i) Whether the revisional jurisdiction under section 263 of the Income-tax Act, 1961 could be invoked where the Assessing Officer had examined the reassessment issue and adopted a permissible view; (ii) Whether the Principal Commissioner could treat the mutual fund investment as a sham transaction, deny exemption on dividend income and capital loss relief, and issue directions beyond the relevant assessment year.

Issue (i): Whether the revisional jurisdiction under section 263 of the Income-tax Act, 1961 could be invoked where the Assessing Officer had examined the reassessment issue and adopted a permissible view.

Analysis: The reassessment record showed that the Assessing Officer had issued notices, called for details, examined the investment and dividend transactions, and thereafter concluded that the transaction was genuine and not a sham. The power under section 263 requires the order to be both erroneous and prejudicial to the interests of the Revenue. Where the Assessing Officer has made enquiries and taken one of the permissible views, revisional interference is not warranted merely because the Principal Commissioner holds a different opinion.

Conclusion: The invocation of section 263 on this issue was unsustainable and was against the assessee.

Issue (ii): Whether the Principal Commissioner could treat the mutual fund investment as a sham transaction, deny exemption on dividend income and capital loss relief, and issue directions beyond the relevant assessment year.

Analysis: No independent material established that the assessee knowingly participated in any colourable device or had prior knowledge of the alleged dividend declaration methodology. The alleged violation of market regulations, if any, was attributable to the fund and not to the investor. The transaction also fell outside the mischief of section 94(7), and the dividend had already suffered dividend distribution tax in the hands of the mutual fund under section 115R. The further direction relating to Assessment Year 2019-20 travelled beyond the scope of revisional proceedings for Assessment Year 2018-19.

Conclusion: The sham-transaction characterization, the consequential denial of exemption and loss relief, and the direction for the subsequent assessment year were all rejected.

Final Conclusion: The reassessment order was restored and the revisional order was quashed, leaving the assessee with full relief.

Ratio Decidendi: Revision under section 263 cannot be sustained where the Assessing Officer has enquired into the issue and adopted a lawful plausible view, and a transaction cannot be treated as sham or denied statutory reliefs in the absence of cogent material showing the assessee's conscious participation in avoidance.

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