Income Tax: Section 263 Revision Invalid Where Assessing Officer Conducted Proper Inquiry

The assessee, Dhani Loans & Services Ltd., engaged in investment and lending activities, filed its return for AY 2018–19 declaring income of Rs. 199.86 crore. The assessment was completed under section 143(3) with certain disallowances under sections 36(1)(va) and 40A(2)(b).

During the assessment, the Assessing Officer issued multiple notices seeking details regarding exempt income, mutual fund investments, and the computation of disallowance under section 14A. The assessee furnished the required information and made a suo motu disallowance of Rs. 1.69 crore under section 14A, calculated at 1% of the average value of investments that yielded exempt income, which the AO accepted after examination.

The PCIT invoked revision under section 263 alleging under-assessment of disallowance under section 14A. The PCIT recomputed the disallowance under Rule 8D at Rs. 13.38 crore and enhanced the assessee’s income by Rs. 11.69 crore. Aggrieved, the assessee appealed before the Income Tax Appellate Tribunal.

Central Issue: Whether revision under section 263 was valid when the Assessing Officer had already examined the issue of disallowance under section 14A during assessment proceedings.

Tribunal’s Ruling: The Income Tax Appellate Tribunal allowed the assessee’s appeal and quashed the revision order. It held that the AO had conducted detailed inquiries and accepted the assessee’s computation after verification. The Tribunal also noted that restricting disallowance to investments yielding exempt income was supported by the Delhi High Court decision in ACB India Ltd. v. ACIT.

The Tribunal emphasised that revision under section 263 is permissible only in cases of “lack of inquiry“, not merely “inadequate inquiry“, and relied on precedents including CIT v. Vikas Polymers, CIT v. Sunbeam Auto Ltd., ITO v. D.G. Housing Projects Ltd., and PCIT v. Delhi Airport Metro Express (P) Ltd. Accordingly, the Tribunal held that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue and set aside the PCIT’s order.

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