The Kerala High Court has ruled that the Income Tax Department is justified in invoking revisional jurisdiction under Section 263 of the Income Tax Act, 1961, in situations where the Assessing Officer (AO) fails to examine the core issue during assessment, even if documents have been furnished by the assessee.
The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harisankar V. Menon observed that the AO had accepted the assessee’s position without adequately scrutinizing whether the sale of its “Test House Division” qualified as a slump sale under Section 50B or should be treated as a transaction falling under Section 50 involving short-term capital gains.
The assessee-company was engaged in two business divisions — Fertilizer Division and Test House Division. During the relevant financial year, the Test House Division was sold, and the assessee declared the transaction as a slump sale under Section 50B of the Act. A scrutiny assessment under Section 143(3) was completed in December 2018, with the AO observing that all supporting documents related to capital gains were verified.
Subsequently, the Commissioner issued a notice under Section 263 stating that the AO had failed to determine whether the transaction truly qualified as a slump sale. The Commissioner held that the assessment order was both erroneous and prejudicial to the interests of the Revenue. This finding was upheld by the Income Tax Appellate Tribunal (ITAT) in February 2024, prompting the assessee to approach the High Court.
The Court emphasized the principles laid down by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT, ruling that revision under Section 263 is valid where:
- The assessment order is erroneous; and
- Such error is prejudicial to revenue interests.
The High Court noted that although documents were furnished, the AO had not carried out statutory adjudication to determine the correct nature of the capital gains arising from the sale of the business division. The Bench stated that merely acknowledging documents without applying the law does not constitute a proper assessment.
While upholding the exercise of power under Section 263, the Court clarified that the assessee retains the right to contest the revised assessment on its merits before the appropriate authority. Any observations in the Commissioner’s revisional order would not preclude the assessee from arguing the correct tax treatment before the AO or Appellate Authorities.
The High Court dismissed the appeal and affirmed the ITAT’s decision, thereby upholding the authority of the Income Tax Commissioner to revise assessments where lack of proper inquiry leads to erroneous outcomes.
Case Details
Case Title: Sterling Farm Research And Services Pvt. Ltd. Versus The Commissioner Of Income Tax
Case No.: ITA NO. 55 OF 2024
Date: 21/10/2025
Counsel For Petitioner: Kuryan Thomas
Counsel For Respondent: Jose Joseph
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