Section 263 revision is impermissible where erroneous depreciation allowance does not result in tax prejudice.

The respondent-assessee, a private limited company in the power industry, filed a return for AY 2015-16 declaring NIL income due to losses

The case underwent limited scrutiny, and the assessment was completed under Section 143(3) of the Income Tax Act, 1961, accepting the NIL income

Later, the Principal Commissioner of Income Tax (PCIT) invoked revisional jurisdiction under Section 263, observing that the assessee claimed 80% depreciation on a windmill instead of the statutory 15% applicable to installations after March 31, 2012

The PCIT quashed the assessment, but the Income Tax Appellate Tribunal (ITAT) subsequently set aside the PCIT’s order

1. Whether the ITAT erred in quashing the revision order passed under Section 263 of the Act when the original assessment was admittedly erroneous

2. Whether an erroneous allowance of excess depreciation is "prejudicial to the interest of the revenue" if the assessee’s income remains NIL even after correcting the depreciation rate

Section 263 of the Income Tax Act, 1961, which empowers the Commissioner to revise an order only if it is both "erroneous" and "prejudicial to the interests of the revenue"

The court followed the established principle that both twin conditions must be satisfied simultaneously to invoke revisional jurisdiction

CBDT Notification No. 15 of 2012 regarding the revised depreciation rates (15%) for windmills

The court noted that while the Assessing Officer committed an "error" by allowing 80% depreciation instead of 15%, the second limb of Section 263—prejudice to the Revenue—was not satisfied

The Tribunal found as a matter of fact that even if the depreciation were capped at 15%, the assessee would still have a business loss, resulting in NIL taxable income for the year under consideration

Furthermore, the court observed that the windmill was sold in AY 2019-20, and the assessee had already offered Short Term Capital Gains for tax at that stage. Since there was no positive taxable income from the year of installation until the year of sale, the inflated depreciation did not result in any actual loss of tax revenue

The High Court dismissed the Revenue's appeal, holding that no substantial question of law arose