ORDER
K.C. SINGHAL, J.M.:
This appeal by the assessee is directed against the order of the CIT, Pune under s. 263 pertaining to the asst. yr. 1992-93.
2. The brief facts of the case are these .- The assessee is engaged in the business of manufacture and sale of bidis since asst. yr. 1975-76. The activity of manufacturing is being carried on at various centres located in various States.
In the past, the assessee had been claiming deductions under ss. 80J, 80HH, 80HHA, 80-1 and 8-IA. Such claims were allowed to the assessee. During the asst. yr. 1992-93, such claims were also claimed and allowed by the AO vide his order dt. 20th March, 1995.
3. In the meanwhile, the assessment for asst. yr. 1990-91 was reopened by issue of notice under s. 148 dt. 30th March, 1994. In the reassessment proceedings, the deductions allowed to the assessee in the original assessment under ss. 80HH,. 80HHA and 80-1 were withdrawn on the ground that new industrial undertaking had been formed by reconstruction of the business already in existence. According to the AO it was merely a question of splitting of existing unit in backward area.
4. The CIT issued notice under s. 263 on 11th March, 1997 in respect of asst. yr. 1992-93 as according to her, the order of the AO was found to be erroneous and prejudicial to the interest of Revenue, inasmuch as the deductions under ss. 80HH, 80HHA, 80-1 and 80-IA had been wrongly allowed by the assessee. In response to the said notice, the counsel for the assessee attended the office of the CIT on 20th March, 1997, and filed written submissions. After considering the submissions of the learned counsel for the assessee, she was of the view that the AO had merely accepted the claim of the assessee without exarnining the claim of the assessee under the aforesaid two sections. Since the AO did not make any enquiry regarding eligibility of the claim of the assessee, she was of the view that the order of the AO was erroneous and prejudicial to the interest of Revenue. She, therefore, set aside the order of the AO and restored the mater to his file for making assessment afresh after examining the claim of the assessee under ss. 80HH, 80HHA, 80-1 and 80-IA in accordance with the law after giving due opportunity of being heard to the assessee. Aggrieved by the same, the present appeal has been preferred by the assessee.
5. The learned counsel for the assessee Mr. K.A. Sathe vehemently assailed the order of the CIT under s. 263 by submitting that the provisions of s. 263 had been wrongly invoked by the CIT. He has filed a statement of facts describing the activities of the assessee right from the inception. It has been stated that the activity of manufacturing bidis was started in asst. yr. 1975-76 and the claim under s. 80-1 was allowed. Such claim was also allowed in the year 197677 and no additional-tax was levied under s. 104 of the IT Act as the profits were derived from an industrial company. In 1977-78 in addition to the claim under s. 80J the claim under s. 80HH was also allowed. Thereafter such claims were allowed upto the asst. yr. 1985-86. The additional claims under ss. 80HHA and 80-1 were also allowed for 1988-89. Subsequently, all the above claims have been allowed upto asst. yr. 1992-93 though such claims has been withdrawn for asst. yr. 1990-91 under reassessment proceedings.
6. It was brought to our notice that during the asst. yr. 1992-93, i.e., the year under consideration, only two new centres were started-(l) at Pegdapalli in Nizamabad District and second at Sulochana in Thirunelvalli, in respect of which deduction under s. 80-IA only has been claimed by the assessee. The claim of the assessee under ss. 80HH, 80HHA and 80-1 related to other centres set up in the earlier years. At this stage, a query was raised from the Bench whether any details or materials were filed in support of its claim with reference to new unit set up during the year under consideration. In response to the same, it was admitted by Mr. Sathe that no material or evidence was filed either before the AO or before the CIT in respect to the new centres set up during the year under consideration.
7. Various submissions were raised by Mr. Sathe. The first submission was that there was no material on record on the basis of which the CIT could come to the conclusion that new units set up by the assessee over the years were by way of splitting up or reconstruction of the old business. In support of his contention, he relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom) at page 116. According to him, the settled position should not be unsettled in an arbitrary manner. He fairly conceded that the principles of res judicata are not directly applicable to the inccme-tax proceedings but it was contended by him that this rule is subject to limitation, i.e., there should be finality and certainty in all litigations and the earlier decision on the same question should not be reopened if that decision is not arbitrary or perverse. The earlier decision can be reopened only where some fresh material is brought on record which may justify to take a view different from the view taken in the earlier years. In support of his contention, he relied on the decision of the Bombay High Court in the case of H.A. Shah & Co. vs. CIT (1956) 30 ITR 618 (Bom) and the decision of the Hon’ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. vs. ]TO 1977 CTR (SQ) 32 : (1977) 106 TTR 1 (SQ) and in the case of Radhasaomi Satsang vs. CIT (1991) 100 CTR (SQ 267: (1992) 193 ITR 321 (SO. In this connection, he also relied on the decision of the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CTT (1979) 11 CTR (Gui) 139: (1980) 123 ITR 669 (Guj), wherein it has been held that relief of tax holiday could not be denied to the assessee held that relief of tax holiday could not be denied to the assessee without disturbing the relief granted in the initial year. He also relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Paul Bros. (1995) 216 ITR 548 (Bom), wherein it has also held that unless deduction allowed in the earlier years were withdrawn, they could not be denied in the subsequent years.
8. It was his submission that there was no fresh material with the CIT to take a different view. The CIT herself was not sure whether there was splitting up or reconstruction of the eAsting business. She had merely restored the matter for making enquiries in this regard. It was contended by him that the provisions of s. 263 could not be invoked for making fishing or roving enquiry. In this connection, he referred to the decision, Pune Bench in the case of Bajaj Auto Employees’ Welfare Fund vs. ITO (1987) 27 TTJ (Pune) 64 and the decision of the Madhya Pradesh High Court in the case of CIT vs. Shri Govindram Seksariya Charity Trust (1987) 65 CTR (MP) 28 : (1987) 166 ITR 580 (MP) and the decision of the Punjab & Haryana High Court in the case of CTT vs. Kanda Rice AMs (1990) 85 CTR (P&H) 5: (1989) 178 ITR 446 (P&H). It was further contended by him that even on merits, the various centres opened by the assessee over the years were new units. He drew our attention to the order of reassessment pertaining to the asst. yr. 1990-91 wherein the assessee had submitted before the AO that the old centres continued when new centres were reopened without transferring the workers of old centres to new centres. The workers for the new centres were entirely new and in each centre there were more than 20 workers. In this connection, the assessee had relied upon the decision of the Supreme Court in the case of Textile Machinery Corpn. Ltd. vs. CIT 1977 CTR (SQ) 151 (1977) 107 1TR 195 (SQ). The contention of the assessee had been rejected arbitrarily by the AO by relying on the decision of the Kerala High Court in the case of Chembra Peak Estates Ltd. vs. CIT (1972) 85 ITR 401 (Ker).
It was submitted by him that the decision of the Kerala High Court is distinguishable on facts of the case, inasmuch as there was a finding in that case to the effect that the entire tea leaves which were being manufactured in the single factory was now manufactured in both the factories. It is on the basis of this finding that it was held that it was a case of splitting of business already in existence. According to him, his case was squarely covered by the decision of the Supreme Court in the case of Textile Machinery Corpn. Ltd. (supra).
9. His next submission was with reference to the doctrine of merger. According to him, the claim of the assessee under ss. 80HH, 80HHA and 80-IA was the subject-matter of consideration by the CIT(A) in respect of the year under consideration and, therefore, the order of assessment merged with the order of the CIT(A) with reference to this issue. In support of his contention, he relied on the decision of the Calcutta High Court in the case of Oil India Ltd. vs. CIT (1982) 27 CTR (Cal) 259: (1982) 138 ITR 836 (Cal).
10. His next submission was that the deduction under the aforesaid sections could not be denied to the assessee merely on the ground that there were common books and management. In this connection, he relied on the decision of the Patna High Court in the case of CIT vs. Hindustan Malleables & Forgings Ltd. (1991) 191 ITR 70 (Pat) and the decision of the Bombay High Court in the case of CIT vs. Mazagaon Dock Ltd. (1991) 191 ITR 460 (Bom).
11. Lastly, it was contended by him that even if two views are possible one which is favourable to the assessee should be accepted. He relied on the decision of the Tribunal, Delhi Bench in the case of Monarch Foods (P) Ltd. vs. Asstt. CIT (1995) 52 TTJ (Ahd)(TM) 294.- (1995) 53 ITD 33 (Ahd)(TM).
12. On the other hand, the learned senior Departmental Representative vehemently opposed the submissions of the assessee’s counsel Mr. Sathe. His first submission was that each assessment is separate and independent year and therefore, principles of res judicata cannot be applied to the income-tax proceedings. In this connection he referred to the decision of the Hon’ble Supreme Court in the case of CTT vs. Guilargravures (P) Ltd. 1978 CTR (SQ) 1 : (1978) 111 ITR 1 (SQ), wherein it has been held that exemption cannot be granted merely on the ground that it was allowed in the subsequent years, On the same analogy, he contended that the Department should not be compelled to give in relief to the assessee merely on the ground that it was granted earlier. According to him, the conditions for eligibility of the deductions under the various sections are to be considered in each assessment year. In this connection, he further relied on various decisions of the High Courts i.e., CIT vs. Ramesh Biscuit Factory (1994) 205 ITR 205 (All), Viswanathan SiLk Centre vs. CIT (1994) 116 CTR (Mad) 372 : (1993) 203 ITR 131 (Mad), CIT vs. Seeyan Plywoods (1991) 97 CTR (Ker) 289: (1991) 190 ITR 564 (Ker) and CIT vs- Sateffite Engg. Ltd. 1978 CTR (Gui) 199: (1978) 113 ITR 208 (Gui).
13. His next submission was that the AO had not made any enquiry which was required to be made by him under the law. Whatever enquiry was made by him related to the computation of business income with reference to the dividends and interest on IDBI, etc. Since the AO had failed to make enquiries with reference to the eligibility of the claim under the various sections, the order of the AO was erroneous and prejudicial to the interest of Revenue. In this connection, he relied on the Supreme Court decisions in the case of Rampyah Devi Saraogi vs. CIT (1968) 67 TTR 84 (SQ), Gee Vee Enterprises vs. AddL CIT (1975) 99 rTR 375 (Del), Addl. CIT vs. Mukur Corpn. (1978) 111 TTR 312 (Guj), K.A. Ramaswamy Chettiar & Anr. vs. CTT (1996) 135 CTR (Mad) 176: (1996) 220 ITR 61,57 (Mad) and the decision of the Tribanal in the case of Mgh Range Breweries Ltd. vs. ITO (1982) 1 ITD 854 (Bang). In this connection, he also drew our attention to the paper-book filed by the Department. He drew our attention to the notice issued by the AO under s. 142(l) which contains queries relat,.ng to the trading profits. No queries had been raised by him in connection with the claim of the assessee under various sections. He also referred to the reply of the assessee in response to the notice under s. 263 dt. 20th March, 1997. In para 2.3 the assessee has stated that for opening the new centre it required premises wherein bhattis were to be installed. He drew our attention to the paper-book filed by the Department to the effect that there was no addition to the building account during the year under consideration. It shows that there was no material for opening the new centre. No query is made by the AO in this regard. Even there is no addition to the plant and machinery in the balance sheet. Therefore, there was a lack of application of mind at the hands of the AO. In this connection, he referred to the decision of the Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 104 CTR (SQ) 116 : (1992) 196 ITR 188 (SO. It was also pointed out by him that the AO had only applied his mind with respect to the dividends and interest on IDBI but no enquiry has been made with reference to other interest for the purpose of computing the business. He referred to the decision of the Kerala High Court in the case of CIT vs. Cochin Refineries Ltd. (1982) 27 CTR (Ker) 147.- (1982) 135 TFR 278 (Ker).
14. His next submission was that the deduction is to be allowed with reference to the income derived from the industrial undertaking. According to him, the income of each industrial undertaking should have been computed by the AO. No enquiry had been made by him in this regard. In this connection, he referred to the decision of the High Court in the case of ClT vs. HMT Ltd. (1993) 203 TTR 811 (Kar) and the decisions of the Tribunal in the case of HMT Ltd. vs. Dy. CIT (1996) 55 TTJ (Bang) 160: (1996) 59 ITD 76 (Bang) and HMT vs. Dy. CIT (1997) 57 TTJ (Bang) 39.
15. His next submission was that on merits, it was a case of reconstruction of splitting up of the e)dsting business. In this connection, he relied on the decisions of CIT vs. Travancore Rayons Ltd. & Anr. (1986) 50 CTR (Ker) 51 : (1987) 164 ITR 134 (Ker) and Chembra Peak Estates Ltd. vs. CIT (supra). At this stage, the Bench referred to the decision of the Supreme Court in the case of Century Enka Ltd. 100 STC (sic) which had been considered by this Bench in some other case. To this it was submitted by him that the decision of the Supreme Court in that case is distinguishable on facts.
16. Regarding the doctrine of merger, it was his submission that the entire assessment does not merge in the order of the CIT(A). It is merged only to the extent to which it is considered by the appellate authority. In this connection, he referred to the decision of the Bombay High Court in the case of Ritz Ltd. & Anr vs. Union of India & Ors. (1990) 83 CTR (Bom) 177 : (1990) 184 ITR 599 (Bom), Hamilton & Co. (P) Ltd. vs. CIT (1991) 187 ITR 568 (Cal) and Supreme Court decision in the case of reported as Aff? 1967 SC 681. Since the aspect of splitting of reconstruction of the existing business was not considered by the CIT(A) it cannot be said that the order of assessment merged with the order of the appellate authority. Therefore, according to him, the CIT could invoke the jurisdiction under s. 263 of the Act.
17. With reference to the last submission of the assessee’s counsel, it was submitted by him that even where there are two views the CIT has jurisdiction to invoke the provisions of s. 263. In this connection, he relied on the decision of the Gujarat High Court in the case of CIT vs. MM Khambhatwala (1992) 198 ITR 144 (Guj).
18. Lastly, it was contended by him that even in the earlier years, there was no conclusive finding that there were industrial undertakings eligible for deduction under various sections. He referred to the decision of the Supreme Court in the case of Radhasoami Satsang vs. CIT (supra) and the decision of the Tribunal Bombay Bench in the case of KEC International Ltd. vs. TTO (1994) 51 ITD 178 (Bom) and the decision of the Pune Bench of the Tribunal in the case of Mayur Trading Co. vs. ITO (1991) 39 ITD 49 (Pune). In connection with the case law relied upon by the assessee’s counsel, it was submitted by him that these were distinguishable on the facts of the case.
19. In reply, the learned counsel for the assessee submitted that the learned Departmental Representative is only supposed to support the order of the CIT under s. 263. It was his submission that the learned Departmental Representative had extended the scope of his argument. It was submitted by him that unless CIT points out what enquiries were made, it was not possible for the assessee to defend his case. Therefore, the assessee is to attack the order of the CIT only on the ground which had been taken by the CIT in her order under s. 263. In this connection, he relied on the decision of the Punjab & Haryana High Court in the case of CIT vs. Jagadhri Elect7ic & Industtial Co. (1981) 25 CTR (P&H) 94 : (1983) 140 ITR 490 (P&H). He submitted that the points argued by the learned Departmental Representative were not before the CIT for consideration and, therefore, the same should not be considered in this appeal. He, therefore, concluded that the Tribunal should consider only those points which were considered by the CIT in her order.
20. Rival submissions of the parties as well as the case law referred to by them have been considered carefully, It is well-settled position of law that in order to assume jurisdiction under s. 263 the CIT must satisfy himself prima facie that the order of the AO is erroneous and prejudicial to the interest of Revenue.
Such satisfaction must be based on the material on record. The assumption of jurisdiction under s. 263 cannot be made in an arbitrary manner. If there is no material on record to satisfy him prima facie thatlaforesaid two conditions are present, then the provisions of s. 263 cannot be invoked. In this connection, reference may be made to the decision of the Hon’ble High Court in the case of CIT vs. Gabriel India Ltd. (supra). Relevant portion is reproduced below :
There must be material available on record called for by the CIT to satisfy him prima facie that the aforesaid two requisites are present. If not he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such material must have materials on record to satisfy it in that regard. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the CIT.
21. Once there is a valid initiation of proceedings under s. 263, then the CIT is required to give a reasonable opportunity of being heard to the assessee. This is one of the principles of natural justice which has been embodied in the provisions of s. 263 itself. The purpose of giving such opportunity is that the affected person has right to defend himself. Unless the basis to assume the jurisdiction is confronted to the assessee, he cannot defend himself. Therefore, the CIT is required to point out to the assessee, how the order of the AO is erroneous and prejudicial to the interest of the Revenue. After considering the objections of the assessee, if the CIT comes to the conclusion that the order of the AO is erroneous and prejudicial to the interest of Revenue, then he may revise the order himself or may restore the matter to the file of the AO for making the assessment afresh in the light of the directions given by the CIT and in accordance with the law.
22. It iEj equally well established where the AO fails to make the necessary enquiries which he is legally required to make and decide the issue without making such inquiries, then the order of the AO would be erroneous in law. Reference can be made to the decision of the Supreme Court in the case of Rampyari Devi Saraogi vs. CIT (supra).
23. The merits of the present case require examination in the light of the aforesaid legal principles. In the present case, the assessee had set up various units over the years right from the asst. yr. 1975-76 and had been claiming various units over the years right from the asst. yr. 1975-76 and had been claiming various deductions under ss. 80HH, 80HHA and 80-1. As far as the year under consideration is concerned, only two units were set up by the assessee-one at pegdapalli and the other at Sulochana in respect of which deduction under s. 80-IA only has been claimed.
24. Firstly, we will consider the validity of the order of the CIT with reference to the two new units set up during the year under consideration. The eligibility of deduction under s. 80-IA depends upon the fact whether the conditions given in sub-s. (2) are fulfilled or not. We have gone through the material placed before us. A copy of the notice under s. 142(l), dt. 10th Nov., 1994, issued by the AO in respect of the asst. yr. 1992-93 is placed in the paper-book filed by the Department at pp. 1 and 2. The assessee had been directed to furnish various details relating to the trading result. The perusal of the notice shows that no queries were raised by the AO with reference to the claim of the assessee under s. 80-IA in respect of the new units set up during the year under consideration. The learned counsel for the assessee Mr. Sathe has also fairly conceded before us that no material whatsoever was furnished either before the AO or before the CIT in support of its claim under s. 80-IA and in respect of the units set up during the year under consideration. In view of the legal position mentioned above, we hold that the order of the AO was erroneous and prejudicial to the interest of Revenue with reference to the claim of the assessee in respect of the two units set up during the year under consideration. To that extent the CIT was justified in assuming the jurisdiction under s. 263 of the Act.
25. Now we will examine the validity of the order of the CIT under s. 263 of the Act with reference to claim of the assessee under ss. BOHH, 80HHA and 80-1 in respect of the units set up over the years prior to asst. yr. 1992-93. We have gone through the impugned notice issued by the CIT in which the foll ‘ owing reasons have been given for assuming the jurisdiction.
(1) The very footing on which these deductions had been claimed is not free from doubt as the AO had failed to examine as to whether these centres were industrial undertaking within the meaning of ss. 80HH, 80HHA and 80-1. He also failed to examine the basic requirements, viz. :
(a) investment of substantial fresh capital in the industrial undertaking; (b) employment of requisite labour therein;
(c) manufacture or production of articles in the said undertaking; (d) a separate and distinct identity of the industrial unit set up.
(2) The AO ought not to have allowed the deduction of income from bank interest and other incomes.
(3) The AO failed to examine the applicability of the provisions of s. 80HH(9A)
of the Act.
(4) He failed to examine the applicability of the provisions of s. 80-1(6).
He also mentioned that the AO has failed to examine the applicability of provisions of s. 80-IA(7) with which we are not concerned, since the claim of the assessee under s. 80-IA is restricted to new units set up during the year 1992-93 in respect of which we have already held that the order of the CIT was valid one.
26. The assessee filed written submissions before the CIT vide its letter dt. 20th March, 1997 with reference to each objection mentioned in the notice under s. 263. After considering the written submissions of the assessee, the CIT has restricted herself to a few issues which are mentioned in para 4 of her order. For the convenience the same are being reproduced below :
(1) According to the assessee, the basic issue once settled, cannot be reopened.
(2) According to the assessee all the conditions are satisfied for allowability of deductions under the aforesaid sections.
(3) According to the assessee, the AO has seen every aspect and only thereafter he has arrived at conclusion that the assessee is eligible for deduction under the aforesaid sections.
(4) According to the assessee, principle of merger applies to the facts of the case.
(5) Assumption of jurisdiction under s. 263 is bad in law in view of Bombay High Court decision in the case of Gabriel India Ltd, (supra).
She decided all these issues against the assessee for the reasons given in para 4.1 to 4.5. Ultimately, she held that the order of the AO was erroneous and prejudicial to the interest of Revenue and consequently the order of the AO was set aside with a direction to examine the claim of the assessee afresh in accordance with law after giving the opportunity of being heard to the assessee.
27. In view of the facts narrated above, we find that the order of the AO has been held to be erroneous on the following grounds :
(1) that various units set up by the assessee in the earlier years were formed either by way of reconstruction or splitting up of the business already in existence;
(2) the activity of the assessee making bidis did not amount to manufacture or production of an article or thing; and
(3) AO has wrongly allowed the deduction in respect of income from banking interest and other income at Rs. 8.64 lakhs.
28. After considering the submissions of the parties, we are of the view that the order of the AO cannot be held to be erroneous an the ground that the units set up by the assessee in the earlier years were formed either by reconstruction or splitting up of the business already in existence and the activity of the assessee did not amount to manufacture or production of an article or thing. In our opinion, the condition regarding formation of units can be examined in the initial year in which the manufacture or production was commenced. This view of ours is based on the use of word ‘formed’ in sub-s. (2) of the respective sections by the legislature. This view has also been taken by this Bench in the case of Vintage Cards & Creations vs. Asstt. CIT (1996) 59 ITD 563 (Pune). Therefore, the AO was not required to examine the issue again in the year under consideration in respect of the units formed in the earlier years. There is another reason to decide the issue in favour of the assessee. The Hon’ble Bonbay High Court in the case of CIT vs. Paul Bros. (1995) 216 ITR 548 (Bom) has held that unless the deduction allowed in the earlier years are withdrawn, the same could not be denied to the assessee in the subsequent years. In that case, the assessee had branches in backward area and the claim under s. 80HH was allowed for asst. yrs. 1980-81 and 1981-82. For similar reasons, the claim for asst. yr. 1982-83 was also allowed by the AO. However, the CIT in the revisional jurisdiction under s. 263 of the Act passed orders quashing the orders for the asst. yrs. 1981-82 and 1982-83. The Tribunal set aside the order of the CIT. On reference, it was held by the Hon’ble Bombay High Court that since the deduction had been allowed for asst. yr. 1980-81 on same ground the same could not be denied for the subsequent years. In view of the binding decision of the Hon’ble Bombay High Court, it cannot be said that the order of the AO was erroneous. The CIT herself was not sure whether the units formed in earlier years were by reconstruction or splitting up of business already in existence, There was no fresh material with CIT for holding as such. The order of CIT was merely based on suspicion and which cannot be sustained.
29. For the similar reasons, it cannot be said that the AO dated erroneously in not examining the issue whether the activity of the assessee amounted to manufacture or production of bidis or not. This aspect had not been examined by the AO in detail in the initial years. We have gone through the material placed before us. Initially the claim of the assessee under s, 80J was not allowed for asst. yr. 1975-76 on the ground that manufacture of bidis was not an industrial undertaking. Against the said order, an application under s. 154 was made by submitting that the activity of the assessee, i.e., making of bidis amounted to manufacture. After considering the submissions of the assessee, the AO vide his order dt. 7th April, 1976 allowed the claim of the assessee under s. 80J by rectifying his earlier order. It has been mentioned in the statement of facts that again in view of the audit objection, the AO once again issued notice under s. 154 seeking to withdraw the claim granted by him under s. 80J on the ground that the manufacture of bidis was not an industrial undertaking. The assessee again replied on 6th Sept., 1976 and thereafter, the proceedings under s. 154 were dropped, These facts are not in dispute. Therefore, once a particular decision has been taken in respect of a legal issue in the earlier years, the same should not be disturbed in the year under consideration unless there was fresh material before the CIT. It is not a case of the CIT that the activity of making bidis could not be treated as manufacturing activity in view of any subsequent decision rendered by the Court. Therefore, in the absence of any fresh material, the earlier legal finding could not be disturbed in view of the decision of the Bombay High Court in the case of Paul Bros. (supra). Accordingly, the order of the AO in our view, was in accordance with law.
30. The learned senior Departmental Representative heavily relied on the proposition that the principles of res judicata are not applicable to the incometax proceedings, inasmuch as each year is an independent year. Various decisions have been cited by him in support of his contention. There cannot be a dispute to such proposition. But this proposition is subject to exceptions as laid down by the Hon’ble Bombay High Court in the case of H.A. Shah & Co. vs. CITICEPT (1956) 30 ITR 618 (Bom) relied upon by the assessee’s counsel. One of the exceptions is that there should be finality and certainty in all the litigations including the litigation arising out of IT Act and the earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due enquiry, if no fresh facts are placed before the Tribunal giving the latter decision. Reference may also be made to the decision of the Hon’ble Supreme Court in the case of Radhasoan2i SatSang (supra) wherein it has been laid down as under :
“Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”
In view of the aforesaid legal position, it is to be held that the deductions under ss. 80HH, 80HHA and 80-1 could not be denied by the AO unless the deductions allowed in the initial years were disturbed. Since there was no fresh material before the CIT, in our opinion, the CIT could not assume jurisdiction under s. 263 on the ground that the order of the AO was erroneous in law and he failed to examine the issue whether the units formed in the earlier years were by way of reconstruction or splitting up of the business already in existence and whether the activity carried on by the assessee amounted to manufacture or not.
31. Now remains the only issue to be considered is whether the deduction under the aforesaid sections could be allowed in respect of bank interest and other miscellaneous income. In our opinion, the CIT could not invoke the provisos of s. 263 in respect of this matter on the ground of doctrine of merger. There was a dispute before the AO with regard to the meaning of the words 11 profits derived from the industrial undertaking”. The assessee included the income by way of dividends on units of UTI, interest on IDBI deposits, interest on bank deposits and other incomes. However, the AO was of the view that the dividend received on units of UTI and interest on IDBI deposits could not be included in the gross total income for the purpose of claiming deduction under ss. 80HH, 80HHA, 80-1 and 80-IA. This matter was considered by the CIT(A). It was ultimately held by him that income by way of dividend on units of UTI and interest on IDBI deposits could not be included in the gross total income. The question for consideration is whether the doctrine of merger applies to the facts of the present case. The amendment to s. 263 now rests the controversy which prevailed in the earlier years. Clause (c) to the Explanation after s. 263(l) now clearly provides that the CIT has power to examine such matters which had not been considered and decided in such appeal. In the present case, the controversy before the AO was whether the dividend income and interest on the bank deposits could be included in the gross total income or not. This very matter was considered by the CIT(A). Therefore, in our opinion, the order of the AO merged with the order of the CIT(A) as far as this matter is concerned. The case law relied upon by the learned senior Departmental Representative are distinguishable on the facts, inasmuch as the subject-matter of appeal as well as the subject-matter of revision were entirely different. The decision of the Calcutta High Court in the case of Oil India Ltd. vs. CTT (supra) relied upon by the assessee’s counsel is much nearer to the facts of the present case. In that case, the appeal before the AAC related to the rate of depreciation of building to be taken into account for the purpose of disallowance under s. 40(a)(v) and the question whether depreciation should be calculated on the basis of user of the building for 12 months or 11 months was not a specific aspect which was agitated before the AAC nor was it one on which he gave any direction. It was held that as the quantum of depreciation was the subject-matter of appeal, the CIT had no jurisdiction under s. 263 to revise the order with reference to the aspect not dealt with by the AAC. In the present case also, the subject-matter was the computation of profits derived from industrial undertaking. Merely the aspect of bank interest was not dealt with by the CIT(A) it cannot be said that the subject-matter was not considered by the CIT(A). Therefore, following the decision of the Calcutta High Court (supra) we hold that the CIT could not invoke the jurisdiction under s. 263 with reference to the aforesaid matter.
32. Before parting with our order, we would like to mention that the learned senior Departmental Representative advanced various submissions to the effect that the AO failed to examine various aspects vis-a-vis the deductions under ss. 80HH, 80HHA and 80-1. In our opinion, it is not necessary for us to deal with those submissions, inasmuch as the duty of the Tribunal is to test the validity of the order of the CIT vis-a-vis the grounds on the basis of which the order of the AO was ultimately held to be erroneous in law. This is what has been held by the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Jagadhari Electricity Supply & Industrial Co. Ltd. (supra). The relevant portion of the judgment is quoted below :
The CIT has the exclusive jurisdiction under s. 263(l) of the Act to revise the order of the ITO. The order of the CIT passed under s. 263(l) will contain the grounds for holding the order of the ITO to be erroneous, as contemplated by that section. In the appeal against an order under s. 263(l) the assessee is to attack the order of the CIT and to challenge the grounds of decision given by him in his order. If the assessee can satisfy the Tribunal that the grounds for the decision given in the order by the CIT are wrong on facts or are not tenable in law, the Tribunal has no option, but to accept the appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CIT as well. If the Tribunal is allowed to find out the ground available to the CIT to pass an order under s. 263(l), then it will amount to a sharing of the exclusive jurisdiction vested in the CIT which is not warranted under the Act.”
In view of the above observations of their Lordships, the order of CIT cannot be justified on the grounds other than the one considered by her for holding the order of the AO to be erroneous in law. The assessee had replied to each objection of CIT. The CIT has ultimately restricted to few grounds because she must have been satisfied with the reply of assessee otherwise she would not have said in para 4 that submissions of assessee boiled down to five issues with which we have already been dealt with.
33. In view of what we have discussed above, we are unable to uphold the order fully. We uphold the order under s. 264 only with reference to the units set up during the year under consideration. However, we quash the other pdrt of the order which holds the order of AO as erroneous and prejudicial to the interest of Revenue vis-a-vis the units formed in the earlier years.
34. In the result, the appeal of the assessee is partly allowed.