1. In this appeal by the assessee, the main point we have been called upon to decide is whether in an assessment completed by the ITO, as per direction of the Commissioner under Section 263 of the Income-tax Act, 1961 ('the Act'), the assessee can claim any further deduction, not claimed by them in the original assessment proceedings.
2. The assessee is a limited company having a business in textile mills. The original assessment was completed on 31-3-1975. The Commissioner set aside the original assessment by an order passed under Section 263 on 4-1-1977. It is not necessary for us to go into the question about the validity of this order. Suffice it to say that the order under Section 263 was not challenged on appeal.
3. In the reassessment proceedings consequent to Section 263 order, the assessee claimed certain further deductions which had not been claimed by them in the original proceedings. On appeal, the Commissioner (Appeals) held that the ITO, having completed an assessment on regular basis, could not review his own order by allowing the assessee to make fresh claims in the assessment consequent to Section 263 order. Since the original assessment order was set aside by the Commissioner on specific point, he held that the ITO could confine himself only to the particular point on which the original assessment order was set aside.
He held that the orders of the Commissioner (Appeals) under Section 263 did not have the effect of reopening the entire assessment. Since these fresh claims now made were not before the ITO at the time of the original assessment proceedings, the ITO was justified in not considering the assessee's claims. He also observed in respect of the claim for deduction of the liability for payment of gratuity that the 'relevant materials were not made available to the ITO at the time of the original assessment proceedings.
4. Against this finding, the assessee has now come on appeal. Shri Bagaria, appearing for the assessee-company, submitted that by the order passed under Section 263, the Commissioner has set aside the original assessment order. The original order of the ITO dated 31-3-1975 had become non est. Thereafter, when the ITO proceeds to make an assessment, it is for all purposes a regular assessment proceeding.
He submitted that it is open for the assessee, therefore, to make any claim and it is immaterial whether in the set aside proceedings, the assessee had made the similar claim. For the purpose of showing that it is open for the assessee to make fresh claims, Shri Bagaria relied on the decision of the Allahabad High Court in the case of J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. CIT  47 ITR 906 and the decision of the Madras High Court in the case of CIT v. Seth Manicklal Fomra  99 ITR 470. Shri Bagaria admitted that these decisions are connected with the powers of the ITO in setting aside assessments consequent to the directions of an appellate authority. But, he submitted that the same position would be applicable where the revisionary authority exercises his power under Section 263. Shri Agarwala, for the department, submitted that the Commissioner has not completely set aside the assessment order of the ITO. He has set aside only partially.
The ITO is only directed to make certain limited enquiries. The matter concerned is only in respect of a single item. Under these circumstances, it is not open to the assessee to expand the scope of the proceedings before the ITO.5. We have considered the facts of the case and we are of the opinion that the department's contention must be accepted. The powers exercised by the Commissioner under Section 263 are, as the marginal note says, revisional powers to correct order passed by the ITO which has led to loss of revenue; when the Commissioner is satisfied that an order passed by the ITO is erroneous and as a consequence, the interest of the revenue had become prejudiced or in other words lost, then the Commissioner, after hearing the assessee, can pass such order as the circumstances would justify. These orders would include modification, enhancement, cancellation of the assessment or directing a fresh assessment. The proceedings before the ITO, as a consequence of the order under Section 263, would be directed to garner the extra revenue which was lost on account of the erroneous nature of the original order. Whatever power the ITO has, must be confined to exercise of eliminating the error which had caused prejudice to the revenue. It is not open for the ITO to entertain any fresh claim on this point.
6. In many ways, the proceedings before the ITO, on these circumstances, would be similar to the reopened proceedings under Section 147 of the Act, Now, the decision of the Bombay High Court in respect of the powers of the ITO in a reopened proceeding, as given in the case of CWT v. Ballarpur Industries Ltd.  118 ITR 711, could be usefully referred to. This decision is in respect of wealth-tax provisions but the law on the point is in pari materia with the provisions in income-tax. In fact, their Lordships referred to a decision given under the Act of the Bombay High Court in the case of Kevaldas Ranchhodas v. CIT  68 ITR 842. They have observed that recomputation under Section 34(1)(o) of the Indian Income-tax Act, 1922, can take place only with a view to garnering in the income escaping assessment under the first clause and that it was clear from the provisions of Section 34 themselves that it was not intended for the benefit of the assessee but only for the benefit of the revenue.
This view of the Bombay High Court had been approved and applied by the Kerala High Court in the case of CWT v. C. Ravindran  107 ITR 547. The same ruling had been applied by the Bombay High Court in Ballarpur Industries Ltd.'s case (supra). On the basis of this decision, there is no scope for the assessee to claim any deduction which has not been claimed in the original proceedings. We are of the opinion that the above principle laid down in reassessment proceedings under Section 147, would apply with greater force to proceedings started by the ITO under Section 263. Whereas under Section 147 it could be said that the entire assessment is at large, under Section 263 the directions to the ITO could be only for correcting the errors in the original order which had led to loss of revenue. Therefore, the principle stated above would apply with greater force to these proceedings springing from an order under Section 263.
7. The authorities relied on by Shri Bagaria are easily distinguishable. In J.K. Cotton Spg. & Wvg. Mills Co. Ltd.'s case (supra), the original assessment order passed by the ITO was set aside by the AAC, who directed the ITO to make fresh assessment. While making fresh assessment, the ITO included certain deemed dividends which were not considered in the original assessment. The ITO's action was challenged unsuccessfully. The High Court pointed out that in a reassessment at the direction of an appellate authority, the ITO has the same powers as in a fresh assessment. In proceedings springing from an order under Section 263, however, the ITO has to function under certain restraints. It is those restraints which prevent the assessee from making any claim which was not before the ITO in the original proceedings. An assessment which had been set aside by an appellate authority restores the matter to the original position from where the ITO started the proceedings. Where an order under Section 263 or a matter is reopened under Section 147, there is no such restoration to the original position as between the assessee and the department. The objects of these types of proceedings are different. The objects are only for garnering the additional revenue.
8. The decision of the Madras High Court in Seth Manicklal Fomra's case (supra) is also more or less identical with the decision of the Allahabad High Court. Reliance had also been placed on the decision of the Delhi Bench of the Tribunal in the case of S.S. Kanwar (HUF) v. ITO  4 ITD 120. In this decision, the Delhi Bench of the Tribunal had considered proceedings under Section 147 and had held that the assessee could be allowed to make claims which were not made in the original proceedings On going through the decision, we find that the attention of the Bench had not been invited to the decisions of the Bombay High Court and the Kerala High Court, to which we have referred to earlier.
In any case, the decision of the Delhi Bench is in respect of proceedings under Section 147 and not proceedings springing from an order under Section 263. We may also mention that the Madras High Court has recently considered the case laws on this point in Chettinad Corpn.
(P.) Ltd. v. CIT  147 ITR 57 and had come to the same conclusion as the Bombay High Court. They have held that it is not open for the assessee to claim any deduction, which was not claimed in the original assessment proceedings. They have relied on the decision of the Calcutta High Court in the case of CIT v. Assam Oil Co. Ltd.  133 ITR 204 and the Allahabad High Court decision in the case of Sir Shadi Lal & Sons v. CIT  92 ITR 453. Thus, it would appear that as many as five High Courts are in favour of the department's view. There is none in favour of the assessee's contention on this point. We, therefore, agree with the Commissioner (Appeals) that the assessee cannot claim any new deduction in these proceedings, which was not claimed by it in the original proceedings.
9 to 11. [These paras are not reproduced here as they involve minor issues.) 12. In Ground Nos. 10 to 12, the question is whether certain interest received by the assessee during the accounting year is assessable for the year under consideration. The interest relates to the excess profit duty payable by the assessee to the Holkar State in respect of the profits for the calendar year 1943 and subsequent years. As per Huzur Shree Shanker Order No. 297, a tax called 'excess profit duty' was levied on all profits of industries in Holkar State exceeding the limit of Rs. 75,000. A part of the duty thus levied would be invested by the Government and this amount together with interest would be refunded to the assessees after a certain period.
13. It would appear that the interest was not received by the assessee for a number of years. The State of Holkar merged with Madhya Bharat and later that part also became part of the Madhya Pradesh State. After enquiries and reminders, the Government of Madhya Pradesh passed an order on 25-2-1972, allowing interest on the refundable portion of the excess profit duty. The interest amounted to Rs. 1,02,559. This was credited to the assessee's books of account. The ITO brought this amount to tax. Although initially the company themselves had admitted this receipt as taxable, nevertheless, in the course of the original proceedings, they raised objections as to its assessability. The ITO, however, overruled these objections. The assessee appealed. When the appeal was pending, the order under Section 263 was passed by the Commissioner. The AAC later disposed of the appeal on the ground that the Commissioner's order under Section 263 had set aside the entire assessment order. It is under these circumstances, that the matter had come up again before the Commissioner (Appeals).
14. It will be seen from the above facts that unlike the claims made for the first time in the proceedings springing from the order under Section 263, this dispute was in existence throughout the original proceedings. Therefore, the assessee can raise this point.
15. Shri Bagaria, the learned Counsel for the assessee, did not make any submission that the receipt is not taxable income. However, his contention is that under the law, the interest accrues automatically.
Therefore, the year of accrual was in the 1950s. It cannot, therefore, be treated as having accrued in the financial year assessable for the year 1972-73.
16. We are afraid, we are unable to accept the submission. It may be true that as per the statute, the interest accrues and arises on the date of refund. But the assessment to income-tax does not depend merely on accrual. It also depends upon the method of accounting followed by the assessee in respect of these receipts. It cannot be disputed that a part of the excess profit duty was returnable to the assessee. Since the excess profit duty was paid out of the business profits of the company on return, it assumes the same character it had at the time of payment of excess profit duty. This is a well settled proposition and does not need any authority. However, we may mention the decision of the Supreme Court in the case of Donald Miranda v. CIT  42 ITR 166. Therefore, the interest accruing to it would also be business receipts.
17. It is open for an assessee to have different methods of accounting to different types of receipts. It is also open for the assessee to account for the interest on the refund of excess profit duty in a manner different from how he accounts for the other business receipts.
Therefore, we have to see how the accounts were maintained on this point. It is an admitted position that in the year of account in which the interest had accrued, the asseseee had not made any entry in their books of account. This would show that where an amount has to be collected from the Government, the assessee is not accounting for it on mercantile basis. This is understandable. Receipts due from the Government sometimes are delayed and to take credit for the same even before the amount was received, would be creating avoidable problem's.
The conduct of the assessee, therefore, shows that as far as these receipts are concerned, the assessee has followed cash system. It will, therefore, be clear that the department was justified in assessing the same during this year.
18 and 19. [These paras are not reproduced here as they involve minor issues.)