This appeal filed by assessee-company, Kirloskar Oil Engines Ltd., Pune, is directed against order of Commissioner passed by him under section 263 of Income-tax Act, 1961 ('the Act'), for assessment year 1977-78, in case of assessee-company. 2. Although in memorandum of grounds of appeal, assessee- company has raised ten grounds, they boil down to following effective grounds: 1. that Commissioner erred in law in assuming jurisdiction under section 263 in respect of order of IAC since said order had already merged in appellate order of Commissioner (Appeals); 2. that, without prejudice to aforesaid contention, it is submitted that Commissioner erred in holding that assessment order was erroneous insofar as it was prejudicial to interests of revenue; 3. that Commissioner erred in holding that interest of Rs. 1,05,515 receivable by assessee-company from subsidiary company, but waived by assessee, was not permissible deduction; 4. that Commissioner erred in treating sitting fees, which are more in nature of reimbursement of expenses, as salary of director within meaning of section 40A(5) of Act. 3. relevant facts of case are briefly as follows: On examination of assessment records of assessee-company for t h e assessment year 1977-78, Commissioner found that assessment order for assessment year 1977-78 passed by IAC in assessee's case was erroneous insofar as it was prejudicial to interests of revenue in several respects. He, therefore, initiated proceedings under section 263 and as required under law, gave assessee-company opportunity of being heard by his notice dated 13-1-1981. 4. Before Commissioner, preliminary objection to proceedings under section 263 was raised that assessment order in question had already been subject-matter of appeal before Commissioner (Appeals), latter had passed his appellate order thereon on 27-12-1980, that thus, assessment order having already merged into said appellate order, former could not be revised under section 263. For this proposition, reliance was placed on decision of Allahabad High Court in case of J.K. Synthetics Ltd. v. Addl. CIT [1976] 105 ITR 344, and that of Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd. v. ITO [1982] 1 ITD 303 (Bom.). Commissioner did not find preliminary objection to be tenable in view of judgment of Bombay High Court in case of CIT v. Sakseria Cotton Mills Ltd. [1980] 124 ITR 570 where, Commissioner pointed out, High Court has held that whether order of subordinate authority has merged partially or wholly with orders of superior appellate or revisional authority will have to be decided with reference to provisions dealing with appellate jurisdiction or revisional jurisdiction of superior authority under relevant enactment. He added that High Court had further held that only that part of order of ITO merges or stands superseded by order of AAC, in respect of which AAC has exercised his appellate jurisdiction. Since none of points to be dealt with in proposed order under section 263 was covered in appellate order of Commissioner (Appeals), question of merger did not arise. Accordingly, Commissioner rejected preliminary objection and proceeded to deal with merits of proceedings under section 263. Among points in assessment order considered by Commissioner, to have been erroneously decided upon by assessing officer, only following two points are now agitated before us in present appeal: (i) allowance by assessing officer of claim for deduction of interest receivable by assessee-company from subsidiary company but which was waived by assessee-company; (ii) failure of assessing officer to take into account sitting fees paid to directors in determining disallowance under section 40A(5). 5. factual background of first point above, is as follows: Commissioner found that in para 4 of report of assessee- company's auditors, it was, inter alia, stated that assessee-company had waived interest amounting to Rs. 1,05,515, which had accrued to it on loan given to Kirloskar Kisan Equipment Co. Ltd., wholly-owned subsidiary of assessee-company. assessee's explanation for this waiver was that assessee had advanced aggregate amount of Rs. 23.78 lakhs to said subsidiary by way of loans, on which interest was payable by subsidiary, that, however, finding subsidiary to be in critical financial condition due to tremendous slump in demand for products of subsidiary, assessee-company had decided to waive interest previously charged to said loan account. It was submitted that as poor financial condition of subsidiary would have adversely affected parent company, latter, in its own interest, had to keep subsidiary as viable unit, and since it would have been impossible for subsidiary to discharge this liability towards interest, assessee-company took initiative for saving subsidiary from financial disaster and, accordingly, waived interest in question. In support of this submission and of claim for allowance of interest so waived, following decisions of Supreme Court were cited before Commissioner, i.e., CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 and CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144. representative for assessee also relied on Circular of CBDT on subject of waiver of managing agency commission. 6. Commissioner, however, found himself unable to agree with aforesaid contentions and submissions. According to him, decision of Supreme Court cited on behalf of assessee dealt with commission paid t o managing agents, whereas in case of assessee, question involved was of waiver of interest. He observed that in present case, assessee had itself taken up extra liability for interest payable on its overdraft accounts. As to Circular of CBDT referred to by assessee-company, Commissioner again observed that waiver of managing agency commission by managing agents stands on different footing from that of waiver of interest by holding company. In this view, Commissioner directed IAC to add said amount of Rs. 1,05,515 to assessee's income for assessment year 1977-78. 7. Then turning to question of disallowance of director's sitting fees, 7. Then turning to question of disallowance of director's sitting fees, Commissioner held that these have to be considered under section 40A(5) which, according to him, applied to employee being director. He observed that director's sitting fees form part of 'salary' under Explanation 2 to section 40A(5), which assigns same meaning to that term as in section 17 of Act with certain modifications. Accordingly, Commissioner directed assessing officer to work out disallowance under section 40A(5) by considering director's sitting fees of Rs. 5,500 as part of his salary. 8. assessee-company is now challenging before Tribunal both validity of proceedings under section 263 and directions of Commissioner for disallowing aforesaid two items. Addressing us, first, on question of legal validity of proceedings under section 263, Shri S.N. Inamdar, learned counsel for assessee, placed k reliance on decision of Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd.. He also cited decision of Tribunal in case of Malegaon Shahar Madhyawarti Sahakari Grahak Sangh Ltd. [IT Appeal No. 463 (Pune) of 1978- 79]. He added that in case of Dwarkadas & Co. (P.) Ltd., Tribunal had considered all relevant case laws including Patna High Court decision in Pandit Lakshmi Kant Jha v. CIT [1980] 124 ITR 470 (Pat.) on subject and had come to conclusion that once AAC appellate authority passed appellate order, Commissioner cannot have jurisdiction under section 263 to revise assessment order. 9. Countering these arguments, Shri K.A. Sathe, learned departmental representative, made following points: That Special Bench of Bombay Tribunal, while dealing with case of Dwarkadas & Co. (P.) Ltd., did not have benefit of decision of Full Bench of Madhya Pradesh High Court in case of CIT v. R.S. Banwarilal [1983] 140 ITR 3, wherein Court has pointed out that in view of Supreme Court decision in case of CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130, it is obvious that Bombay view expressed as obiter dicta in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 (Bom.) and followed in Amritlal Bhogilal & Co.'s case, is no longer good law. Shri Sathe added that Special Bench of Tribunal was not right in distinguishing decision of Bombay High Court in Sakseria Cotton Mills Ltd.'s case. Shri Sathe further submitted that Tribunal, Pune Bench, whose decision in case of Malegaon Shahar Madhyawarti Sahakari Grahak Sangh Ltd. was cited on behalf of assessee- company also, had not considered decision of Madhya Pradesh High Court in R.S. Banwarilal's case. In this regard, he submitted that principle governing merger of order under section 154 of Act was not different from that applicable to other orders. He pointed out that Bombay High Court, in arriving at its decision in Sakseria Cotton Mills Ltd.'s case, has quoted with approval, test laid down by Gujarat High Court in case of Karsandas Bhagwandas Patel v. G.V. Shah, ITO [1975] 98 ITR 255 and has dissented from decision of Allahabad High Court in case of J.K. Synthetics Ltd., which was followed by Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd.. Shri Sathe urged that Bombay High Court decision should have more persuasive effect than decision of Special Bench of Tribunal and that said decision of Bombay High Court coupled with that of Full Bench of Madhya Pradesh High Court in case of R.S. Banwarilal, provided effective answer to preliminary objection of assessee-company to validity of section 263 proceedings in question. 10. In his rejoinder, Shri Inamdar submitted that, as explained by Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd., decision of Bombay High Court in case of Tejaji Farasram Kharawala cannot be held to have been overruled directly or by implication by Bombay High Court in case of Sakseria Cotton Mills Ltd.. Shri Inamdar added that even if observations of Bombay High Court in case of Tejaji Farasram Kharawala are taken to be obiter dicta, these, being of Bombay High Court, are binding on Tribunal, which is under jurisdiction of said Court. He further argued that fact that provisions like section 154(1A) have not been enacted in context of section 263, shows that Legislature has accepted proposition of 'merger'. 11. We have given careful thought to arguments and counter- arguments on preliminary objection in this appeal as to validity of proceedings under section 263 vis-a-vis facts and circumstances of case proceedings under section 263 vis-a-vis facts and circumstances of case and in light of relevant case law. In our view, decision of Bombay High Court in case of Sakseria Cotton Mills Ltd., as explained by Full Bench of Madhya Pradesh High Court in case of R.S. Banwarilal, does effectively meet preliminary objection on behalf of assessee-company. To arrive at decision in aforesaid case, Bombay High Court has relied on observations of Supreme Court in case of State of Madras v. Madurai Mills Co. Ltd. AIR 1967 SC 681 on doctrine of merger and scope of its applicability. observations are as follows: "....But doctrine of merger is not doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by inferior Tribunal and other by superior Tribunal, passed in appeal or revision, there is fusion or merger of two orders irrespective of subject- matter of appellate or revisional order and scope of appeal or revision contemplated by particular statute. In our opinion, application of doctrine depends on nature of appellate or revisional order in each case and scope of statutory provisions conferring appellate or revisional jurisdiction ......" That decision in case of Sakseria Cotton Mills Ltd. was given in context of rectification order under section 154, does not make any difference since, as held by Madhya Pradesh High Court in case of R. S. Banwarilal, principle involved is same, viz., application of doctrine of merger. We may mention here that existence of power of AAC to examine and pass appropriate order in appeal from assessment order of ITO, including power to enhance assessment on any point, has apparently prompted Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd. to opt for theory of complete merger of assessment order w i t h appellate order. For this proposition, Tribunal has obviously presumed that even in case where AAC could examine certain issues and pass appropriate order thereon, but had not actually done so, he should be deemed to have examined those issues and agreed with ITO and, thus, even that portion of assessment order would merge in order of AAC. For this presumption, one does not find support in decisions of Bombay High Court and Madhya Pradesh High Court cited above. In our view, unless there is overt allusion in appellate order to particular issue either raised in grounds of appeal or taken up by appellate authority, e.g., AAC/Commissioner (Appeals) suo moto, adjudication on such issue or issues cannot be presumed although technically, entire assessment may be open before appellate authority. As matter of fact, appellate authority is not expected to and does not, in normal circumstances, travel beyond aspects of case, which are necessary for disposal of appeal before it. We, therefore, following ratio decidendi of Bombay High Court in case of Sakseria Cotton Mills Ltd. and that of Full Bench of Madhya Pradesh High Court in case of R.S. Banwarilal, hold that proceedings under section 263 were validly initiated in present case by Commissioner. 12. Before parting with this aspect of case, we would like to mention here that we are aware that there is Full Bench decision of Madhya Pradesh High Court in case of CIT v. Mandsaur Electric Supply Co. Ltd. [1983] 140 ITR 677 on point at issue, which is apparently in conflict with decision of same Court in case of R.S. Banwarilal. It must, however, be noted that decision in case of R.S. Banwarilal is later (8-3-1982) than that in case of Mandsaur Electric Supply Co. Ltd. (25-2-1982). Besides, in case of Mandsaur Electric Supply Co. Ltd., entire order of assessment was set aside under section 263, whereas, in present case, directions have been issued by Commissioner only on specific points. It is common ground that none of points dealt with in appellate order of Commissioner (Appeals), in case of assessee-company, Kirloskar Oil Engines Ltd., is touched by impugned order passed by Commissioner under section 263. preliminary objection is overruled. 13. As for second and alternative preliminary ground, suffice it to say that Commissioner had come across fact that certain claims on account of expenses, which were made by assessee, were allowed by ITO, but which, in view of Commissioner, were not admissible on facts and in law. allowance of such claims, thus, would obviously cause prejudice to interests of revenue. There was, thus, prima facie, good reason for to interests of revenue. There was, thus, prima facie, good reason for Commissioner to initiate proceedings under section 263. second contention of assessee-company is also, therefore, accordingly, rejected. 14. We now come to merits of proceedings under section 263. 14.1 On question of waiver of interest due from subsidiary Kirloskar Kisan Equipments Ltd., Shri Inamdar, learned counsel, submitted that said subsidiary has been making losses in successive years right from its inception and, therefore, board of directors of assessee-company took decision to waive interest due from said subsidiary on short-term loans advanced by assessee-company to subsidiary from time to time. Shri Inamdar read out following relevant part of resolution of board of directors of assessee-company passed at meeting of board held on 8-11-1975: " In view of present critical financial position of said subsidiary, all interest accrued on this aggregate amount of loan to this date and which may accrue thereon hereafter, until amount of loan is completely repaid by that subsidiary, be and is hereby waived. " Shri Inamdar argued that decision taken by board of directors of assessee, public limited company, had been duly endorsed by its shareholders and, therefore, its bona fides should not have been doubted as is done by Commissioner, who has alleged that waiver represents 'gratuitous sacrifice' on part of assessee-company. He added that Commissioner has overlooked fact that whereas assessee-company had taken decision t o waive interest purely on grounds of commercial expediency, interest so remitted/waived was taxed in hands of subsidiary under section 41(1) of Act. In support of his arguments, Shri Inamdar cited decisions of Supreme Court in cases of Chandulal Keshavlal & Co. and CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266. He made special reference to decision of Madras High Court in case of CIT v. Amalgamations (P.) Ltd. [1977] 108 ITR 895 as well as to decision of same Court in case of Devi Films (P.) Ltd. v. CIT [1970] 75 ITR 301. In former case, assessee's claim of loss incurred in honouring commitment to guarantee debts borrowed by its subsidiary company, was held to be admissible as business loss. In latter case, voluntary waiver of substantial portion of loan on finding that debtor was not in position to repay outstanding dues was held to be trading loss, on reasoning that assessee, in course of its business, had thought it necessary to waive portion of outstanding dues. 14.2 Summing up his arguments, Shri Inamdar submitted that Commissioner has erred in overlooking all these legal aspects and has equally erred in law in substituting his own judgment in place of that of board of directors, who had considered it commercially expedient to waive accrued interest in question. He urged that in these circumstances, decision of Commissioner deserves to be reversed. 14.3 Shri Sathe, learned departmental representative, on his part argued that in order to judge admissibility of claim of waiver of interest, correct financial position of subsidiary company was relevant. According to him, financial condition of subsidiary was not critical as made out, but there may have been temporary set back. In this regard, Shri Sathe drew our attention to observations in report of board of directors of assessee-company for year ended on 30-6-1976 (the assessment year 1977-78) concerning subsidiary, Kirloskar Kisan Equipments Ltd. In said report at page 7, chairman of assessee-company on behalf of board of directors has only pointed out that Kirloskar Kisan Equipments Ltd. had to curtail its production due to fall in demand for agricultural sprayers, that there is no whisper in said report about alleged desperate financial condition of subsidiary company. Shri Sathe also referred to report of directors of subsidiary company (page 58 of printed annual report of company and its subsidiaries) for year ending on 31-12-1975, where directors have referred to development of petrol engines for cycles and cycle rikshaws and to prospects of improvement in demand for these engines. directors have also mentioned that company has received indication of good export business and initial orders for exports have also been executed. Shri Sathe added that even balance sheet of subsidiary company did not present dismal financial picture. Shri Sathe submitted that in these circumstances, it was dismal financial picture. Shri Sathe submitted that in these circumstances, it was not correct for counsel for assessee to say that Commissioner had substituted his own judgment in place of that of directors and that, on other hand, Commissioner has objectively viewed issue, i.e., whether any prudent businessman would find justification to waive interest in question. 14.4 Then adverting to case law stated on behalf of assessee- company, Shri Sathe submitted that most of cases relied upon were of managing agencies, where managing agency commission, waived by assessee-company's concern, constituted business income of said company, which was not case with present assessee-company, who was 'holding company' and as such, was entitled only to dividend from subsidiary company and such income was chargeable under section 56 of Act under head 'Income from other sources'. Shri Sathe pointed out that even circular of Board, cited on behalf of assessee-company, was issued in context of managing agency business. He argued that even if assessee were to claim that waiver of interest was in order to preserve assessee-company's investment, onus to prove this was on assessee for extraneous motive and purpose could not be relevant, but it should only be 'for earning income' that is relevant. Proceeding further, Shri Sathe submitted that Supreme Court decisions in Chandulal Keshavlal & Co.'s case and Birla Gwalior (P.) Ltd.'s case were distinguishable on facts from assessee's case for interest in question accrued to assessee-company from day to day, whereas managing agency commission dealt with in Supreme Court cases, arose only on settling of accounts for relevant previous year and it was waived before its accrual. That similarly, Madras High Court decision in Amalgamations (P.) Ltd.'s case was also distinguishable being in case of investment company, which present assessee- company is not. Shri Sathe urged that disallowance of interest in question was, thus, in order both on facts and in law. 15. In his rejoinder, Shri Inamdar submitted that it was incontrovertible fact that subsidiary company had been making losses for consecutive years since it commenced business, that, however, directors did not, for obvious reasons, consider it proper to convey sense of alarming situation to shareholders. He argued that this was commercially expedient policy. Then, strictly confining himself to balance sheet of assessee-company, Shri Inamdar pointed out that subsidiary company had not charged depreciation on its assets for calendar years 1971 to 1975, as would be evident from schedule of fixed assets at page 66 of printed accounts. He submitted that figures do not lie and they are there for everyone to see. On legal aspects of claim, Shri Inamdar contended that forming of subsidiary was not mere investment so far as assessee-company was concerned, but it was part of diversification of assessee-company's business activities inasmuch as assessee-company was major manufacturer of oil engines used by agriculturists, subsidiary company manufactured sprayers and other machinery used in agro industries. Thus, he submitted, here was case of business interest of holding company and those of subsidiary company being inter-linked and, therefore, had to be safeguarded even at cost of sacrifice by way of waiver of interest. 16. We have carefully considered submissions made and arguments advanced from both sides vis-a-vis facts and circumstances of case on record and in light of relevant case law. It is evident from balance sheet of subsidiary company, Kirloskar Kisan Equipments Ltd., as on 31-12-1975 that it was not financially sound concern for its accumulated losses, as on aforesaid date, amounted to Rs. 9,75,654 as against its reserves and surplus, which amounted to Rs. 9,26,000 only. As matter of fact, reserves comprised only net development rebate reserves. It is also noteworthy that depreciation aggregating Rs. 16,69,313 was not charged for years 1971 to 1975, as already pointed out by counsel for assessee-company. It is also observed that both board of directors of assessee-company as well is that of subsidiary company have made it quite clear that operational results for year ending on 31-12-1975 of subsidiary company were seriously affected by many adverse market conditions. In view of these circumstances, we see no reason to doubt bona fides of assessee-company in trying to save subsidiary company from further financial decline by waiving interest which, in accordance with mercantile system of accounting regularly followed by assessee, had technically accrued to it. Viewed in this perspective, we find that ratio decidendi in cases of Chandulal Keshavlal & Co. and Shoorji Vallabhdas & Co. is applicable t o present case. We may mention here that, in similar circumstances, Madras High Court has, in following cases, held that commercial and business realities of situation have to be taken into account rather than technical aspects such as accounting principles---CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.) and CIT v. Devi Films (P.) Ltd. [1983] 143 ITR 386 (Mad.). 17. We also find that in similar circumstances, Punjab and Haryana High Court has in two cases, viz., Shiv Parkash Janakraj & Co. (P.) Ltd. v. CIT [1978] 112 ITR 872 and CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619, held that assessee was justified in not making any debit entries in account of debtor on account of interest and corresponding credit in its interest account in view of weak financial position of debtor and that in these circumstances, it could not be said even in context of mercantile system of accounting that income had actually accrued to assessee and, therefore, ought to be included in assessee's total income. We hold likewise in present case and reverse decision of Commissioner on point. 18. This brings us to fourth and last ground of appeal. In this regard, Shri Inamdar reiterated assessee-company's argument that director's sitting fees represented only reimbursement of expenses incurred by director for purpose of attending Board meetings. We find ourselves unable to agree with this proposition. It is matter of common knowledge that apart from reimbursing director's travelling and other incidental expenses, incurred for purpose of attending meetings of board of directors, directors are paid sitting fees for attending meetings and for contributing to deliberations. In other words, fees paid are for services rendered qua director and stand to be included in salary/remuneration. However, so far as application of section 40A(5) in context of aforesaid remuneration is concerned, we hold that said section has been erroneously invoked by Commissioner. As held by Special Bench of Tribunal in Geoffrey Manners & Co. Ltd. v. ITO [1983] 3 SOT 40 (Bom.), remuneration paid to director, whether as employee or otherwise, would fall only under section director, whether as employee or otherwise, would fall only under section 40(c)(i) and (ii) and not under section 40A(5)(a)(i) and (ii). Shri Sathe, learned departmental representative, without giving up department's case, stated that he was aware of aforesaid decision of Special Bench of Tribunal, which is being consistently followed by Tribunal. 19. We too follow said decision and hold that sitting fees paid to director, Shri S.L. Kirloskar, in case of assessee-company, be examined with reference to parameters laid down in section 40(c) and disallowance, if any, be made, accordingly. 20. In result, assessee-company's appeal is partly allowed. *** KIRLOSKAR OIL ENGINES LTD. v. INSPECTING ASSISTANT COMMISSIONER