This appeal has been preferred by assessee and relates to assessment year 1978-79. In this case, original assessment for accounting period ended 31-8-1977 was completed on 24-7-1981. assessment was made under provisions of section 143(3) , read with section 144B , of Income-tax Act, 1961 ('the Act'), i.e., after reference to IAC and on due consideration of directions issued by him. We would set out certain facts. assessment order insofar as computation of business income is concerned, starts with income as per adjustment statement as filed by assessee which was Rs. 79,74,913. This figure was arrived at by assessee after making certain additions to profit as per profit and loss account of Rs. 72,11,960 and making certain deductions therefrom. In printed accounts for year in Schedule 10 under head 'Manufacturing and other expenses', and amount of Rs. 1,70,07,139 stands exhibited as 'salaries, wages and bonus'. Thereafter details were furnished by assessee in course of assessment proceedings of this amount. Two of components thereon were bonus of Rs. 20,16,925 and productivity bonus of Rs. 11,77,658. In order sheet entry dated 23-10-1980, ITO had referred to handing over to authorised representative of assessee, usual questionnaire and of his having further request for particulars, in particular, apart from other items, regarding 'productivity bonus'. letter was filed by assessee dated 29-10- 1980, in which following appeared: "6. To say why productivity bonus of Rs. 11,77,658 and terminal payments of Rs. 28,216 were paid: productivity bonus of Rs. 11,77,658 was paid by my clients under terms of agreement entered into by them with employees. details for payment of Rs. 28,216 referred to as terminal payments are not readily available, but these represent only other payments made to employees." After this, there were other hearings and further details were called for. Another letter was filed on 12-3-1981 and following appeared regarding productivity bonus: "9. To furnish details of productivity bonus: It is submitted that productivity bonus has been paid in earlier years also and amount of such bonus had been included under head 'Salaries'. It is, therefore, submitted that this is not new item of expenditure incurred particularly in previous year relevant to above assessment." draft assessment order was sent to assessee on 23-3-1981 in which there was no reference to any item of bonus and assessee sent reply dated 31-3-1981 to draft assessment order furnishing objections which were duly considered by IAC in memo dated 16-7-1981. Here again bonus did not figure in directions issued by IAC. On receipt of order of IAC giving specific directions, ITO completed assessment on 24-7- 1981 and in making assessment there was no addition or discussion regarding bonus payments. Subsequently, assessee appealed to Commissioner (Appeals). Because there was no disallowance in respect of bonus payments, this item did not figure in grounds of appeal. On 22-1-1983, Commissioner (Appeals) decided appeal preferred under by assessee. On 28-3-1983 notice was issued by ITO under section 148 of Act for reopening assessment. While this notice was pending on 7-6- 1983, Commissioner issued notice to assessee to show cause why proceedings should not be taken under section 263 of Act for bringing to tax bonus allowed in excess of limits under section 36(1) (ii) of Act. On 6-7- 1983, ITO passed order stating that 'the proceedings initiated under section 147(b) are hereby dropped.' 2. Commissioner thereafter considered assessee's reply and stated that assessee had paid annual bonus of Rs. 20,16,925 and productivity bonus of Rs. 11,77,658 making total of Rs. 31,94,593. While completing assessment Commissioner observed that ITO had not applied limits prescribed under section 36(1) (ii) of Act had allowed payment of bonus in its entirety as deduction and excess of bonus allowed was to extent of Rs. 8,21,738. Commissioner did not accept contention of assessee that because assessment had been made after obtaining IAC's directions under section 144B , he was precluded from exercising his powers, under section 263. Commissioner stated that since issue of allowance of bonus in full or disallowance of portion thereof was not subject matter of reference to IAC under section 144B , Commissioner's jurisdiction was not shut out to rectify any error regarding such item. Commissioner on merits did not agree with assessee that productivity bonus was not hit by ceiling prescribed under section 36(1) (ii). Eventually, therefore, in exercise of his powers under section 263 , Commissioner directed ITO to withdraw excess allowance of bonus amounting to RS. 8,21,738, which was allowed in assessment. 3. Before us, learned counsel for assessee put forth were propositions in support of contention that Commissioner had no jurisdiction to exercise powers under section 263. 4. first contention was that since assessment was made after obtaining instructions of IAC under section 144B , Commissioner could not revise assessment order as passed by ITO. For this, learned Counsel sought to rely on decision of Special Bench of Tribunal in East Coast Marine Products (P.) Ltd. v. ITO [1983] 4 ITD 73 (Hyd). learned departmental representative opposed plea and submitted that on aspect of bonus no specific directions had been sought from or had been given by IAC and, therefore, Commissioner's jurisdiction was not shut out. Special Bench in order referred to had repelled contention that IAC's directions got merged in order of ITO. This finding has been given in paragraph 13 of order of Special Bench. Thereafter, after discussing contentions in extenso, Special Bench came to conclusion that Commissioner had no jurisdiction under section 263 to revise that portion of order covered by directions given by IAC under section 144B (4). This finding is contained in paragraph 24 of aforesaid order. In present case, in draft assessment order, ITO had not proposed any addition nor had he sought for any instruction from IAC regarding admissibility as deduction of payment of bonus. IAC had not also given any directions in that regard. Therefore, admissibility of bonus was not matter covered by directions given by IAC specifically under section 144B (4). Hence, Commissioner's jurisdiction under section 263 to consider this aspect regarding admissibility as deduction of bonus paid was not shut out merely because assessment was made after referring draft assessment order to IAC under section 144B (4). 5. For sake of convenience, we will take up third aspect on which jurisdiction of Commissioner under section 263 was challenged. learned counsel submitted that proceedings under section 147 had been initiated by issue of notice under section 148 on 28-3-1983 and ITO has passed order on 6-7- 1983, dropping proceedings under section 147(b). According to learned counsel, this order of 6-7-1983 should be construed as order of assessment u n d e r section 147 and, therefore, Commissioner was shut out from exercising his powers under section 263 because it would be tantamount to revising order of reassessment made under section 147. This plea was also opposed by learned departmental representative who submitted that dropping of proceedings under section 147 could not be equated with passing order of assessment under section 147. 6. learned counsel for assessee in support of aforesaid proposition had relied on judgment of Punjab and Haryana High Court in CIT v. Damyanti Mehta and Yash Raj Mehta [1972] 83 ITR 502. That was case in which proceedings under section 34(1) (a) of Indian Income-tax Act, 1922 ('the 1922 Act') were initiated but ITO dropped proceedings by his order 'proceedings filed'. Commissioner thereafter acting under section 33B of 1922 Act, cancelled order of ITO filing proceedings and directed him to continue proceedings under section 34(1) (a). High Court had held that on facts, Commissioner was precluded from revising aforesaid order by reason of section 33B (2) (a), viz., that provision precluded Commissioner from revising order of reassessment made under provisions of section 34. In aforesaid decision, their Lordships had stated that in every case it had to be determined, on facts and circumstances thereof, as to what expression used by ITO, i.e., 'proceedings filed' or 'proceedings disposed of or filed ' connotes or means. Their Lordships observed that in one set of circumstances it may not amount to order of assessment or reassessment whereas in another set of circumstances it may so amount. In case of Esthuri Aswathiah v. ITO [1961] 41 ITR 539 where nil return was filed and ITO wrote 'no proceedings', Supreme Court held that it had to be construed that assessed income was nil. In case of CIT v. Bidhu Bhusan Sarkar [1967] 63 ITR 278, where expression used was 'filed', Supreme Court observed that it meant that case was disposed of and nothing remained and their Lordships further observed: "..... In effect, therefore, what he did was to terminate proceedings before him without making any order of assessment, on ground that order of assessment in respect of income in question would be made by ITO in proceedings before him." (p. 284) From aforesaid observations, it is clear that proceedings could be terminated without making any order of assessement. statute itself contemplates dropping of proceedings when action is taken under section 147(b) in certain cases without making of assessment. relevant provision in this regard is section 152(2) of Act, which reads as under: "Where assessment is reopened in circumstances falling under clause (b) of section 147 , assessee may, if he has not impugned any part of original assessment order for that year either under section 246 to 248 or under section 264 , claim that proceedings 147 shall be dropped on his showing that he had been assessed on amount or to sum not lower than what he would be rightly liable for even if income alleged to have escaped assessment had been taken into account, or assessment or computation had been properly made: Provided that in so doing he shall not be entitled to reopen matters c oncluded by order under section 154 , 155, 2 60, 262 or 263." Therefore, use of terminology 'dropped' is recognised by statute also as resulting in termination of proceedings but not being tentamount to making of assessment in appropriate cases. In present case, ITO had issued notice under section 148. It was ascertained by us that there was no written submissions made by assessee in response to this notice; but after certain discussion, ITO passed order that proceedings were dropped. On facts, all that has happened is that ITO had terminated action initiated by him under section 148 but such termination would not tentamount to action initiated under section 148 being equated by 'making of order of reassessment under section 147' . order dropping proceedings is not synonymous, on facts of present case, with order of reassessment made under section 147. Therefore, bar prescribed by provisions of section 263(2) (a) does not operate and Commissioner was not precluded from exercising his powers under section 263. 7. next contention of learned counsel was that since there was appeal to Commissioner (Appeals), in view of ratio of decision of Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd. v. ITO [1982] 1 ITD 303 (Bom) jurisdiction under section 263 stood ousted. learned departmental representative, on other hand, submitted that question of admissibility of bonus paid as deduction did not figure in grounds of appeal before Commissioner (Appeals) and was, hence, not matter considered by him. In view of ratio of judgments of Madras High Court in cases of CIT v . City Palayacot Co. [1980] 122 ITR 430, Puthuthotam Estates (1943) Ltd. v. State of Tamil Nadu [1980] 12 ITR 41 and CIT v. Eimco-K. C. P. Ltd. [1984] 147 ITR 603, he stated shut out. He also submitted that there were decisions of other High Courts which were to effect that unless point was specifically taken up and considered by Commissioner (Appeals), jurisdiction of Commissioner to pass order of revision under section 263 was not shut out. 8. We have considered rival submissions. Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd. (supra) had held that for purposes of jurisdiction under section 263 , ITO's order merged with that of first appellate authority not only to extent to which first appellate authority as matter of fact dealt with it but also to extent to which he had power to look into it with view to enhancement within limits prescribed by Supreme Court in its decision in case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443. As to what these limits were, observations of supreme Court are contained, which read as under: ".... As we have already stated, it is not open to Appellate Assistant Commissioner to travel outside record, i.e., return made by assessee or assessment order of Income-tax Officer with view to find out new sources of income and power of enhancement under section 31(3) of Act i s restricted to sources of income which have been subject-matter of consideration by Income-tax Officer from point of view of taxability. In this context 'consideration' does not mean 'incidental' or 'collateral' examination of context 'consideration' does not mean 'incidental' or 'collateral' examination of any matter by Income-tax Officer in process of assessment. There must be something in assessment order to show that Income-tax Officer applied his mind to particular source of income with view to its taxability or to its non-taxability and not to any incidental connection...." (p. 451) restrictions in first appellate authority exercising powers of enhancement are (a) that he cannot travel outside record, i.e., return made by assessee or assessment order to find out new source of income, and (b) that enhancement is restricted to sources of income which were subject-matter of consideration of course had to be direct and not merely incidental or collateral. In present case, we have set out facts elaborately to show that payments described as bonus of Rs. 20.16 lakhs as well as productivity bonus of Rs. 11.77 lakhs had been claimed as expenditure in profit and loss account. ITO had asked for details about productivity bonus and assessee had made clarifications regarding item on two occassions. It is, therefore, clear that ITO had considered taxability of payment in question expressly by calling for specific details and it was not mere indicental or collateral examination of matter in process of assessment. What ITO did was to directly consider admissibility of bonus claim as deduction. It was case where ITO had applied his mind to subject-matter and because he took view that entire amount was admissible, no specific further discussion appeared in assessment order. This is, therefore, matter on which first appellate authority could have exercised powers of enhancement if it was considered called for. Therefore, according to ratio of decision of Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd. (supra), jurisdiction of Commissioner to effect revision in exercise of power under section 263 stood shut out. 9. We have now to see whether decision of Madras High Court relied on by learned departmental representative alter position on facts of present case. In City Palayacot Co.'s case (supra), Madras High Court has clearly laid down that doctrine of merger would have to be considered in light of what was in controversy before the appellate authority or what could have been considered by appellate authority. In present case, admissibility of bonus was not in controversy before first appellate authority, but certainly on facts stated by us and ratio of judgment of Supreme Court in Rai Bahadur Hardutroy Motilal Chamaria's case (supra), it was matter which could have been considered by first appellate authority. Therefore, according to ratio of decision of Madras High Court also in aforesaid case, Commissioner's jurisdiction to exercise his powers under secitn 263 stood shut out. Since ratio of aforesaid case is directly on point, it will really be superfluous to discuss other decisions of Madras High Court where circumstances are different. But for sake of completeness, we may point out that decision in case of Eimco-K. C. P. Ltd. (supra) is decision which states that mere pendency of appeal before first appeal authority is not sufficient to shut out jurisdiction of Commissioner under section 263. present is not case where there was merely appeal pending before first appellate authority. case Puthuthotam Estates (1943) Ltd. (supra) is case under Tamil Nadu Agricultural Income-tax Act, 1955, which deals with provisions akin to section 264 and not provisions of section 263 , which are now under consideration. Therefore, ratio of that case also does not apply here. 10. Special Bench of Tribunal in case of Dwarkadas & Co. (P.) Ltd. (supra) has considered decisions of other High Courts as to what extent there would be merger and has enunciated ratio to which we have referred and in light of which we have examined facts of present case. 11. In view of this, we would hold that jurisdiction of Commissioner to exercise his powers under section 263 stood shut out because question of admissibility as deduction of bonus was matter which could have been considered by first appellate authority in appeal filed before him which he disposed of by his order dated 22-1-1983 which was even prior to date of issue of notice of notice under section 263 by Commissioner, which even took place only on 7-6-1983. 12. In view that we have taken on question of jurisdiction, appeal of assessee succeeds and order of Commissioner under section 263 is set aside. We, therefore, do not go into merits of disallowance as directed by Commissioner. 13. In result, appeal is allowed. *** CARBORUNDUM UNIVERSAL LTD. v. INCOME TAX OFFICER