1. For assessment year 1975-76 assessee-firm Auto Pins (India) Regd., was assessed on income of Rs. 24,82,895 vide assessment order dated 23-9-1978. Action under section 271(1)(c) of Income-tax Act, 1961 (' Act ') was also directed to be initiated as result of assessment. On 22- 9-1980, Commissioner passed order under section 263 of Act setting aside assessment to be made afresh as per his directions. appeal had been filed by assessee against order of Commissioner passed under section 263. Before order passed by Commissioner under section 263 dated 22-9-1980 could be said to have become final. IAC (Assessment) passed order dated 9-10-1980 cancelling initiation of penalty proceedings under section 271(1)(c). order of IAC (Assessment), reads as follows: " Order under sections 271(1)(c) and 273(a) of Income-tax Act, 1961 Penalty proceedings initiated under sections 271(1)(c) and 273(a) stand cancelled as assessment itself has been cancelled by Commissioner. Sd/ (H. Tulsyan) Inspecting Assistant Commissioner of Income-tax (Central) Range: V New Delhi". Thereafter on 27-2-1982 Tribunal cancelled order of Commissioner dated 22-9-1980 passed under section 263. In other words, original assessment made by assessing officer on 23-9-1978 was restored. In these facts and circumstances Commissioner became of view that order of IAC (Assessment) dated 9-10-1980 was erroneous and prejudicial to interests of revenue. He, therefore, after hearing assessee, cancelled above order of IAC (Assessment) vide his second order dated 4-6-1982 passed under section 263. present appeal bearing IT Appeal No. 2690 (Delhi) of 1982 was filed by assessee challenging correctness of Commissioner's order dated 4-6-1982 on several grounds. Tribunal vide its order dated 6-8-1983, cancelled Commissioner's order as without jurisdiction. According to it jurisdiction under section 263 could be exercised with respect to order passed by ITO and not against order passed by IAC (Assessment). Even though order of Tribunal dated 6-8-1983 went in favour of assessee, latter sought recall of order on ground that all contentions raised in assessee's appeal had not been considered and disposed of by Tribunal. Tribunal agreed with assessee and recalled its order dated 6-8-1983 vide its order passed under section 254(2) of Act on 28-4-1984. 2. It is in background of above facts that we have heard this appeal once again. Mr. R.K. Relan, learned authorised counsel of assessee, has vehemently assailed order of Commissioner. He has in all made five points against validity of order passed under section 263. Firstly it is contended that what IAC (Assessment) did on 9-10-1980 did not tantamount to order and, therefore, there was no question of cancellation thereof by Commissioner acting under section 263. For so contending reliance is placed on decision of Hon'ble Allahabad High Court in case of Ramlal Kishore Lal v. CIT [1972] 84 ITR 138. It is next contended without prejudice to first contention that on basis of record as it existed on 9-10-1980, there was no error in so-called order passed by IAC (Assessment) and, therefore, Commissioner had no jurisdiction to act under section 263. For this proposition Mr. Relan has placed reliance on decision of Hon'ble Calcutta High Court in case of Ganga Properties v. ITO [1979] 118 ITR 447. Thirdly, Mr. Relan contends that original assessment order made on 23-9-1978 by which penalty proceedings under section 271(1)(c) had been initiated, having got merged with order of Commissioner (Appeals) in appellate proceedings jurisdiction of Commissioner to act under section 263 stood ousted. Fourth contention of Mr. Relan is that penalty proceedings having b e c o m e time barred as per provisions of section 275 of Act, Commissioner had no justification and authority in law to revive them by passing impugned order under section 263. Lastly, it is contended by Mr. Relan that so-called order dated 9-10-1980 having been passed by IAC (Assessment), Commissioner had no jurisdiction to cancel it under provisions of section 263. According to Mr. Relan jurisdiction of Commissioner under section 263 is limited to orders passed by ITO only and since order in question was not passed by ITO, but by IAC (Assessment), provisions of section 263 were rendered inapplicable. 3. In reply Shri P.K. Sridharan has refuted contentions raised by learned authorised counsel of assessee. He has supported order of Commissioner passed under section 263 and submitted that it did not suffer from any infirmity. 4. We have considered rival submissions. We have also gone through historical background of case and perused impugned order as well as papers annexed in paper book submitted on side of assessee. After so doing we will adjudicate upon various points made by learned authorised counsel of assessee. After going through decision of Hon'ble Allahabad High Court in case of Ramlal Kishore Lal, we, find that facts in that case were substantially different from facts in present case. In Allahabad High Court case only note had been made by ITO which was entered in order sheet and which was to effect ' penalty dropped '. In present case regular order was passed by IAC (Assessment) which is reproduced in paragraph 1 of this order. According to us when regular order was passed by IAC (Assessment) dropping penalty proceedings, it had to be considered to be in order and, therefore, Commissioner could exercise jurisdiction under section 263 if other facts and circumstances warranted so doing. first contention of learned authorised counsel of assessee is, therefore, rejected. second contention of learned counsel taken on authority of Calcutta High Court decision in case of Ganga Properties is also not acceptable to us. We will now go to decision of Hon'ble Calcutta High Court and we would abide by it. We find that in present case facts as on 9-10-1980 were such that these entitled Commissioner to take recourse to provisions of section 263. As on 9-10-1980 order of Commissioner passed on 22-2-1980 had not yet become final and assessee had not accepted it as such. appeal had been filed against that order before Tribunal. In these circumstances when order of Commissioner under section 263 dated 22-1-1980 had not yet become final, IAC (Assessment) had no justification in cancelling initiation of penalty proceedings which had had no justification in cancelling initiation of penalty proceedings which had been directed to be initiated as per assessment order dated 23-9-1978. second contention of Mr. Relan, therefore, also fails. As regards third contention of Mr. Relan, we find that theory of merger would not enure in favour of assessee in present case. According to us correct position of law in respect of theory of merger is that only that part of order merges or gets fused in order of higher appellate authority which has been subject-matter of appeal before him. Apart from our this understanding of theory of merger, we find that in present case question of any merger did not arise at all. penalty proceedings had no doubt been directed to be initiated when assessment was framed on 23-9-1978, but since question of penalty had not been subject matter of any appeal before any higher authority, there was no question of saying that order of assessing officer directing initiation of penalty proceedings under section 271(1)(c) had at any stage got merged with any order of higher judicial authority. third contention of Mr. Relan is, therefore, rejected, fourth contention of Mr. Relan is also without any substance. When penalty order has to be passed as per directions of higher authority, limitation provisions would not apply as per ratio and decision of Hon'ble Supreme Court in case of CIT v. National Taj Traders [1980] 121 ITR 535. Having thus rejected first four contentions of learned authorised counsel of assessee we once again find that assessee is entitled to succeed on basis of last contention raised. order dated 9-10-1980 was passed by IAC (Assessment) and not by ITO. provisions of section 263 till before their amendment by insertion of Explanation with effect from 1-10-1984 provided that Commissioner could assume jurisdiction under section 263 to revise order passed by ITO if it was erroneous insofar as it was prejudicial to interests of revenue. After 1- 10-1984 it has been made explicit by insertion of new Explanation that order passed by IAC (Assessment) in exercise of powers or functions assigned to him under section 125 or 125A of Act will also be treated as order passed by ITO. Since new Explanation has been made applicable with effect from 1-10-1984 Commissioner could not have invoked powers under section 263 to revise order passed by IAC (Assessment) in relation to assessment year 1975-76. provisions of section 125(2)(a) have been duly taken into consideration by us while coming to above conclusion. According to us, these provisions will apply only in given situation mentioned in that section and would not entitle Commissioner to revise order passed by IAC (Assessment). In case Legislature had intention of saying that provisions of section 263 could be invoked in all cases where IAC (Assessment) acted as assessing officer, it would not have while amending that provision by insertion of new Explanation said that new provisions will be applicable only with effect from 1-10-1984. Being of these views in matter, we would once again reiterate finding which had been given by us vide our first order dated 6-8-1983 and hold that order passed by Commissioner was without jurisdiction. 5. In conclusion assessee succeeds on basis of fifth contention taken by learned authorised counsel of assessee. appeal is allowed. *** AUTO PINS (INDIA) v. INCOME TAX OFFICER