S. NARAYANAN, A.M. assessee is HUF. It filed return disclosing loss of Rs. 4,85,660. assessment was closed on 14th March 1983 with brief order on total income of Rs. 27,000. Included in this was short term capital loss which ITO described as having arisen on sale of units and which was determined by ITO at Rs. 5,323. assessee filed appeal against this order. This was disposed of by AAC on 31st July 1984. AAC was on point of disallowance of interest of Rs. 24,577 paid by assessee to Allahabad Bank. ITO disallowed this interest claimed as deduction on ground that there was no evidence for same. It was only on this disallowance that assessee filed appeal against net computation of short term capital loss of Rs. 5,323. AAC, by his order dt. 31st July 1984 allowed assessee's appeal directing ITO to allow deduction of Rs. 24,575 under head "Business". 2. On 11th January 1985, CIT, Delhi-VIII, New Delhi issued show cause notice to assessee purporting to act under s. 263. Apparently, he had looked into assessment record for this assessment year. He found that assessee sold 29,17 per cent of half portion of house property at No. 23, Ansari Road, Darya Ganj, Delhi for Rs. 3,50,000 on 24th November 1978. Further facts noticed by Commissioner was as follows: (a) Out of above sale proceeds, assessee deposited Rs. 3,45,000 i n units of Unit Trust of India (Specified asset) for claiming deduction under s. 54-E of Act. (b) In view of above investment in specified asset, no capital gains were assessed on assessee on sale proceeds of above property for asst. yr. 1979-80. (c) However, details filed by assessee for asst. yr. 1981-82 showed that assessee sold all unit originally purchased by him as under: Assessment year Amount (1) 1980-81 Rs. 1,99,815 (2) 1981-82 Rs. ,14,505 (d) Under s. 54-E (2) taxable capital gains originally not charged/taxed on account of acquisition of specified asset would become chargeable if same (specified asset)was transferred within time stipulated in aforesaid provision. Thus, it was clear that transfer of specified asset having taken place within period of three years in previous year relevant for asst., yr. 1980-81. Capital gains amounting to Rs. 2,42,312 not charged for asst., yr. 1979-80 became chargeable for asst., yr. 1980-81. ITO failed to bring to tax such capital gain. Hence his order was erroneous in so far as it was prejudicial to interests of revenue. 3. Before CIT, assessee contended that no capital gain was assessable as there was no cost of acquisition looking to mode of acquisition of interest in said house property by assessee i.e., by adverse possession. CIT found no substance in this objection. He, therefore, directed that ITO to assess entire capital gains of Rs. 2,42,514 arising on sale of house property in previous year relevant for asst. yr. 1980-81, as per computation below: Sale price of 29.17 per cent half portion Rs. "1. of property No. 23, Ansari Road, Daryaganj, 3,50,000 Delhi Less: Cost of acquisition of property 2. (value as on 1st April, 1964 is not to be taken 21,648 as property was acquired thereafter) Rs. 3, . Long term capital gain 28 ,352 . Less: Deduction under s. 80-T Rs. . First . 5,000 25 per cent on balance of Rs. . 80,840 Rs. 3,23,352 85,840 Rs. . Taxable capital gain . 2,42,512 assessee is in appeal. 4 . We have heard Shri S.R. Aiyar, authorised representative of assessee as well as Smt. S. Kapila, departmental representative. major submission for assessee was that CIT has acted wholly without jurisdiction in proceeding under s. 263. It was submitted that on 11th Jan, 1985. When CIT issued show cause notice, assessment for this year had been subject of appeal and AAC had, in fact, disposed of that appeal also as far back as on 31st July, 1984. In other words, assessment order of 14th March 1983 had merged in appellate order of 31st July 1984. Under s. 263 CIT may interfere only with order passed by ITO. He has no power to vary in any manner order of AAC, which was only order standing after 3 1 s t July, 1984. Various authorities were cited in this regard. It was also submitted that so far as assessee was concerned, full facts relating to sale of units had been given before ITO and ITO completed assessment also after due enquiry. If that be so, it was not open to CIT to interfere with that order on ground that different view could have been taken on facts considered by ITO. 5 . Smt. Kapila submitted with all emphasis at her command that this was clear case of taking unfair advantage of exemption ranted by legislature but with built-in safeguards for Revenue. assessee was quick to take advantage of exemption provision but, quite unfairly, ignored legislature prescription regarding restrictions on sale and hence nothing could have been fitter case for interference by CIT. It was emphasised that after all Department has no right of appeal against order of ITO and if ITO makes serious mistake and that mistake affects Revenue prejudicially, only course provided by legislature to correct situation was through revisional power of CIT under s. 263. She contended that interpretation of said provision must be proceeded in such manner as to make Act workable and not in manner to destroy very purpose of provision. 6 . On charge that CIT ceased to have any jurisdiction once assessment order stood merged in order of AAC dt., 31st July, 1984 submission for Department was that judicial authorities were divided on this aspect. She relied, in particular, on decision of Supreme Court in State of Madras vs. Madurai Mills Co. Ltd (1967) 19 STC 144 (SC), wherein court observed at provision 149 and 150 as under: "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 interior 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." Smt. Kapila also placed reliance on another decision of Supreme Court, viz., Gojer Bros. (P) Ltd., vs. Rattan Lal Singh AIR 1974 (SC) 1380. Basically her contention was that there is no merger with regard to point considered and decided by ITO in his assessment order, which is not subject matter of appeal before appellate authority. doctrine of merger only operates with regard to points taken in appeal before appellate authority and which come to adjudicated upon by that authority. On merits of disputes, departmental representative relied upon reasoning of Comrr., 7 . In reply, Shri Iyer pointed out for assessee that both above decisions of Supreme Court were considered specifically by Karnataka High Cout (Full Bench) in CIT vs. Hindustan Aeronautics Ltd. (19 86 ) 54 CTR (Kar) 158 (FB) : (19 86 ) 157 ITR 315 (Kar) (FB). After such consideration, court held that CIT has no power to entertain assessee's petition under s. 264, preferred from part of appellate order passed by AAC against which assessee was aggrieved during pendency or after disposal, as case may be of Department's second appeal before Tribunal preferred against another part of same order even if subject matter of appeal and revisional proceedings were not same but related to distinct matters. 8. We have considered position. As observed by Madhya Pradesh High Cout in CIT vs. Mandsaur Electric Supply Co. Ltd., (1982) 29 CTR (MP) 324 (FB) : (1983) 40 ITR 677 at 682 (MP) (FB), there are conflicting decisions on question as to whether entire order of assessment passed by ITO merges with order of AAC or merger is only with respect of that part of order of ITO which relates to items considered and decided by AAC. same controversy came by before Ahmedabad Bench of Tribunal in Himson Textile Engg., Industries vs. ITO (19 86 ) 24 TTJ (Ahd) 101 : (1985) 14 ITD 393 (Ahd) (TM). It was held by Ahmedabad Bench of Tribunal that in light of decision in Shree Arbinda Mills Ltd vs. ITO (1983) 15 TTJ ( Ahd ) 204 ( SB ) : ( 1983) 3 SOT 311 (Ahd) (SB), authority has power or discretion to do something for which appropriate circumstances exist, whether or not that authority has, as matter of fact, exercised that power, such authority should be deemed to have exercised that power i.e., order ITO will merge in order of AAC even on points not appealed against. In this regard, Special Bench preferred (in Shree Arbinda Mills (supra), to follow decision of Bombay High Cout in CIT vs. Tejaji Paras Ram Kharwala (1953) 23 ITR 412 (Bom) in preference to decision of Gujarat High Cout in Karsandas Bhagwandas Patel vs. G.V. Shah, ITO, Rajkot & Ors. (1975) 98 ITR 255 (Guj). 9. In any case, it is apparent that, on this issue, two equally valid opinions are possible, one in favour of assessee. In such situation, it is settled law that interpretation in favour of tax payer has to be preferred. Sec. CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC). In this view, we hold that CIT had no jurisdiction to interfere under s. 263 after 31st July, 1984. July, 1984. 1 0 . In view we have taken, above, we do not find it necessary to consider assessee's submission before us on merits of CIT's directions to ITO for assessment of capital gains computed at Rs. 2,42,512. 11. appeal is allowed. *** DEWAN DAULAT RAI KAPUR v. INCOME TAX OFFICER