This is appeal by assessee against order of Commissioner under section 263 of Income-tax Act, 1961 ('the Act') by which order of ITO had been set aside to be redone de novo. 2. objection of assessee is primarily on issue of legality in order of Commissioner specially when order of ITO was appealed against and appellate authority had occasion to go into entire assessment with powers in hands. second objection of assessee was that Commissioner started proceedings with examination of loss sufferred on purchase and sale of rice but held that certain payments made were disallowable under section 40A(3) of Act which were never put to assessee. last grievance of assessee is that Commissioner has ultimately only doubted entire transaction and has not brought out anything from which it could be concluded that order of ITO was erroneous causing prejudice to revenue. 3. assessee carries on contract business for supply of bricks to RCP authorities. assessee apart from this business had been dealing with other items like, dal, etc., in earlier years and in year dealt with business of rice. assessee alongwith return of income had provided detailed particulars about loss suffered in purchase and sale of rice. In earlier years also assessee have dealt with cotton as well as gram and had suffered loss on cotton. Separate trading accounts of rice, kiln account, etc., were provided alongwith return of income. ITO examined purchase and sale transactions through agent in Bhatinda, namely. Jairam Dass Baburam & Co. required stock tally was provided to him and details of purchases and sales were also provided on basis of which he had accepted loss. order of ITO is dated 6-9-1983. Since there was trading addition made by ITO, assessee preferred appeal to Commissioner (Appeals) who vide his order dated 18-4-1985 had sustained addition made by ITO. 4. argument of assessee in this connection was that Commissioner (Appeals) had all powers of enhancement or looking into matter which were not looked into by ITO. He referred to notice of Commissioner and submitted that enquiry was to examine correctness or otherwise of loss claimed by assessee. Reply was provided to Commissioner along with various statements and documents as were provided before ITO. He referred to pages 8 and 9 wherein in reply to notice under section 131 of Act served on agent of assessee who dealt with rice for assessee. agent has confirmed that he had carried on business for and on behalf of assessee enclosing copies of account of assessee in books of agent. At page 11 he submitted copy of reminder sent by agent for payment of Rs. 66,327 on account of dealings in rice by him for assessee. This particular reminder, he submitted was in possession of ITO collected directly from said party. From page 12 onwards is details of entire transactions as was submitted with ITO at time of assessment. Referring to order of Commissioner, learned counsel for assessee submitted that department has doubted transaction because purchases were made during course of transit. Referring to order he further submitted that notice was for allowance of loss claimed by assessee while in view of fact assessee sufferred logs. They are presumed payment in cash and allowed claim under section 40A(3). argument was that factually speaking, referring to various documents that have been filed, agent carried out all transactions on assessee's behalf and agent raised bill on assessee and amount was payable by assessee to agent. To say that since agent had paid for in cash tantamounts to payment in cash by assessee is not proper according to assessee. Referring to copy of account of agent which is at page 10, he submitted that amount due to agent was paid by draft and small amount of Rs. 1,300 only was paid by cash and, therefore, even on this count conclusion drawn by Commissioner was wrong. It was argued that Commissioner had in fact found that he has only gained some suspicious grounds but nothing concrete to establish that there was in fact error committed by ITO followed by prejudice caused to revenue. Several legal authorities were relied upon on issue of order of ITO merging with order of Commissioner (Appeals) thereby Commissioner's order under section 263 being bad and also on issue that specific finding should be given to error followed by prejudice. 5. For department argument was that entire transaction was fishy one which can very well be seen from various documents. goods were already meant for destination during which time agent of assessee is shown to have bought it and then shown to have sold it to another person at same destination. It is subsequently shown to have suffered loss due to fact of damage caused to it or being of inferior quality. Commissioner examined issue of claim of loss and disallowance under section 40A(3) is part of it and nothing extraneous to entire proceedings. It was further argued that payment of cash for purchases whether it is made by assessee himself or through his agent results in same thing, i.e., purchases are cash by assessee. He drew our attention to several authorities in this connection supporting order of Commissioner and on issue of merger, he submitted that Commissioner (Appeals) did not have any occasion to consider, transaction of purchases and sale of rice and since it was not matter that appealed, it could not be said that that particular issue could not be revised by Commissioner under section 263. 6. We have carefully considered arguments of both parties and have examined various materials that have been placed on record. basis on which reopening proceedings were initiated as under: " Loss of Rs. 86,412 claimed in rice account is speculative loss and as such it was wrongly set off against profits from business, other than speculative nature. As per section 43(5) of Act, speculative transaction means one in which contract for purchase and sale of any commodity including stocks and shares is periodically and ultimately settled otherwise than by actual delivery or transfer of commodity or scripts. same has been done in instant case, as in none of documents name of assessee is mentioned. All bills for purchase and sale of rice are in name of Jairam Dass Baburam & Co., Bhatinda. income was thus computed under by Rs. 86,412 with tax effect of Rs. 49,136 approximately (both in case of assessee-firm and its partners). " ITO Ward 'C' of Sriganganagar had issued notice under section 131 dated 15-2-1985 to agent Jairam Dass Baburam & Co. making enquiry on alleged transaction by him for assessee. reply dated 28-2-1985 of agent in this connection is reproduced below: " We are in receipt of your notice under section 131 dated 15-2-1985. In this connection it is respectfully submitted as under: 1. Copy of account of Suresh Kumar Kuthari, Anoopgarh from 1-4-1981 to 31-3-1982 attached. 2. business was done for said firm on usual terms and conditions and no special terms were settled with party. 3. No advance was received from firm for conducting rice business. 4. That purchases and sales of rice were made by us on behalf of said firm as agents. 5. Details of railway receipt is attached, railway receipts are with purchaser. 6. firm has separated dealings also with firms to whom goods were sold on behalf of Suresh Kumar, Anoopgarh. copies of account of both these firms are attached. " Alongwith this reply reminder dated 26-10-1981 sent to assessee whereby assessee was informed of amount of Rs. 66,327 becoming due to party in respect of transactions on rice carried on for assessee. During assessment proceedings ITO called for some explanation on account of claim of loss on rice and assessee vide letter dated 22-8-1983 filed following reply: " My client had also done business of purchase and sale of rice and has suffered loss of Rs. 86,412 in it. Due to rains rice became defective and my client had to compensate purchaser for sale of defective quality of rice. All relevant documents of purchase, sale and settlement of claim are filed herewith in support of loss. " total value of purchases done for assessee was Rs. 6,25,575 and realisation on account of sale was Rs. 5,39,248.30. After adjustment of advance of Rs. 20,000 made in September 1981, loss of Rs. 66,327 was claimed from assessee by agent. various ledger account in books of agent of assessee alongwith copy of various bills as were provided to ITO have been attached. agent had further asked other dealers to act on his behalf and all thorough bills are made in name of agent. bills that were raised by agent on various persons have not been found to be fake. commission agents were also paid commission in respect of various transactions carried on behalf of agents. All these transactions of agent were shown to have been carried on by him on behalf of assessee. doubt in minds of department is because of fact that entire purchases and sales are made by agent in his own name and not for and on behalf of assessee. From these facts except for absence of something in writing between assessee and party, entire action only leads to conclusion that transactions appeared to be genuine and it is not after-thought. From order of Commissioner since certain transactions had commenced earlier to payment of advance on 29-9- 1981 transaction could not be real, cannot be accepted as entirely probable, as was explained that assessee requested agent to act on his behalf and to stand by his commitments, he had sent advance of Rs. 20,000. further argument that agent was in fact playing with assessee's money as he was able to realise funds through bank drafts from buyers which he utilised for making purchases. From this angle also it appears that transaction cannot be said to be made-up affair. On question of payment by cash, fact remains that assessee did not make payment in cash. On basis of realisation from customers agent made purchases for assessee. Whether purchases are made directly by assessee or through agent amounts to one and same thing as agent is acting on behalf of assessee. Since purchases made by him are to be treated as purchases by assessee in circumstances prevailing before us, it only leads to inference that purchases are made by assessee himself. When purchases are made by assessee which is treated as expenditure under section 40A(3) then to extent of purchases by cash in excess of Rs. 2,500 have necessarily to be disallowed unless requirements of rule 6DD of Income-tax Rules, 1962 are satisfied. fact that ITO did not apply his mind to question of allowability or satisfaction of requirements of section 40A(3), view taken by Commissioner in regard to setting aside of order is proper in view of Delhi High Court decision in case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375. 7. important question was raised as regards theory of merger. After assessment was made by ITO, assessee preferred appeals against additions that were made to trading account, which were considered in appeal by Commissioner (Appeals). plea of assessee was that order under section 263 having been passed subsequent to Commissioner (Appeals) order he could not have done so as ITO's order had already merged with order of Commissioner (Appeals). 8. Special Bench had occasion of considering merger theory in t h e cases of Shree Arbuda Mills Ltd. v. ITO [1983] 3 SOT 311 (Ahd.) and Dwarkadas & Co. (P.) Ltd. v. ITO [1982] 1 ITD 303 (Bom.) (SB). In both these cases, view taken by learned Members was that ones order of ITO has been appealed against and first appellate authority passes order then ITO's order merges en bloc with order of AAC with first appellate order and, therefore, Commissioner cannot revise order under section 263 of ITO. Rajasthan High Court in its recent decision in case of Sint. Ganga Devi v. CWT [1986] 28 TAXMAN 254 was considering powers of Commissioner to revise orders of WTO under section 25(2) of Wealth-tax Act, 1957. In this case, their Lordships considered several authorities including case of Karsandas Bhagwandas Patel v. G. V. Shah, ITO [1975] 98 ITR 255 (Guj.) and also in case of CIT v. Tejaji Farasram Kharawalla [1953] 23 ITR 412 (Bom.) Their Lordships observed thus: " It is clear from aforesaid decision that assessment order was subject matter of appeal and said appeal having been disposed of, order was merged in appellate order. observations still hold good. With respect to this theory, they will have to be viewed in light of theory of merger developed by Supreme Court in Madhurai Mills Co. Ltd.'s case 19 STC 144 and Amritlal Bhogilal & Co.'s case 34 ITR 130. We, therefore, hold that in facts and in circumstances of case, Commissioner had jurisdiction to act under section 25(2) in view of fact that part of assessment order was only subject matter of consideration before AAC, in other words, only that part of order of WTO which was not made subject matter of appeal before AAC by assessee, and which he had not examined suo motu did not get merged in order of AAC and, therefore, Commissioner was entitled to pass order under section 25(2) (of Wealth- tax Act)... " 9. In view of said decision, with which we are bound, we have to take contrary view from one expressed by learned Members in two Special Bench cases referred to by assessee. In instant case, assessee appealed to first appellate authority in respect of his contract business only on which certain additions were made and first appellate authority did not suo motu look into dealings in respect of rice, etc. Therefore, facts and circumstances are same as ones which were before their Lordships of Rajasthan High Court, supra. Even on legal issue assessee does not seem to have any merit in present appeal and on this basis respectfully following Rajasthan High Court decision we have to hold that there was no merger of order of ITO in respect of dealings in rice which was not appealed and thereby action of Commissioner in invoking his powers under section 263 is fully justified. We, accordingly, dismiss this appeal. *** SURESH KUMAR KOTHARI v. INCOME TAX OFFICER