Partial merger allows revision; chit fund business is not a loan company for interest disallowance purposes.

Partial merger in an appellate order does not bar revision under section 263(1) for matters not actually considered in appeal, so the original assessment remains open to that extent. A chit fund business is not a financial company or loan company under section 40A(8) merely because it conducts chit operations or provides prize-related funding; the statutory test is whether its principal business is financing by loans, advances or cognate modes, and the assessee failed that test. The disallowance of interest on deposits or borrowings was therefore sustained.

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Issues: (i) whether the Commissioner could invoke revisional jurisdiction under section 263(1) in respect of an assessment order that had merged only partially in an appellate order; (ii) whether a chit fund company carrying on substantial chit operations could be treated as a financial company or loan company for the purpose of section 40A(8) so as to escape disallowance of interest paid on deposits or borrowings.

Issue (i): whether the Commissioner could invoke revisional jurisdiction under section 263(1) in respect of an assessment order that had merged only partially in an appellate order.

Analysis: The disallowance of 15% of interest under section 40A(8) was not part of the subject-matter of the earlier appeal. Only the issues actually carried in appeal merged in the appellate order. Where there is only partial merger, the original assessment order remains open to revision on matters not considered in appeal.

Conclusion: The Commissioner had valid jurisdiction to revise the assessment order.

Issue (ii): whether a chit fund company carrying on substantial chit operations could be treated as a financial company or loan company for the purpose of section 40A(8) so as to escape disallowance of interest paid on deposits or borrowings.

Analysis: The expression "loan company" in the definition of financial company under section 40A(8) requires that the principal business be the providing of finance by loans, advances or other similar modes. On the facts, the assessee's dominant activity was conducting chits, with most income and assets attributable to chit operations. A chit foreman is bound by the chit arrangement and statutory obligations under the Chit Funds Act, and the business is not the same as lending or advancing funds in the ordinary sense. The word "otherwise" in the clause was read in context and by applying ejusdem generis to refer to other cognate modes of financing, not to chit transactions. The Reserve Bank classification did not control the statutory definition under the Income-tax Act.

Conclusion: The assessee was not a financial company or loan company within section 40A(8), and the disallowance was rightly directed.

Final Conclusion: The revision was competent and the assessee was liable to the interest disallowance under section 40A(8), leaving the appeal without merit.

Ratio Decidendi: Where an issue was not the subject-matter of the earlier appeal, partial merger does not bar revision under section 263(1); and a chit fund undertaking is not a loan company under section 40A(8) merely because it provides prize money or ancillary finance-like facilities, since the principal business must be the cognate business of financing by loans, advances, or similar modes.

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