Court’s decision
The Madras High Court allowed the tax appeals filed by the assessee and set aside the rectification orders passed by the Income Tax Appellate Tribunal under Section 254(2) of the Income Tax Act, 1961. The Court held that the Tribunal had clearly transgressed the narrow limits of rectification by effectively reviewing and rewriting its earlier final order on merits, which is impermissible in law.
The Court held that the power under Section 254(2) is confined strictly to rectifying mistakes apparent on the face of the record and cannot be used to re-appreciate evidence, alter conclusions, or enhance assessed income. The High Court concluded that the Tribunal’s rectification order, which substantially modified the computation of income and resulted in enhancement, amounted to a review without statutory authority.
Accordingly, the rectification orders were quashed and the original order of the Tribunal, as modified earlier within permissible limits, was restored.
Facts
The proceedings originated from block assessment proceedings initiated against the assessee pursuant to a search conducted in connection with a large public procurement scheme. The Assessing Officer completed block assessment by estimating undisclosed income and allowing a one-third deduction towards expenditure, resulting in a particular profit ratio being applied.
The assessee challenged the assessment before the Tribunal, which partly allowed the appeal and reduced the profit ratio applied by the Assessing Officer. Subsequently, multiple miscellaneous petitions were filed by both the assessee and the Revenue seeking clarification and rectification of the Tribunal’s order under Section 254(2).
Initially, the Tribunal clarified that the reduced profit percentage would apply to gross turnover. Thereafter, on a rectification application filed by the Revenue, the Tribunal re-examined the entire computation and passed a fresh rectification order substantially modifying the income determination, resulting in enhancement of income. Further rectification sought by the assessee was rejected, leading to the present appeals before the High Court.
Issues
Whether the Income Tax Appellate Tribunal can re-adjudicate and modify the substance of its final order while exercising powers under Section 254(2).
Whether enhancement of income through a rectification order amounts to an impermissible review.
Whether errors requiring detailed reasoning and re-appreciation of facts can be treated as “mistakes apparent on the record”.
Whether repeated rectification proceedings can be used to unsettle concluded findings of the Tribunal.
Petitioner’s Arguments
The assessee contended that the Tribunal had completely exceeded its jurisdiction under Section 254(2) by re-opening the entire assessment and altering the computation of income. It was argued that rectification is limited to correcting patent, obvious, and self-evident errors and cannot be used to revisit factual findings or legal conclusions.
The assessee submitted that the rectification order resulted in enhancement of income, which is impermissible unless strictly falling within the proviso to Section 254(2) and after satisfying jurisdictional requirements. It was argued that the Tribunal effectively sat in appeal over its own order, which the statute does not permit.
The assessee relied on binding Supreme Court jurisprudence holding that Section 254(2) powers are akin to review powers under Order XLVII Rule 1 of the CPC and cannot be exercised to correct alleged errors of judgment.
Respondent’s Arguments
The Revenue argued that the Tribunal had only corrected an erroneous assumption in its earlier order regarding the manner in which profit was computed by the Assessing Officer. It was contended that the Tribunal noticed a factual mistake apparent from the record and was therefore justified in rectifying the same.
The Revenue submitted that the rectification order merely aligned the Tribunal’s findings with the actual assessment methodology adopted by the Assessing Officer. It was argued that such correction fell within the permissible scope of Section 254(2).
The Department further contended that the assessee was afforded adequate opportunity and therefore could not complain of jurisdictional excess.
Analysis of the law
The High Court undertook a detailed analysis of Section 254(2) of the Income Tax Act and reiterated that the provision confers a very limited power of rectification. A “mistake apparent on the record” must be obvious, patent, and not one that requires elaborate argument or re-examination of facts.
The Court held that the Tribunal cannot revisit its reasoning, reassess evidence, or substitute one possible view with another while exercising rectification powers. Any such exercise would amount to review, which is not contemplated under the Act.
The Court emphasised that even if an earlier order is erroneous on merits, the remedy lies in appeal and not in rectification. Jurisdictional discipline requires finality of appellate orders except to the extent expressly permitted by statute.
Precedent Analysis
The High Court relied extensively on Supreme Court decisions clarifying the scope of Section 254(2). It applied the ratio that rectification powers are akin to limited review under civil procedure law and cannot be used to rehear matters on merits.
Judgments holding that enhancement of income through rectification is impermissible unless strictly falling within the statutory proviso were relied upon. The Court also relied on precedents cautioning against repeated rectification applications being used to unsettle finality.
These precedents squarely governed the controversy and rendered the Tribunal’s rectification order unsustainable.
Court’s Reasoning
The High Court found that the Tribunal’s rectification order involved re-appreciation of the entire assessment methodology and substitution of one computational approach with another. Such an exercise, the Court held, clearly crossed the boundary between rectification and review.
The Court observed that the Tribunal’s original order had attained finality on merits and any perceived error therein could not be corrected through Section 254(2). The rectification order resulted in enhancement of income, which further demonstrated that the Tribunal had exceeded its statutory jurisdiction.
The Court therefore recogniszed the rectification order as legally void and liable to be set aside.
Conclusion
The High Court allowed the tax appeals and quashed the rectification orders passed by the Tribunal. It held that the Tribunal had acted without jurisdiction in re-adjudicating and enhancing income under the guise of rectification.
The original appellate order of the Tribunal stood restored.
Implications
This judgment is a significant reaffirmation of the limited scope of rectification under Section 254(2). It protects taxpayers from endless re-litigation through repeated miscellaneous applications and reinforces finality of appellate proceedings.
The ruling sends a clear message that tribunals must exercise jurisdictional restraint and cannot correct perceived errors of judgment through rectification.
