ITAT Cannot Re-Adjudicate Issues Under Guise Of Rectification U/S 254(2) Income Tax Act: Madras High Court

The Madras High Court has held that the rectification power under Section 254(2) of the Income Tax Act is akin to the review power under Order 47 Rule 1 CPC and is limited to rectifying any mistake apparent on the face of the record. The Tribunal cannot re-adjudicate issues or modify its original order under the guise of rectification. Section 254(2) of the Indian Income Tax Act, 1961, grants the Income Tax Appellate Tribunal (ITAT) the authority to amend its orders to rectify any mistake apparent from the record. Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan stated that when the power under section 254(2) is akin to Order 47 Rule 1 of CPC, the scope and ambit of rectification/review could be only within the contours provided under the provision. When the provision only allows for rectification for any errors apparent on the face of the record, the mistake should be discernible on the face of the record without requiring any elaborate enquiry or reasoning. In the garb of rectification, the issue cannot be re-adjudicated, and a fresh order cannot be passed effacing the original order, which is clearly impermissible. In the case at hand, a scheme to provide dhotis and sarees for the poor was formulated by the Tamil Nadu State Government. A large scam erupted in the scheme, prompting the Income Tax Department to conduct a search on the premises of Tamil Nadu Textile Corporation. During the search proceedings, including the assessee, pertaining to some transactions were found out, which resulted in the initiation of proceedings under Section 158BD of the Income Tax Act. The assessment was completed under section 143(3). The assessee filed an appeal before the ITAT challenging the block assessment, and the ITAT remanded the case back to the assessing authority. The AO allowed 1/3rd of the income to be deducted towards expenses, observing that since the assessee was involved in the business of supplying uniform cloth, he could not have earned 120% profit. Therefore, a sum equal to 1/3rd of the total income computed in the original assessment order was allowed as expenditure. The block assessment made by the AO in the remand was again challenged by the assessee before the ITAT. The Tribunal allowed the appeal in part by modifying the rate of profit from 8% to 5%. The assessee filed a rectification application under section 254(2) seeking a clarification as to whether the 5% profit ratio as directed by the Tribunal would be adopted on the gross turnover or not. The Tribunal disposed of the application by clarifying that 5% profit ratio suggested by the Tribunal would obviously relate to gross turnover. Thereafter, the revenue also filed a rectification petition under section 254(2). The Tribunal, by order dated 26.03.2013, determined the estimated income in the hands of the assessee afresh and modified the income of the assessee at 50% of the income determined in the original assessment. The assessee further filed a rectification petition under section 254(2), praying for reconsideration of the order dated 26.03.2013 which was dismissed. The issue before the bench was whether the Tribunal was right in modifying the orders passed by exercising the power under section 254(2) of the Act. The bench observed that in exercise of the powers conferred on the Tribunal under section 254(2), the Tribunal may amend any order passed under section 254(1) only to the limited extent of rectifying any mistake that is apparent on the face of the record. The bench stated that the Tribunal, while exercising the power of rectification under section 254(2), does not sit in appeal over its own order and further, the scope of rectification is not an appeal in disguise. An erroneous order can only be challenged before the appellate court, and it cannot be a subject matter of rectification, as the Tribunal is not exercising the appellate jurisdiction while considering the rectification petition under section 254(2). The bench opined that the rectification order dated 26.03.2013 by ITAT is erroneous, perverse and clearly exceeding its jurisdiction. In view of the above, the bench set aside the rectification order. Case Title: M/s. Devaraj & Others v. The Income Tax Officer Case Number: TCA Nos. 319 of 2016 and 538 of 2021 Counsel for Appellant/Assessee: A.S. Sriraman Counsel for Respondent/Department: V. Pushpa Click Here To Read/Download Order

ITAT Cannot Re-Adjudicate Issues Under Guise Of Rectification U/S 254(2) Income Tax Act: Madras High Court

Mehak Dhiman

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