Landmark Judgements of Supreme Court on Section Section 254(2) [Appellate Tribunal – Rectification of Mistake]

ITAT has no power to recall its order even if submissions were filed on merits – Supreme Court allows Revenue’s appeal against Reliance Telecom over dismissal of Revenue's writ petitions by Bombay High Court against ITAT’s recall order under section 254(2)

The powers of ITAT under Section 254(2) of the Act are only to rectify/correct any mistake apparent from the record. If the order passed by the ITAT was erroneous on merits, the remedy available to the Assessee was to prefer an appeal before the High Court. Therefore, as such, the order passed by the ITAT recalling its earlier order is beyond the scope and ambit of the powers of the Appellate Tribunal conferred under Section 254 (2) of the Act. Merely because the Revenue might have in detail gone into the merits of the case before the ITAT and merely because the parties might have filed detailed submissions, it does not confer jurisdiction upon the ITAT to pass the order de hors Section 254(2) of the Act.

Assessee filed an application under Section 195(2) of the Act before the Assessing Officer, to make payment to the nonresident company for purchase of software without TDS. It was contended by the Assessee that it was for the purchase of software and Ericsson A.B. had no permanent establishment in India and in terms of the DTAA between India and Sweden & USA, the amount paid is not taxable in India.

The Assessing Officer passed an order dated 12.03.2007 rejecting the Assessee’s application holding that the consideration for software licensing constituted under Section 9(1)(vi) of the Act and under Article 12(3) of the DTAA is liable to be taxed in India and accordingly directed the assessee to deduct tax at the rate of 10% as royalty.

The Assessee after deducting the tax appealed before the CIT(A). CIT(A) vide order dated 27.05.2008 held in favour of the Assessee. Revenue appealed before the ITAT and by a detailed judgment and order dated 06.09.2013, the ITAT allowed the Revenue’s appeal by relying upon the judgments/decisions of the Karnataka High Court and held that payments made for purchase of software are in the nature of royalty. Against the detailed judgment and order dated 06.09.2013 passed by the ITAT, the Assessee filed miscellaneous application for rectification under Section 254(2) of the Act. Simultaneously, the Assessee also filed the appeal before the High Court against the ITAT order dated 06.09.2013

The ITAT vide order dated 18.11.2016, allowed the Assessee’s miscellaneous application filed under Section 254(2) of the Act and recalled its original order dated 06.09.2013. Immediately, on passing the order dated 18.11.2016 by the ITAT recalling its earlier order dated 06.09.2013, the Assessee withdrew the appeal preferred before the High court, which was against the original order dated 06.09.2013.

Feeling aggrieved and dissatisfied with the order passed by the ITAT allowing the miscellaneous application under Section 254(2) of the Act and recalling its earlier order dated 06.09.2013, the Revenue

preferred writ petition before the High Court. By the impugned common judgment and order, the High Court dismissed the said writ petition/s.

On Revenue’s appeal, Supreme Court observes that ITAT’s order recalling its original order was beyond the scope and ambit of the powers under section 254(2) and remarks that while allowing the MA, ITAT reheard the entire appeal on merits as if it was deciding the appeal against the CIT(A)’s order; Further observes that powers under section 254(2) are akin to Order XLVII Rule 1 of Code of Civil Procedure, 1908, thus, holds ITAT could only rectify any mistake apparent from record, and was not required to revisit its earlier order and go into the merits; Supreme Court notes that the only remedy available to the Assessee was to prefer an appeal before the High Court and allows Assessee to prefer an appeal before High Court within six weeks which can be decided and disposed of on merits without any objection on limitation period. Supreme Court finds High Court’s reasoning for dismissal of Revenue’s writ petition not tenable in law; High Court had held, “(i) the Revenue itself had in detail gone into merits of the case before the ITAT and the parties filed detailed submissions based on which the ITAT passed its order recalling its earlier order; (ii) the Revenue had not contended that the ITAT had become functus officio after delivering its original order and that if it had to relook/revisit the order, it must be for limited purpose as permitted by Section 254(2) of the Act; and (iii) that the merits might have been decided erroneously but ITAT had the jurisdiction and within its powers it may pass an erroneous order and that such objections had not been raised before ITAT. The Supreme Court, thus, quashes the impugned High Court ruling dismissing Revenue’s writ petitions as well as the ITAT’s recall order and restores ITAT’s original order dated 06.09.2013 – [CIT, Mumbai v. Reliance Telecom Ltd. – Date of Judgement : 03.12.2021 (SC)]

SLP dismissed against High Court ruling that where Tribunal rejected assessee's cross-objection and assessee did not appeal and when High Court decided revenue’s appeal in revenue’s favour, assessee filed rectification application before Tribunal regarding earlier cross-objection, same would be barred by principle of finality

Assessing Officer disallowed certain amounts under section 68. On appeal, Commissioner (Appeals) allowed assessee’s contentions and deleted amounts added back by Assessing Officer. However, Commissioner (Appeals) rejected assessee’s arguments regarding validity of reassessment notice. Tribunal rejected revenue’s appeal and, further, it also rejected cross-objection of assessee regarding validity of re-assessment notice. Assessee did not file appeal to High Court nor challenged rejection of its cross-objection in revenue’s appeal. High Court allowed revenue’s appeal. Thereafter, assessee approached Tribunal by filing an application for rectification of Tribunal’s order in appeal preferred by revenue contending that since rejection of its cross-objection about validity of re-assessment notice was not on merits, Tribunal ought to consider that ground and revive cross-objections. Tribunal rectified its earlier order - High Court by impugned order held that rectification application filed by assessee was barred by principle of finality and to an extent doctrine of merger and, further, Tribunal’s previous decision to dismiss cross appeal as infructuous was not a mistake or error warranting rectification and, hence, Tribunal entirely mis-appreciated its jurisdiction of correcting apparent mistake. Special Leave Petition filed against impugned order was to be dismissed. [In favour of revenue] – [PCIT v. N.R. Portfolio (P) Ltd. (2019) 265 Taxman 559 : 108 taxmann.com 266 (SC)]

SLP dismissed against High Court ruling that where assessee filed instant petition challenging validity of Tribunal's order under section 254(2), in view of fact that Tribunal had accepted additional evidence without complying with provisions of rule 29 of ITAT Rules, impugned order passed by Tribunal became defective and, thus, same was to be set aside

Section 254 of the Income-tax Act, 1961 read with rule 29 of the Income-Tax (Appellate Tribunal) Rules, 1963. Assessee filed instant petition challenging validity of order passed by Tribunal under section 254(2). According to assessee, Tribunal, in a very unusual manner, entertained additional documents which were not part of record. High Court by impugned order held that since revenue had not moved a formal application under rule 29 of ITAT Rules, Tribunal could not admit additional evidence and in view of aforesaid irregularities, impugned order passed by Tribunal became defective and, thus, same was to be set aside. Special Leave Petition filed against impugned order was to be dismissed. [In favour of assessee] (Related Assessment years : 2009-10 and 2010-11) – [DCIT v. Radhika Roy (2019) 263 Taxman 117 : 105 taxmann.com 35 (SC)]

Dismissal of rectification application under section 254(2) by Tribunal without appreciating alternative submission of assessee was not justified

The assessee’s claim for deduction of the foreign exchange fluctuation loss was disallowed by the Assessing Officer. The Tribunal also upheld the disallowance. On appeal, the High Court took view that the assessee should file application under section 254(2) before the Tribunal. Thereafter the assessee filed an application under section 254(2) before the Tribunal but same was dismissed.

Held that in the light of the orders passed for the earlier assessment years 1996-97 and 1997-98 as also having regard to the assessment orders passed in the following year 1999-2000 and in view of the judgment of Apex Court in the case of CIT v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254, the Tribunal was wrong in refusing to rectify its own order under section 254(2) particularly when it had failed to appreciate that, the expenditure could have fallen on the capital account, which was specifically pleaded by the assessee as an alternate submission. The Tribunal was directed to decide the matter de novo in accordance with the law laid down in the case of CIT v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 : 179 Taxman 326 (SC) as well as on the merits of the case. [Matter remanded] (Related Assessment year : 1998-99) – [Perfetti Van Melle India (P) Ltd. v. CIT (2011) 334 ITR 259 : (2012) 20 taxmann.com 756 (SC)]

Non-consideration of decision of jurisdictional High Court (or Supreme Court) is a mistake apparent from record rectifiable under section 254(2)

A patent, manifest and self evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction. An error cannot be said to be apparent on the face of the record if one has to travel beyond the record to see whether the judgement is correct or not. An error apparent on the face of the record means an error which strikes on mere looking and does not need long drawn out process of reasoning on points where there may conceivably be two opinions. Such error should not require any extraneous matter to show its incorrectness. (Related Assessment year : 1996-97) - [ACIT v. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 227 : 219 CTR 90 : 173 Taxman 322 (SC)]

Where the application for rectification is made within four years of the order of the Appellate Tribunal, the Appellate Tribunal has jurisdiction to pass the order disposing of the application and cannot reject the