The Gujarat High Court has reaffirmed the limited scope of the Income Tax Appellate Tribunal’s (ITAT) rectification powers under Section 254(2) of the Income-tax Act, 1961, holding that the Tribunal cannot recall its final order by effectively re-hearing the matter on merits.
The bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati ruled that if the department believes an ITAT decision is legally or factually erroneous, the proper remedy is to file a statutory appeal before the High Court rather than seek a review disguised as a rectification application.
The petitioner had originally filed his income tax return on 25 March 2008, which was processed under Section 143(1) of the Income-tax Act. Subsequently, the Assessing Officer reopened the assessment under Sections 143(3) read with 147 and passed an assessment order on 30 March 2015 making an addition of ₹34.59 lakh. The Commissioner of Income Tax (Appeals) dismissed the assessee’s appeal on 3 April 2017.
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The assessee then approached the ITAT, which, by its order dated 27 June 2019, allowed the appeal after examining the legality of the reassessment proceedings. However, the Revenue filed a miscellaneous application under Section 254(2) seeking recall and modification of the Tribunal’s order. Accepting the Revenue’s plea, the ITAT recalled its earlier judgment on 28 April 2021 for fresh hearing.
Aggrieved by this recall order, the assessee challenged the Tribunal’s decision before the Gujarat High Court through writ petitions.
The principal question before the High Court was whether the ITAT could invoke its rectification powers under Section 254(2) to recall a detailed final order and reopen the entire appeal on the ground that it had allegedly proceeded on an incorrect factual premise.
The petitioners argued that Section 254(2) authorizes only correction of a “mistake apparent from the record” and does not confer any power of review or rehearing.
The petitioners relied heavily on the Supreme Court’s decision in Commissioner of Income Tax v. Reliance Telecom Ltd., contending that Section 254(2) permits only rectification of obvious mistakes. The Tribunal cannot review or reconsider the merits of a concluded appeal. The department had attempted to reargue the entire case under the guise of a rectification application. The recall order exceeded the Tribunal’s statutory jurisdiction.
The department defended the Tribunal’s order, asserting that the original ITAT decision contained an apparent factual error. According to the Department, the Tribunal had proceeded on an incorrect assumption while deciding the legality of the reassessment, thereby justifying invocation of Section 254(2).
It argued that the recall merely corrected an apparent mistake and therefore did not amount to an impermissible review.
The Division Bench carefully examined the original ITAT judgment dated 27 June 2019 and noted that it was a detailed order rendered after extensive consideration of both facts and law.
The Tribunal had specifically examined two fundamental issues governing the reassessment: whether the reopening under Section 147 had been validly initiated after obtaining mandatory sanction under Section 151; and whether the Assessing Officer had independently formed the requisite “reason to believe” or merely acted on borrowed satisfaction.
After evaluating the material on record, the Tribunal had concluded that mandatory approval under Section 151 had not been obtained and that the Assessing Officer had failed to independently apply his mind before initiating reassessment proceedings. The Tribunal also found that there was no sufficient nexus between the available material and the belief that income had escaped assessment.
The High Court observed that while allowing the Revenue’s miscellaneous application, the Tribunal merely stated that certain factual aspects required reconsideration and, on that basis alone, recalled its earlier order.
The Court found that this exercise amounted to reopening the entire appeal instead of correcting any obvious clerical or apparent error. Such an exercise, it held, falls completely outside the limited jurisdiction conferred under Section 254(2).
The High Court extensively relied upon the Supreme Court’s judgment in Commissioner of Income Tax (IT-4), Mumbai v. Reliance Telecom Ltd. (2022) 440 ITR 1, wherein it was categorically held that Section 254(2) is confined to rectification of mistakes apparent from the record. The Tribunal cannot revisit or re-appreciate the merits of its earlier decision. The power under Section 254(2) is analogous to review on extremely limited grounds and cannot be exercised as an appellate jurisdiction over its own orders. If an order on merits is erroneous, the aggrieved party must approach the High Court through the statutory appellate remedy.
The Gujarat High Court held that the Revenue’s miscellaneous application sought reconsideration of findings already rendered after a detailed adjudication on facts and law.
The Court emphasized that elaborate submissions by parties or an alleged error in appreciation of evidence cannot enlarge the Tribunal’s jurisdiction under Section 254(2). The provision permits only correction of mistakes apparent on the face of the record and does not authorize a fresh adjudication.
The Bench further observed that if the Revenue considered the original ITAT decision legally unsustainable, its proper remedy was to file a tax appeal before the High Court instead of seeking recall through a miscellaneous application.
Allowing the writ petitions, the Gujarat High Court quashed the ITAT’s order dated 28 April 2021 recalling its earlier judgment. Consequently, the Court restored the original ITAT order dated 27 June 2019 in favour of the assessees.
The Court also clarified that the Revenue remains free to pursue the statutory appellate remedy by filing a tax appeal before the High Court within the period indicated by the Court, where such appeal would be considered in accordance with law.
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