2012 (9) TMI 266 - HC - Income Tax

Rectification of mistake u/s 254 - Disallowance of commission paid to dealers - ITAT allowed it - rectification application by assessee accepted on drastic disallowance to the extent of 10% for two succeeding assessment years i.e 2005-06 and 2006-07 - Held that - Section 254(2) of the Act makes it amply clear that a mistake apparent from the record is rectifiable. To attract the jurisdiction under Section 254(2) a mistake should exist and must be apparent from the record. The power to rectify the mistake however does not cover cases where a revision or review of the order is intended. Considering the legal position the Tribunal was not justified in recalling the order passed by it in toto and setting the matter down for a fresh hearing - whether the dealer commissions remained constant throughout the previous years or had to dwindle according to the Tribunal s understanding in its previous order of 30-11-2009 were matters that had to be gone into and were directed to be gone into by the AO. However in the order by which previous order was rectified the entire basis of its previous reasoning was substituted and a wholly new result ensued. This court is clear that such re-appreciation did not amount to rectification of a mistake but re-appreciation of a process of reasoning which falls legitimately in the sphere of the appellate forum - As Tribunal took note of its order dated 9-10-2009 in respect of the AY 2005-06 and was to quite an extent influenced by it but is to be noted that the correctness of that order is under appeal before this court - thus the Tribunal could have not entirely substituted and re-written its previous order - the main order disposing of the matter on 30-11-2009 is hereby restored.

Summary

Issues Involved:
1. Jurisdiction of the Tribunal under Section 254(2) of the Income Tax Act.
2. Whether the Tribunal exceeded its jurisdiction by reappreciating the merits of the case.
3. The distinction between rectification and review under Section 254(2).

Detailed Analysis:

1. Jurisdiction of the Tribunal under Section 254(2) of the Income Tax Act:
The core issue revolves around the Tribunal's jurisdiction to rectify its orders under Section 254(2). The section allows rectification of "mistakes apparent from the record." The High Court emphasized that a mistake should be "patent, obvious and whose discovery is not dependent on argument." The Tribunal's power is limited to correcting such mistakes and does not extend to revising or reviewing the order. The court cited the Supreme Court's interpretation in Master Construction Co. (P) Ltd. v. State of Orissa and Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tirumale, which clarified that an error apparent on the face of the record should not require elaborate arguments or investigation.

2. Whether the Tribunal exceeded its jurisdiction by reappreciating the merits of the case:
The Tribunal initially allowed the revenue's appeal, reasoning that the commission payable during the initial years after setting up the business might have been warranted, but for AY 2006-07, a decline in such commission could be justified. However, the Tribunal later rectified its order, concluding that the commission expenses should not have reduced as the number of dealerships remained constant. The High Court found that this reappreciation of facts and substitution of the previous order amounted to a review rather than a rectification, which is beyond the Tribunal's jurisdiction under Section 254(2).

3. The distinction between rectification and review under Section 254(2):
The High Court reiterated that Section 254(2) does not permit the Tribunal to obliterate the original order and substitute it with a new one. This distinction was highlighted in Commissioner of Income Tax v. Income Tax Appellate Tribunal and Commissioner of Income Tax v. Honda Siel Power Products. The court noted that the Tribunal's action of substituting its previous order with a new one, based on a reappreciation of facts, constituted a review rather than a rectification. The Tribunal's reliance on its order for AY 2005-06, which was under appeal, further complicated the matter. The High Court concluded that the Tribunal's rectification order was unsustainable as it exceeded the limited jurisdiction conferred under Section 254(2).

Conclusion:
The High Court quashed the Tribunal's rectification order dated 14-1-2011 and restored the original order dated 30-11-2009. The court held that the Tribunal's action amounted to a review rather than a rectification, which is not permissible under Section 254(2). The assessee was advised to seek appellate remedies if aggrieved by the original order. The writ petition was allowed, and no costs were awarded.