INCOME TAX APPELLATE TRIBUNAL CANNOT RECALL ITS ORDER BY INVOKING SECTION 254(2) OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Rectification of Orders of Appellate Tribunal

Section 254 of the Income Tax Act, 1961 (‘Act’ for short) provides with the passing of order by the Income Tax Appellate Tribunal (‘ITAT’ for short).  Section 254(1) provides that the ITAT may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.  Section 254(2) provides that the ITAT may, at any time within six months from the end of the month in which the order was passed with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the Assessing Officer.

An amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub-section unless the ITAT has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard.     Any application filed by the assessee shall be accompanied by a fee of ₹ 50/-.

In COMMISSIONER OF INCOME TAX (IT-4) , MUMBAI VERSUS M/S RELIANCE TELECOM LIMITED AND COMMISSIONER OF INCOME TAX (IT-4) , MUMBAI VERSUS M/S RELIANCE COMMUNICATIONS LIMITED [2021 (12) TMI 211 - SUPREME COURT], the assessee entered into a contract with Ericsson AB on 15.06.2004.  The assessee filed an application before the Assessing Officer under section 195(2) of the Act, to make payment to the nonresident company for purchase of software without deducting tax at source.  The assessee contended before the Assessing Officer that Ericsson AB has no permanent establishment in India and in terms of Double Tax Avoidance Agreement (‘DTAA’ for short) between Sweden and India & USA the amount paid is not taxable in India.

The Assessing Officer rejected the contentions of the assessee.  The Assessing Officer held 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.  In compliance with the order of Assessing Officer the assessee deducted the tax and filed appeal before the Commissioner of Income Tax (Appeals).  The Commissioner of Income Tax (Appeals) allowed the appeal in favor of the assessee.

Being aggrieved against the order of Commissioner of Income Tax (Appeals) the Revenue filed appeal before the ITAT’.  The ITAT allowed the appeal filed by the Revenue holding that the payments made for purchase of software are in the nature of royalty. 

The assessee filed miscellaneous application before ITAT for rectification of the order under Section 254(2) of the Act.  The assessee also filed appeal before the High Court simultaneously.  The ITAT allowed the miscellaneous application filed by the assessee and recalled its original order dated 06.09.2013.  Therefore the assessee withdrew the appeal filed before the High Court. 

The Revenue filed a writ petition before the High Court challenging the recall order of ITAT.  The High Court dismissed the writ petition.  The High Court held that-

• 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;
• 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
• 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.

Against the order of High Court the Revenue filed appeal before Supreme Court.  During this period corporate insolvency resolution process (‘CIRP’ for short) has been initiated against the assessee.  The Resolution Professional has also been appointed in the CIRP.

The Supreme Court considered the orders passed by the ITAT dated 06.09.2013 and its recall order under section 254(2) of the Act.  The Supreme Court was of the opinion that the recall order, dated 18.11.2016 passed by the ITAT recalling its earlier order dated 06.09.2013 is beyond the scope and ambit of section 254(2) of the Act.  The Supreme Court observed that the ITAT has re-heard the entire appeal on merits as if the ITAT was deciding the appeal against the order passed by the Commissioner of Income Tax (Appeals).  While considering the application under Section 254(2) of the Act, the ITAT is not required to re-visit its earlier order and to go into detail on merits. The powers under Section 254(2) of the Act are only to rectify/correct any mistake apparent from the record.

The Supreme Court further observed that ITAT has passed a detailed order in the appeal in favor of the Revenue.  Therefore the said order cannot be recalled under the provisions of section 254(2).   The only remedy available to the assessee is to file appeal before the High Court against the order of ITAT instead he filed appeal before the High Court.  The assessee also filed misc application before ITAT for it recall of its order dated 06.09.2013.  Since the ITAT decided the case in favor of the assessee by recalling its order the assessee withdrew the appeal filed before the High Court.

The Supreme Court did not accept the findings of the High Court.  The Supreme Court held that 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. As observed hereinabove, the powers under Section 254(2) of the Act are only to correct and/or rectify the mistake apparent from the record and not beyond that.

The Supreme Court quashed the orders passed by the High Court and restored the order passed by ITAT dated 06.09.2013.  The Supreme Court held that only the remedy available to the assessee is to file appeal before the High Court against the order of ITAT.  The Supreme Court held that if  the assessee prefers appeal within six months from the date of order before High Court against the order of ITAT dated 06.09.2013, the same may be decided and disposed of by the High Court in accordance with law and on its/their own merits and without raising any objection with respect to limitation.