Madras High Court Restores Original ITAT Order, Curtails Tribunal's Overreach in Income Tax Rectification

High Court finds ITAT's rectification beyond jurisdiction, reinstates previous assessment order favoring M/s. Devaraj and Others.

In a significant judgment, the Madras High Court has reinforced the limited scope of rectification powers under Section 254(2) of the Income Tax Act, 1961, by setting aside the rectification order passed by the Income Tax Appellate Tribunal (ITAT), Chennai. This judgment comes in the case of M/s. Devaraj & Others versus the Income Tax Officer, illustrating the judicial restraint required in tax rectification proceedings.

The case stems from a series of rectification petitions filed by both the revenue and the assessee, M/s. Devaraj & Others, concerning the block assessment of income related to a government scheme scam. The Tamil Nadu Textile Corporation was implicated in a scam involving the distribution of dhotis and sarees, leading to investigations and subsequent tax proceedings against various entities, including M/s. Devaraj.

Initially, the ITAT had modified the profit ratio of the assessee from 8% to 5% in its order dated 21.09.2011, after finding the original profit estimation excessive. However, the Tribunal later entertained a rectification petition from the revenue and reappraised evidence, modifying the income assessment significantly. The High Court found this subsequent order, dated 26.03.2013, to be beyond the Tribunal's jurisdiction.

The bench, consisting of Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan, highlighted that the rectification power under Section 254(2) is strictly confined to correcting apparent mistakes on the record and does not extend to reappraising evidence or substituting its original orders. "The Tribunal, while considering the petition under Section 254(2), had exercised the power of appellate jurisdiction, which is impermissible," the court observed.

The High Court's decision reinstates the ITAT's original order dated 21.09.2011, which had been challenged by the revenue but was withdrawn on account of low tax effect. This reinstatement effectively resolves the issue in favor of the assessee, M/s. Devaraj, by confirming the 5% profit ratio on the gross turnover.

Legal experts suggest that this judgment reaffirms the statutory limitations on rectification powers, ensuring that tribunals do not overstep by revisiting the merits of the case under the guise of rectification. The decision underscores the necessity for the ITAT to exercise caution and adhere strictly to its statutory mandate.

Bottom Line:

Income Tax Act, 1961 - Scope of rectification under Section 254(2) is limited to correcting mistakes apparent on the record and does not permit the Tribunal to reappraise evidence or review its own decisions.

Statutory provision(s): Income Tax Act, 1961 Section 254(2), Order 47, Rule 1 of CPC

M/s.Devaraj v. Income Tax Officer, (Madras)(DB) : Law Finder Doc Id # 2813922