2007 (11) TMI 8 - SC - Income Tax

Section 254(2) permits rectification of manifest omission causing prejudice when enhanced depreciation from forex term loan was overlooked

SC held that the Tribunal properly exercised its power under section 254(2) to rectify a manifest omission that caused prejudice to the assessee, where ... Rectification of mistake - apparent from the record by any income tax authority - Rule of precedent - company filed a return of nil income but claimed enhanced depreciation due to a term loan in foreign exchange for machinery import, resulting in increased liability due to exchange rate fluctuation - HELD THAT:- 'Rule of precedent' is an important aspect of legal certainty in rule of law. That principle is not obliterated by section 254(2) of the Income-tax Act, 1961. When prejudice results from an order attributable to the Tribunal's mistake, error or omission, then it is the duty of the Tribunal to set it right. Atonement to the wronged party by the court or Tribunal for the wrong committed by it has nothing to do with the concept of inherent power to review. In the present case, the Tribunal was justified in exercising its powers under section 254(2) when it was pointed out to the Tribunal that the judgment of the coordinate bench was placed before the Tribunal when the original order came to be passed but it had committed a mistake in not considering the material which was already on record. The Tribunal has acknowledged its mistake, it has accordingly rectified its order. In our view, the High Court was not justified in interfering with the said order. We are not going by the doctrine or concept of inherent power. We are simply proceeding on the basis that if prejudice had resulted to the party, which prejudice is attributable to the Tribunal's mistake, error or omission and which error is a manifest error then the Tribunal would be justified in rectifying its mistake, which had been done in the present case. The impugned judgment of the High Court is set aside and the order passed by the Tribunal allowing the rectification application filed by the assessee is restored. Consequently, the appeal is allowed. Issues:Application of Section 154 of the Income Tax Act for rectification of mistakes apparent from the record.Analysis:The case involved an assessee company engaged in manufacturing portable generator sets in collaboration with Honda Motor Company, Japan, for the assessment year 1991-92. The company filed a return of nil income but claimed enhanced depreciation due to a term loan in foreign exchange for machinery import, resulting in increased liability due to exchange rate fluctuation. The Assessing Officer disallowed the revision in actual cost under section 43A. The CIT(A) allowed the claim, but the Tribunal held that actual payment was a condition precedent for availing benefits under section 43A. The assessee filed a rectification application under section 254(2) based on a judgment in a similar case, which the Tribunal initially missed but later rectified, allowing the application. The High Court, however, held that rectification cannot be used for review and set aside the Tribunal's order. The Supreme Court emphasized the purpose of section 254(2) to prevent parties from suffering due to Tribunal mistakes and upheld the Tribunal's rectification, stating that rectification is not a review but a correction of manifest errors to prevent prejudice to parties.Conclusion:The Supreme Court set aside the High Court's judgment and restored the Tribunal's order, allowing the rectification application by the assessee. The Court clarified that rectification under section 254(2) aims to correct manifest errors to prevent prejudice to parties, not for review purposes.