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 enhanced depreciation arising from a foreign exchange term loan was overlooked. The Tribunal acknowledged its mistake and corrected its order; the High Court erred in setting aside that rectification. The SC restored the Tribunal's order allowing the rectification application and set aside the High Court judgment, allowing the appeal.

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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.

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