2013 (12) TMI 1311 - HC - Income Tax

Tribunal Rectifies Error in Stock Pledge vs. Hypothecation Case, Assessee Prevails

CIT, Kanpur Versus Quality Steel Tubes Ltd.

CIT, Kanpur Versus Quality Steel Tubes Ltd. - TMI Issues Involved:1. Whether the Tribunal was right in law in recalling its order dated 6.11.1990 under Section 254(2) of the Income-tax Act, 1961.2. The distinction between hypothecation and pledge of stock and its impact on the application of Section 69B of the Income-tax Act, 1961.Detailed Analysis:1. Recalling of Order under Section 254(2):The primary issue was whether the Tribunal was justified in recalling its order dated 6.11.1990 under Section 254(2) of the Income-tax Act, 1961. The Tribunal initially allowed the Department's appeal and restored the order of the Assessing Officer, based on the judgment in the case of Swadeshi Cotton Mills Co. Ltd. However, upon a Miscellaneous Application by the assessee, the Tribunal later recalled its order, citing a misapplication of the principles laid down in Swadeshi Cotton Mills.The Revenue argued that the Tribunal's action amounted to a review of its judgment, which is not permissible under Section 254(2). They relied on judgments from various High Courts, including Delhi High Court in J.N. Sahni Vs. Income Tax Appellate Tribunal, Rajasthan High Court in Champa Lal Chopra Vs. State of Rajasthan, and Madhya Pradesh High Court in Agarwal Warehousing and Leasing Ltd Vs. Commissioner of Income Tax, to support their contention.Conversely, the assessee's counsel argued that the Supreme Court in ACIT Vs. Saurashtra Kutch Stock Exchange Ltd and Honda Siel Power Products Ltd Vs. CIT had clarified that the Tribunal could rectify mistakes apparent on record to ensure justice. The Tribunal's power under Section 254(2) includes correcting errors, even if it means recalling an order to prevent miscarriage of justice.The Court noted that the Tribunal had indeed referred to the judgment in Swadeshi Cotton Mills but later found that it had misapplied the principle, leading to an incorrect decision. The Tribunal's realization of its mistake and subsequent rectification was deemed appropriate, as it aimed to ensure justice and fair play. The Court emphasized that the power of rectification is for correcting errors and not for disturbing finality, aligning with the principles laid down in the judgments cited by the assessee.2. Distinction between Hypothecation and Pledge:The Tribunal initially treated the case as one involving a pledge of stock, similar to Swadeshi Cotton Mills, where the entire discrepancy was added to the income of the assessee. However, upon reconsideration, the Tribunal observed that the assessee's case involved hypothecation, not a pledge. The distinction is critical as hypothecation does not transfer possession of the stock to the lender, unlike a pledge.The Tribunal realized that applying the principles of Swadeshi Cotton Mills, which dealt with a pledge, to a case of hypothecation was a mistake. The Tribunal's rectification aimed to align the decision with the correct legal principles applicable to hypothecation, ensuring that the addition to income was justified and reasonable.The Court agreed with the Tribunal's assessment, noting that the rectification was necessary to correct the misapplication of law and prevent prejudice to the assessee. The Court held that the Tribunal's action was within its powers under Section 254(2) and was justified to ensure justice.Conclusion:The Court decided the question of law in favor of the assessee, holding that the Tribunal was right in recalling its order dated 6.11.1990 under Section 254(2) to correct the apparent mistake. The Tribunal's distinction between hypothecation and pledge was appropriate, and the rectification ensured that the principles of justice and fair play were upheld. The department was directed to proceed accordingly.