2008 (3) TMI 301 - HC - Income Tax

Tribunal's Order Review vs. Rectification under Income-tax Act: High Court Appeal Success

The High Court held that the Tribunal's modification of its earlier order under section 254(2) of the Income-tax Act amounted to a review rather than a ... Scope of power of tribunal u/s 254 (2) to rectify mistakes in its order – held that tribunal has no power to recall and review the earlier order which is beyond the scope of S. 254 (2) – Tribunal in earlier order allowed deduction of 1/10th of expenditure incurred on issue of shares – on application, tribunal is not justified in allowing entire claim of deduction holding them as revenue expenditure - impugned order deserves to be set aside by allowing this appeal Issues Involved1. Legality of the Tribunal's order under section 254(2) of the Income-tax Act.2. Classification of expenditure as revenue or capital.3. Scope of rectification under section 254(2) of the Income-tax Act.Issue-wise Detailed Analysis1. Legality of the Tribunal's order under section 254(2) of the Income-tax Act:The primary issue was whether the Tribunal was justified in modifying its earlier order dated September 25, 2000, under section 254(2) of the Income-tax Act. The Tribunal initially upheld the disallowance of Rs. 3.82 crores as capital expenditure but later reversed this decision in a miscellaneous petition, treating the expenditure as revenue in nature. The High Court held that the Tribunal's action amounted to a review of its earlier order rather than a mere rectification of a mistake apparent from the record. The Court emphasized that section 254(2) does not permit the Tribunal to review its own decisions on merits.2. Classification of expenditure as revenue or capital:The assessee incurred an expenditure of Rs. 4,24,47,933 for issuing shares to increase its share capital and claimed this as revenue expenditure under section 37(1) of the Income-tax Act. The Assessing Officer allowed only 1/10th of this expenditure under section 35D, disallowing the remaining amount as capital expenditure. This disallowance was confirmed by the Commissioner of Income-tax (Appeals) and initially by the Tribunal. However, in the miscellaneous petition, the Tribunal reversed its earlier decision, treating the expenditure as revenue in nature. The High Court found that the Tribunal's initial decision was based on a detailed consideration of relevant Supreme Court judgments, and its subsequent reversal was not justified under the scope of section 254(2).3. Scope of rectification under section 254(2) of the Income-tax Act:The High Court discussed the scope of the Tribunal's power to rectify mistakes under section 254(2). It referred to the Supreme Court's decision in Honda Siel Power Products Ltd. v. CIT, which allows rectification to prevent any party from suffering due to a mistake by the Tribunal. However, the High Court noted that in the present case, the Tribunal had not overlooked any cited decisions or facts in its original order. The Tribunal's detailed consideration of the same issues and decisions in its earlier order indicated that its subsequent reversal was an impermissible review rather than a rectification of an apparent mistake.Conclusion:The High Court concluded that the Tribunal's impugned order dated October 23, 2002, was beyond the scope of section 254(2) as it amounted to a review of its earlier order. Thus, the substantial question of law was answered in the negative, and the appeal was allowed, setting aside the Tribunal's order. No costs were awarded.