Tribunal must follow binding precedent on staff loan interest deductibility under Section 254

Gujarat HC allowed rectification application u/s 254, finding Tribunal failed to follow Coordinate Bench decision on identical facts previously confirmed by the Court. The Tribunal incorrectly held interest on staff loans was incidental to business, contradicting binding precedent. HC ruled this constituted mistake apparent on record, emphasizing subordinate tribunals must follow superior court decisions. The impugned orders were quashed and matter remanded to Tribunal for fresh consideration in accordance with established legal precedent.

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Issues Involved:
1. Whether the interest income from staff loans and advances should be classified as "business income" or "income from other sources."
2. Whether the Tribunal erred in dismissing the Misc. Application u/s 254(2) of the Income Tax Act, 1961.

Summary:
Issue 1: Classification of Interest Income
The petitioner challenged the classification of interest income from staff loans and advances as "income from other sources" instead of "business income." The Tribunal initially treated this income as "income from other sources," distinguishing it from the business income based on the facts that the loans were not mandatory incentives. The petitioner cited the Gujarat High Court decision in Gujarat Urja Vikas Nigam Ltd vs. DCIT, which classified similar interest income as business income. The Tribunal's decision to classify the income differently was deemed incorrect by the High Court, which held that the Tribunal should have followed the jurisdictional High Court's binding decision.

Issue 2: Tribunal's Error in Dismissing Misc. Application u/s 254(2)
The petitioner argued that the Tribunal made a mistake apparent on record by not considering the binding decisions of the jurisdictional High Court and the Coordinate Bench. The Tribunal dismissed the Misc. Application, stating it had limited power to rectify mistakes apparent from the record u/s 254(2) and that the petitioner was seeking a review, not a rectification. The High Court found that the Tribunal's failure to follow the binding decisions constituted a mistake apparent on record. The Tribunal should have rectified this mistake instead of dismissing the Misc. Application.

Conclusion:
The High Court quashed the Tribunal's impugned orders and remanded the matter back to the Tribunal to pass fresh orders in the Misc. Application, adhering to the binding decisions of the jurisdictional High Court. The rule was made absolute to the extent of these observations, with no order as to costs.

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