2025 (9) TMI 1037 - HC - Income Tax

ITAT rectification u/s254(2) after later Supreme Court ruling-change in law not 'apparent mistake'; orders set aside

The dominant issue was whether the ITAT could invoke rectification power under s.254(2) of the IT Act to alter its earlier order solely because a later SC ... Power u/s 254(2) - “mistake apparent from the record” on the basis of a subsequent decision of the Superior Court - HELD THAT:- Powers under Section 254(2) of the IT Act are akin to Order 47 Rule 1 of the CPC. The Explanation to Order 47 Rule 1 of the CPC clearly provides that the fact that a decision on a question of law on which the judgement of the Court is based has been reversed or modified by a subsequent decision of a superior court in any other case was not a ground for review of such judgement. Hence, the said Explanation under Order 47 Rule 1 of the CPC expressly bars a review on the ground that there is a mistake apparent on the face of the record on the basis of a subsequent decision of a Court. Further, this exposition of law in respect of the Explanation under Order 47 Rule 1 has been confirmed by a decision of the Hon’ble Supreme Court in Gracemac Corporation [2023 (8) TMI 98 - SC ORDER]. Further, in its decision in Beghar Foundation vs. Justice K.S. Puttaswamy [2021 (2) TMI 504 - SUPREME COURT] the Hon’ble Supreme Court has held that a change in law or a subsequent decision / judgement of a Co-ordinate Bench or a Larger Bench by itself cannot be regarded as a ground of review. We hold that a subsequent ruling of a Court cannot be a ground for invoking the provisions of Section 254(2) of the IT Act. Section 254(2) of the IT Act can be invoked with a view to rectify any mistake apparent from the record. Admittedly, on the date when the original order was passed by the ITAT on 5th September 2022, it followed the law as it stood then. This was overruled subsequently by the Hon’ble Supreme Court in Checkmate Services [2022 (10) TMI 617 - SUPREME COURT (LB)] Hence, we are of the view, that, on the date when the ITAT passed its original order dated 5th September 2022, it could not be said that there was any error or mistake apparent on the record, giving jurisdiction to the ITAT to invoke Section 254(2) of the IT Act. Order [2024 (9) TMI 1808 - ITAT PUNE] passed by the ITAT, under Section 254(2) of the I.T. Act, is required to be set aside. Further, if the order passed by the ITAT under Section 254(2) of the IT Act is set aside, then the order passed by the ITAT under Section 254(1) dismissing the said Appeal is also required to be set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether the Appellate Tribunal (under Section 254(2) of the Income Tax Act) can recall/rectify its earlier order on the ground of a 'mistake apparent from the record' by relying upon a judicial decision rendered by a superior court subsequent to the Tribunal's original order. 2. The scope and character of the power conferred by Section 254(2) of the Income Tax Act - whether it is akin to review under Order XLVII Rule 1 CPC and, accordingly, whether a subsequent change or reversal in the law by a superior court can constitute a ground for exercise of Section 254(2). 3. Whether the decision in Saurashtra Kutch Stock Exchange Ltd. establishes that a subsequent decision of a superior court can be the basis for rectification under Section 254(2), and, if so, whether that principle applies to the facts where the Tribunal's original order followed the then-prevailing law. ISSUE-WISE DETAILED ANALYSIS Issue 1: Power of the Tribunal under Section 254(2) to recall an order on the basis of a subsequent superior-court ruling Legal framework: Section 254(2) permits the Appellate Tribunal to amend any order passed by it under sub-section (1) for rectifying any 'mistake apparent from the record'. The power has been judicially equated to the review jurisdiction under Order XLVII Rule 1 CPC. Precedent Treatment: The Court considered (i) the decision equating Section 254(2) to Order XLVII Rule 1 CPC; (ii) the Explanation to Order XLVII Rule 1 CPC which expressly provides that reversal or modification of a question of law by a subsequent decision of a superior court is not a ground for review; and (iii) recent authoritative decisions holding that a change in law or a subsequent coordinate/larger-bench decision is not a ground for review. Interpretation and reasoning: The Tribunal's power under Section 254(2) is limited to correcting manifest errors apparent from the record and does not authorize a re-hearing on merits. The Explanation to Order XLVII Rule 1 CPC (which bars review on the basis of a subsequent superior-court decision) is relevant by analogy and consistent with the limited remedial character of Section 254(2). Accordingly, a subsequent judicial pronouncement altering or clarifying the law cannot, by itself, convert a previously correct decision into one suffering a 'mistake apparent from the record'. Ratio vs. Obiter: Ratio - Section 254(2) cannot be invoked merely because a subsequent decision of a superior court altered the legal position after the Tribunal's order; such subsequent rulings do not constitute a 'mistake apparent from the record'. Observations about the nature of Section 254(2) being akin to Order XLVII Rule 1 CPC and the applicability of the Explanation are ratio in this context. Conclusions: A subsequent ruling of a superior court is not a valid ground for invoking Section 254(2) to recall a Tribunal order that, at the time it was passed, followed the law as then understood. Issue 2: Scope of Section 254(2) vis-à-vis Order XLVII Rule 1 CPC and effect of subsequent change in law Legal framework: Section 254(2) must be exercised only to rectify mistakes apparent from the record; it is not a substantive rehearing power. Order XLVII Rule 1 CPC governs review of judgments and, by its Explanation, excludes subsequent reversal/modification of a question of law as a ground for review. Precedent Treatment: The Court relied on higher judicial pronouncements equating Section 254(2) with Order XLVII Rule 1 CPC and on later authorities holding that review/recall is not available merely because a later decision overruled or modified the law on which the original order was based. Decisions stating that review jurisdiction is narrow and cannot be employed to re-open finally decided matters on the basis of subsequent legal developments were followed. Interpretation and reasoning: Given the narrow remedial function of Section 254(2), principles governing review under Order XLVII Rule 1 CPC - particularly the Explanation excluding subsequent changes in law as ground for review - are applicable and persuasive. The Tribunal cannot treat Section 254(2) as a mechanism to re-open final orders whenever a superior court subsequently alters legal doctrine; doing so would convert a limited corrective power into an appellate/re-deciding power incompatible with the statutory scheme. Ratio vs. Obiter: Ratio - Section 254(2) is limited in scope and cannot be used to revisit an order on the basis of subsequent changes in law; reliance on the CPC Explanation and parallel Supreme Court authority is binding on the point. Conclusions: Section 254(2) must be construed restrictively and cannot be invoked to recall an erstwhile final Tribunal order on the sole basis of a later superior-court decision that changes the legal position. Issue 3: Precedential value of Saurashtra Kutch Stock Exchange Ltd. and its applicability where the Tribunal followed then-existing law Legal framework: Precedent is an authority for what it actually decides; factual differences may limit precedential reach. The Court examined whether Saurashtra Kutch Stock Exchange Ltd. supports rectification under Section 254(2) on the basis of a subsequent superior-court decision. Precedent Treatment: The Court analyzed Saurashtra Kutch Stock Exchange Ltd., noting that in that case the superior-court decision relied upon had existed prior to the Tribunal's order and had not been brought to the Tribunal's notice. Although that decision endorsed rectification in those facts, the Court emphasized that Saurashtra does not lay down a general principle permitting recall based on a ruling delivered after the Tribunal's order. Interpretation and reasoning: Saurashtra was confined to its facts - non-consideration of an existing binding decision by the Tribunal - and did not establish that a subsequent decision (i.e., one delivered after the Tribunal's order) can be the basis for rectification. The Court reiterated established principles of precedent: a decision is authority only for what it actually decides; differences in facts are decisive; and reliance on a case must consider the factual matrix and reasoning. Consequently, Saurashtra was distinguished on its facts and held not to support the Tribunal's reliance on a later decision to recall its order. Ratio vs. Obiter: Ratio - Saurashtra does not authorize recall under Section 254(2) on the basis of a subsequent judgment; its authority is fact-specific where an existing binding decision was not considered. Observations in Saurashtra about retrospective operation of law were noted but not held to permit a general rule enabling recall based on later decisions. Conclusions: Saurashtra Kutch Stock Exchange Ltd. is distinguishable and does not furnish authority for recalling a Tribunal order on the ground of a later superior-court decision; rectification remains limited to mistakes apparent from the record as assessed at the time of the original order. Final Conclusions and Consequential Orders (Ratio applied to the present facts) The Tribunal's order recalling its earlier order under Section 254(2) on the ground that a subsequent superior-court decision purportedly gave rise to a 'mistake apparent from the record' was beyond the scope of Section 254(2) and therefore liable to be set aside. Consequentially, the Tribunal's order dismissing the taxpayer's appeal (issued after the recall) was also set aside. The Revenue retains statutory remedies available under the law (including appeal under Section 260A) where legally permissible.