Delayed employees' PF/ESIC contribution tax deductions-later Supreme Court ruling can't justify ITAT rectification u/s254(2); order quashed.

The dominant issue was whether the ITAT could invoke s.254(2) to rectify its earlier order by treating a subsequent SC ruling on delayed employees' PF/ESIC contributions as a "mistake apparent from the record." The HC held that s.254(2) is confined to errors apparent on the record as it existed when the original order was passed; a later change in law by a subsequent SC decision cannot retrospectively create such a mistake. Since the ITAT's original order followed the law prevailing on its date, it suffered from no apparent error, and the ITAT lacked jurisdiction to rectify on that basis. The rectification order was quashed and the petition allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether a subsequent judgment of the Supreme Court, rendered after the original order of the Tribunal, can constitute a "mistake apparent from the record" so as to justify rectification under Section 254(2) of the Income-tax Act, 1961.

1.2 What is the scope and limitation of the Tribunal's rectification jurisdiction under Section 254(2) of the Income-tax Act, 1961, particularly vis-à-vis change in law or subsequent judicial precedents.

1.3 Consequentially, whether the rectification order passed by the Tribunal under Section 254(2) sustaining the disallowance of employees' contribution to PF/ESI was valid, and what relief, if any, should be granted.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Subsequent Supreme Court judgment as "mistake apparent from the record" and scope of Section 254(2)

Legal framework (as discussed by the Court)

2.1 The Court noted that Section 254(2) empowers the Tribunal to rectify any "mistake apparent from the record" in its order. This jurisdiction is limited and akin to, though more restricted than, the jurisdiction of a Civil Court under Order XLVII Rule 1 of the Code of Civil Procedure to correct mistakes apparent on the face of the record.

2.2 The Court referred to and relied upon a prior Division Bench decision which had examined Section 254(2) in the context of the same Supreme Court judgment in Checkmate Services (P.) Ltd., and which in turn had discussed: (i) the principle that change in law or subsequent decisions/judgments of a coordinate or larger Bench cannot, by themselves, be grounds for review as laid down by the Constitution Bench in Beghar Foundation; and (ii) the reiteration of this principle by the Supreme Court in Sanjay Kumar Agrawal v. State Tax Officer (1) and Another.

Interpretation and reasoning

2.3 The Court found as an admitted position that, on the date of the Tribunal's original order (4 August 2022), the Tribunal had followed the then prevailing law as declared by the jurisdictional High Court in Ghatge Patil Transports Ltd., which itself followed the Supreme Court's decision in Alom Extrusions Ltd. Under that legal position, deduction for employees' share of PF/ESI was allowable if deposited before the due date of filing the return under Section 139(1).

2.4 The Supreme Court's decision in Checkmate Services (P.) Ltd., which overruled the earlier proposition in Ghatge Patil Transports Ltd. and held that employees' contributions are deductible under Section 36(1)(va) only if deposited within the time prescribed under the respective statutes, was rendered on 12 October 2022, i.e., after the Tribunal's original order.

2.5 The Tribunal, in allowing the Revenue's rectification application and sustaining the disallowance, had relied solely on this subsequent judgment in Checkmate Services (P.) Ltd. as the basis for invoking Section 254(2).

2.6 The Court held that a subsequent change in the legal position by a later judgment, which did not exist when the original order was passed, cannot be treated as a "mistake apparent from the record." The Tribunal cannot be said to have overlooked or failed to follow a Supreme Court or High Court decision that was not in existence at the time of its original decision.

2.7 Applying the ratio of the earlier Division Bench decision (involving the same Checkmate Services (P.) Ltd. judgment), and following the principles laid down in Beghar Foundation and Sanjay Kumar Agrawal, the Court reiterated that:

(a) Change in law or subsequent judicial decisions by themselves cannot be grounds for review; and

(b) The rectification jurisdiction under Section 254(2) is even more restricted than review jurisdiction under Order XLVII Rule 1 CPC and cannot be used to reopen or revisit decisions based solely on subsequent changes in the law.

2.8 The Court also noted its agreement with a Tribunal decision in ANI Integrated Services Ltd., which had rejected similar miscellaneous applications by the Revenue seeking rectification under Section 254(2) on the basis of Checkmate Services (P.) Ltd., applying the same principles on the limited scope of rectification jurisdiction.

2.9 The Court further observed that its view is consistent with other Bench decisions which have quashed rectification orders under Section 254(2) passed in an identical factual and legal backdrop (including decisions subsequently following the same Division Bench ruling).

Conclusions on Issues 1 & 2

2.10 A subsequent Supreme Court judgment rendered after the Tribunal's original order does not constitute a "mistake apparent from the record" and cannot be a valid ground for exercising jurisdiction under Section 254(2) of the Income-tax Act, 1961.

2.11 The Tribunal's rectification jurisdiction under Section 254(2) is narrow and cannot be equated with a power to review its own order on account of subsequent change in law or later judicial pronouncements. Such later decisions cannot, by themselves, justify rectification.

2.12 On the date of the original order (4 August 2022), the Tribunal had correctly applied the then prevailing legal position; hence, there was no mistake apparent from the record, and the Tribunal lacked jurisdiction to entertain and allow the rectification application filed by the Revenue.

Issue 3: Validity of the rectification order and consequential relief

Interpretation and reasoning

3.1 Since the only ground for rectification was the subsequent judgment in Checkmate Services (P.) Ltd., and such subsequent decision could not constitute a "mistake apparent from the record," the Tribunal's order passed under Section 254(2) sustaining the disallowance of employees' contribution to PF/ESI was held to be without jurisdiction and legally unsustainable.

3.2 The Court therefore considered that the appropriate relief was to quash and set aside the impugned rectification order and restore the Tribunal's original order allowing the deduction, which had been passed in accordance with the law then prevailing.

3.3 At the same time, the Court clarified that by setting aside the rectification order and restoring the original order, the Revenue is not precluded from availing any statutory remedy of appeal under Section 260A of the Income-tax Act against the original Tribunal order, if otherwise permissible in law.

Conclusions on Issue 3

3.4 The rectification order passed by the Tribunal under Section 254(2), based solely on the subsequent Supreme Court decision in Checkmate Services (P.) Ltd., is invalid and is quashed and set aside.

3.5 The original order of the Tribunal dated 4 August 2022, granting deduction for employees' contribution to PF/ESI as per the law then prevailing, is restored.

3.6 The Revenue retains liberty, if otherwise entitled in law, to challenge the restored original Tribunal order by way of an appeal under Section 260A of the Income-tax Act, 1961.

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