To have rectification power of ITAT under section 254(2), an issue must be self-evident without need for elaborate argument or re-examination.

 

An issue before the High court was regarding the power of ITAT in respect of rectification of its earlier order? Whether ITAT was justified in modifying its earlier orders by exercising powers under Section 254(2) of the Income Tax Act, 1961, specifically in relation to the determination of profit rate and whether it has a power of review or just rectify only?

Let us have a Short Overview of the case:  

Facts: Assessee filed returns declaring income, later revised; block assessments were made fixing undisclosed income.
•  Appeals before ITAT led to remands and reassessments with deductions allowed for expenses, and varied profit rates applied (from 8% to 5%).
•  Multiple rectification petitions under Section 254(2) were filed by both assessee and revenue, leading to confusion and overlap in orders.
•  ITAT modified income estimates through rectification orders, some of which enhanced tax liabilities and were challenged.

Arguments by Both Parties
Assessee
•  The ITAT exceeded its jurisdiction under Section 254(2) by reviewing earlier orders on merits rather than just rectifying apparent mistakes.
•  Rectification should be limited to correcting mistakes apparent on record, not re-deciding issues or enhancing assessments.
•  The 5% profit rate adopted by ITAT should be upheld.

Revenue:-

Rectification under Section 254(2) allows ITAT to correct mistakes apparent on the record.
•  The original orders contained errors needing correction, including profit rate and expense deductions.
•  ITAT’s rectification orders were necessary to rectify such mistakes.

Finding Section 254(2) limits ITAT to rectifying only “mistakes apparent on the record” and does not allow reappraisal of evidence or re-hearing on merits.
•  Rectification is akin to Order 47 Rule 1 CPC — it is a procedural correction mechanism, not a substantive review or appeal.
•  The ITAT wrongly exercised appellate jurisdiction when it modified the profit rate and income by reappraising facts in the rectification order dated 26.03.2013.
•  Orders that enhance tax liability under Section 254(2) must give the assessee notice and opportunity to be heard.
•  The rectification order of 26.03.2013 was held to be perverse and beyond ITAT’s jurisdiction and thus set aside.
•  The original ITAT order dated 21.09.2011 reinstated as final.
•  The court recognized that errors to attract rectification must be self-evident without need for elaborate argument or re-examination.

Decision:

TCA No. 538 of 2021 filed by the assessee challenging ITAT’s rectification was allowed in favour of the assessee.
•  TCA No. 319 of 2016 filed by the assessee was dismissed.
•  The rectification order dated 26.03.2013 by ITAT was set aside.
•  The final ITAT order dated 21.09.2011 was restored as the conclusive order.
•  No order as to costs.

The copy of the order is as under:

20251204_20410000319201611