Supreme Court clarifies the limited scope of Section 254(2) of the Income Tax Act in tax appeals: Commissioner of Income Tax vs. Reliance Telecom (2021)

Introduction

Date of the Judgment: 03 December 2021

Citation: [Not provided in the document]

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can the Income Tax Appellate Tribunal (ITAT) recall its earlier order and rehear an entire case under the guise of rectifying a mistake? The Supreme Court of India recently addressed this critical question regarding the scope of the ITAT’s powers under Section 254(2) of the Income Tax Act, 1961. The core issue revolved around whether the ITAT exceeded its jurisdiction by recalling its original order and effectively re-adjudicating the case on merits. This judgment clarifies the limitations on the ITAT’s power to modify its own orders.

Case Background

The case originated from a dispute regarding the taxability of payments made by M/s Reliance Telecom Limited (and a related company, M/s Reliance Communications Limited) to Ericsson A.B. for the purchase of software. Reliance Telecom entered into a supply contract with Ericsson A.B. on 15.06.2004. The company sought to make payments to the non-resident company without deducting Tax Deducted at Source (TDS), arguing that the payments were for software purchases and not taxable in India under the Double Taxation Avoidance Agreement (DTAA) between India and Sweden & USA, as Ericsson A.B. had no permanent establishment in India.

The Assessing Officer rejected this application on 12.03.2007, holding that the payments constituted royalty under Section 9(1)(vi) of the Income Tax Act, 1961, and Article 12(3) of the DTAA, and thus were taxable in India. The Assessing Officer directed the assessee to deduct tax at 10% as royalty.

The Assessee, after deducting tax, appealed to the Commissioner of Income Tax (Appeals), who ruled in favor of the Assessee on 27.05.2008. The Revenue then appealed to the ITAT. The ITAT, on 06.09.2013, reversed the Commissioner’s decision, holding that the payments for software were indeed in the nature of royalty, relying on judgments of the Karnataka High Court.

Following this, the Assessee filed a miscellaneous application under Section 254(2) of the Income Tax Act, 1961, seeking rectification of the ITAT order. Simultaneously, the Assessee also appealed the ITAT order before the High Court. The ITAT, on 18.11.2016, allowed the miscellaneous application and recalled its original order of 06.09.2013. Subsequently, the Assessee withdrew its appeal from the High Court.

The Revenue, aggrieved by the ITAT’s decision to recall its earlier order, filed a writ petition before the High Court, which was dismissed. The Revenue then appealed to the Supreme Court.

Timeline:

Legal Framework

The core legal provision at the heart of this case is Section 254(2) of the Income Tax Act, 1961, which outlines the powers of the Income Tax Appellate Tribunal (ITAT) to amend its orders. The section states:

“The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the Assessing Officer: Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub-section unless the Appellate Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard.”

The Supreme Court noted that the powers under Section 254(2) of the Income Tax Act, 1961 are similar to the powers under Order XLVII Rule 1 of the Civil Procedure Code (CPC), which allows for the review of a judgment only when there is an error apparent on the face of the record.

The court emphasized that the power under Section 254(2) of the Income Tax Act, 1961 is limited to rectifying mistakes apparent from the record and does not allow for a complete re-hearing of the case on merits.

Arguments

The Revenue contended that the ITAT had exceeded its powers under Section 254(2) of the Income Tax Act, 1961, by recalling its original order and effectively re-hearing the case on merits. The Revenue argued that the ITAT’s power to rectify mistakes was limited to errors apparent on the record and did not extend to revisiting the entire case.

The Assessee argued that the ITAT had the jurisdiction to recall its order if it found an error in its earlier decision. They contended that the ITAT had the power to correct its own errors, even if it meant revisiting the merits of the case.

The Revenue argued that the ITAT’s order dated 06.09.2013 was a detailed order and could not be recalled under Section 254(2) of the Income Tax Act, 1961. The only remedy for the Assessee was to appeal to the High Court, which they had initially done but later withdrew.

The Assessee argued that the ITAT had the power to correct its own errors, even if it meant revisiting the merits of the case.

The High Court had dismissed the Revenue’s writ petition, stating that the Revenue had participated in detailed submissions before the ITAT and had not objected to the ITAT’s jurisdiction. The High Court also noted that the ITAT might have made an error on merits, but it had the jurisdiction to do so.

The Revenue argued that the High Court’s reasoning was flawed because mere participation in the proceedings does not confer jurisdiction on the ITAT to act beyond the scope of Section 254(2) of the Income Tax Act, 1961.

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the Income Tax Appellate Tribunal (ITAT) was justified in recalling its earlier order dated 06.09.2013 in exercise of powers under Section 254(2) of the Income Tax Act, 1961?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following legal provision:

• Section 254(2) of the Income Tax Act, 1961: The court analyzed the scope of this provision, emphasizing that it only allows for the rectification of mistakes apparent from the record and not a complete re-hearing of the case.

The Supreme Court also referred to the principle that the powers under Section 254(2) of the Income Tax Act, 1961 are akin to Order XLVII Rule 1 of the Civil Procedure Code (CPC).

Judgment

The Supreme Court held that the ITAT had exceeded its jurisdiction by recalling its original order under Section 254(2) of the Income Tax Act, 1961. The court emphasized that the ITAT’s power to rectify mistakes is limited to errors apparent on the record and does not extend to a complete re-hearing of the case.

The Court also analyzed how the authorities were viewed:

✓ Section 254(2) of the Income Tax Act, 1961: The court interpreted this section to define the scope of the ITAT’s power to rectify its orders. The court held that the ITAT exceeded its powers by re-hearing the case on merits.

✓ Order XLVII Rule 1 of the Civil Procedure Code (CPC): The court used this provision as an analogy to explain the limited scope of the ITAT’s powers under Section 254(2) of the Income Tax Act, 1961.

The Supreme Court quashed the High Court’s judgment and the ITAT’s order dated 18.11.2016, restoring the original order of the ITAT dated 06.09.2013.

The Court also allowed the Assessee to file an appeal before the High Court against the original order of the ITAT within six weeks, without raising any objection with respect to limitation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to maintain the integrity of the appellate process and to ensure that the ITAT does not overstep its statutory powers. The Court emphasized that the ITAT’s power under Section 254(2) of the Income Tax Act, 1961 is limited to correcting errors apparent on the record and not to re-adjudicating the entire case.

The ratio of fact to law that influenced the court’s decision is as follows:

The court’s reasoning can be broken down as follows:

The court did not consider any alternative interpretations of Section 254(2) of the Income Tax Act, 1961, as it was clear that the ITAT had exceeded its jurisdiction.

The court stated, “In exercise of powers under Section 254(2) of the Act, the Appellate Tribunal may amend any order passed by it under sub-section (1) of Section 254 of the Act with a view to rectifying any mistake apparent from the record only.”

The court further clarified, “Therefore, the powers under Section 254(2) of the Act are akin to Order XLVII Rule 1 CPC. While considering the application under Section 254(2) of the Act, the Appellate Tribunal is not required to re-visit its earlier order and to go into detail on merits.”

The court emphasized, “If the Assessee was of the opinion that the order passed by the ITAT was erroneous, either on facts or in law, in that case, the only remedy available to the Assessee was to prefer the appeal before the High Court.”

Key Takeaways

✓ The Income Tax Appellate Tribunal (ITAT) cannot rehear a case under the guise of rectifying a mistake under Section 254(2) of the Income Tax Act, 1961.

✓ The ITAT’s power to amend its orders is limited to correcting errors apparent on the record.

✓ If an assessee believes that an ITAT order is erroneous, the only remedy is to appeal to the High Court.

✓ This judgment reinforces the principle that the ITAT’s powers are defined by statute and cannot be expanded.

Directions

The Supreme Court allowed the Assessee to file an appeal before the High Court against the original order of the ITAT dated 06.09.2013 within six weeks from the date of the judgment, without raising any objection with respect to limitation.

Specific Amendments Analysis

(Not Applicable as no specific amendment was discussed in the judgment)

Development of Law

The ratio decidendi of this case is that the Income Tax Appellate Tribunal (ITAT) cannot rehear a case under the guise of rectifying a mistake under Section 254(2) of the Income Tax Act, 1961. The judgment clarifies that the powers of the ITAT under Section 254(2) of the Income Tax Act, 1961 are limited to correcting errors apparent on the record and do not extend to re-adjudicating the case on merits. This is consistent with the principle that the ITAT is a creature of statute and its powers are limited by the statute. There is no change in the previous position of law, but the judgment reinforces the limited scope of the ITAT’s powers under Section 254(2) of the Income Tax Act, 1961.

Conclusion

In conclusion, the Supreme Court’s judgment in the case of Commissioner of Income Tax vs. Reliance Telecom clarifies the limited scope of the Income Tax Appellate Tribunal’s (ITAT) powers under Section 254(2) of the Income Tax Act, 1961. The ITAT cannot rehear a case under the guise of rectifying a mistake, and its powers are limited to correcting errors apparent on the record. This judgment reinforces the importance of adhering to statutory limits and maintaining the integrity of the appellate process.