ITAT’s Rectification Power u/s 254(2) Confined to Apparent Errors, Not Review: Madras HC Allows Appeals against Income Re‑Determination

The Madras High Court, in a recent case, has allowed two appeals filed by the appellant, holding that the Income Tax Appellate Tribunal ( ITAT ) exceeded its jurisdiction under Section 254(2) of the Income Tax Act, 1961, by re‑determining income in rectification proceedings.

The matter arose from a large scam in the Tamil Nadu Government’s dhoti and saree distribution scheme, which led to searches by the Income Tax Department. During the investigation, transactions linked to the assessee M/s.Devaraj were unearthed, resulting in block assessment proceedings under Section 158BD.

The assessee initially declared undisclosed income of ₹1.23 crore, later revised to ₹1.44 crore. The Assessing Officer (AO), however, fixed undisclosed income at ₹9.25 crore.

On appeal, ITAT set aside the block assessment in 2005 and remanded the matter. The AO, in fresh assessment dated 27.03.2006, determined undisclosed income at ₹6.17 crore, allowing one‑third deduction towards expenses.

The assessee again appealed, and ITAT in its order dated 21.09.2011 partly allowed relief, reducing the profit ratio from 8% to 5%.

Subsequently, rectification petitions were filed. On 09.03.2012, ITAT clarified that the 5% profit ratio applied to gross turnover. On 26.03.2013, however, ITAT, in rectification proceedings initiated by the Revenue, re‑determined income afresh at 50% of the original assessment. The assessee’s further rectification plea was dismissed on 19.06.2015. Aggrieved, the assessee filed appeals before the High Court.

The assessee contended that ITAT had exceeded its limited jurisdiction under Section 254(2) by effectively reviewing its own earlier order. Rectification is confined to correcting mistakes apparent on record, not re‑adjudicating merits.

It was argued that the Tribunal’s 2013 order amounted to a fresh determination of income, which is impermissible. The assessee also pointed out that the Revenue itself had challenged the rectification orders earlier, but those appeals were dismissed as infructuous, leaving only the assessee’s challenge alive.

The Revenue maintained that ITAT’s rectification was justified to correct errors in its earlier order, particularly regarding the method of computing profit ratio. It argued that the Tribunal had only clarified the computation basis and aligned it with the AO’s findings.

The Division Bench comprising Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan examined the scope of Section 254(2).

Referring to the Supreme Court’s ruling in CIT v. Reliance Telecom Ltd. (2021) and earlier decisions, including Express Newspapers Ltd. V. Deputy Commissioner of Income Tax (2010), the Court reiterated that rectification power is akin to review under Order 47 Rule 1 CPC but narrower in scope. Only patent manifest errors apparent on the face of the record can be corrected.

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The Court observed that ITAT’s 2013 rectification order went beyond correcting an apparent mistake. By re‑determining income at 50% of the original assessment, the Tribunal effectively revisited merits and substituted its earlier order, which is impermissible. The Court stressed that rectification cannot be used as an appeal in disguise.

Allowing the assessee’s appeals, the Madras High Court held that ITAT had exceeded its jurisdiction under Section 254(2). The rectification orders dated 26.03.2013 and 19.06.2015 were set aside. The Court reaffirmed that rectification is confined to correcting mistakes apparent on record and cannot be used to re‑adjudicate or enhance income.

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