Popular Engineering Co. vs Income Tax Appellate Tribunal and Another

G.S. Singhvi, J.—Whether the Income Tax Appellate Tribunal can, while deciding an application u/s 254(2) of the Income Tax Act, 1961 (for short, "the Act"), review or revise an order passed u/s 254(1) is the question that arises for consideration in this petition filed for quashing the order dated January 20, 1999, passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (for short, "the Tribunal"), vide which it allowed the miscellaneous application filed by the Department and recalled the order dated December 15, 1997.

The facts of the case lie in a narrow compass. The petitioner filed a return for the assessment year 1992-93 declaring nil income by claiming deduction of Rs. 49,86,664 u/s 80HHC of the Act. The Assessing Officer disallowed the claim of deduction and finalised the assessment u/s 143(3) of the Act. The appeal filed by the petitioner was allowed by the Commissioner of Income Tax (Appeals), Jalandhar (for short, "the CIT(A)"). He set aside the order of assessment and remanded the case to the Assessing Officer with a direction to allow the deduction. The Tribunal confirmed the order of the Commissioner of Income Tax (Appeals) and dismissed the appeal filed by the Department. However, it accepted the reference application filed u/s 256(1) of the Act and referred the following questions to this court for its opinion :

"1. Whether, on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was right in law in dismissing the appeal of the Revenue and upholding the order of the learned Commissioner of Income Tax (Appeals) that the term ''profit'' in the proviso to Subsection (3) of Section 80HHC of the Income Tax Act, 1961, can be stretched to include the term ''loss'' whereby directing to allow the deduction as claimed by the assessee-firm ?"

Whether, on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was right in law in dismissing the appeal of the Revenue and upholding the order of the learned Commissioner of Income Tax (Appeals) whereby directing that income earned by sale of scrap made in India is entitled to deduction u/s 80HHC of the Income Tax Act, 1961, and does not form part of the total turnover ?"

In the meanwhile, the Income Tax Officer, Ward-I, Phagwara (respondent No. 2), filed an application before the Tribunal for recall of the order dated December 15, 1997, on the ground that it had not considered the Department''s plea on the merits. In response to the notice issued by the Tribunal, the petitioner filed a reply questioning the very maintainability of the application on the ground that a reference made to the High Court is pending. It also pleaded that the order dated December 15, 1997, did not suffer from any mistake apparent from the record and, therefore, there was no justification to recall the same. After hearing the representatives of the Department and the petitioner, the Tribunal allowed the application and recalled the appeal for deciding the issue of allowance of deduction afresh.

Shri G.C. Sharma, senior advocate appearing for the petitioner, submitted that even though the application filed by respondent No. 2 did not contain reference to the provision of law under which it had been filed, the same must be treated as an application u/s 254(2) of the Act and the court may accordingly decide the issue raised in this petition. He argued that the power vested in the Tribunal u/s 254(2) can be exercised only for rectifying a mistake apparent from, the record and not for reviewing/revising an order made u/s 254(1) and submitted that the order dated December 15, 1997, passed by the Tribunal did not suffer from any mistake apparent justifying its review in the garb of recall. He then argued that the absence of detailed reasons in the order dated December 15, 1997, cannot be construed as a mistake apparent within the meaning of Section 254(2) of the Act because the Tribunal had expressly concurred with the reasons assigned by the Commissioner of Income Tax (Appeals). In support of his arguments, learned counsel relied on the following decisions :

(1) Commissioner of Income Tax, Bangalore Vs. K.Y. Pilliah and Sons, ;

(2) CIT v. ITAT [1992] 196 ITR 685 ;

(3) Commissioner of Income Tax and Another Vs. Income Tax Appellate Tribunal and Another, ;

(4) Assistant Commissioner of Income Tax Vs. Ved Prakash and Another, ;

(5) Commissioner of Income Tax Vs. Income Tax Appellate Tribunal and Another, ; and

(6) Shaw Wallace and Co. Ltd. Vs. Income Tax Appellate Tribunal and Others, ) .

Shri R.P. Sawhney, senior advocate for the Department, submitted that the Tribunal has not committed any illegality by recalling the order dated December 15, 1997, because it was entirely based on the concession made by the Departmental representative and the office note recorded by the Income Tax Officer in relation to the assessment year 1993-94, though the same had no bearing on the assessment for the year 1992-93. He submitted that pendency of reference before this court cannot be treated as a bar to the entertaining of an application u/s 254(2). Shri Sawhney further argued that one line observation contained para. 6 of the order dated December 15, 1997, suggesting that the Tribunal had agreed with the finding given by the Commissioner of Income Tax (Appeals) cannot be treated as a compliance of the requirement of recording reasons which the Tribunal was bound to do in discharge of its judicial function. Shri Sawhney relied on the following decisions :

(1) Income Tax OFFICER, A-WARD, DEHRA DUN, AND ANOTHER Vs. Income Tax APPELLATE TRIBUNAL, A-BENCH, DELHI, AND ANOTHER., ;

(2) Commissioner of Income Tax Vs. Mithalal Ashok Kumar, ;

(3) Commissioner of Income Tax, Delhi-VIII Vs. Shakuntala Rajeshwar, ;

(4) H.H. Maharaja Martant Singh Ju-Deo v. CIT [1988] 171 ITR 586 ; and

(5) Laxmi Electronic Corporation Ltd. Vs. Commissioner of Income Tax, .

We have given serious thought to the respective contentions. Sub-sections (1) and (2) of Section 254 of the Act which have bearing on the decision of this petition read as under :

"254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.

(2) 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 asses-see 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 :

Provided further that any application filed by the assessee in this sub-section on or after the 1st day of October, 1998, shall be accompanied by a fee of fifty rupees."

A perusal of the provisions quoted above shows that under Sub-section (1) of Section 254, the Appellate Tribunal can, after hearing the parties to the appeal, pass such orders as it thinks fit. Sub-section (2) of Section 254 empowers the Appellate Tribunal to amend any order passed by it under Sub-section (1) with a view to rectify any mistake apparent from the record. The expression "mistake apparent from the record" has not been defined in the Act and no strait jacket formula can be adopted for determining whether an order made u/s 254(1) suffers from a mistake apparent from the record warranting its rectification u/s 254(2). However, there cannot be any doubt that in the exercise of the powers vested in it u/s 254(2), the Tribunal cannot review or revise an order made u/s 254(1) though it may amend such order for rectifying a patent mistake which may have crept in, in such order, on account of non-consideration of an important piece of evidence or plea raised by the aggrieved party. The absence of adequate reasons in an order passed u/s 254(1) cannot per se be regarded as a mistake apparent within the meaning of Section 254(2). Likewise, the possibility of forming a different opinion than the one expressed in the order passed u/s 254(1) cannot be treated as a ground for entertaining an application u/s 254(2).

At this stage, we may notice some of the judicial precedents relied upon by learned counsel for the parties.

In Commissioner of Income Tax Vs. Income Tax Appellate Tribunal and Another, , a Division Bench of the Orissa High Court interpreted Section 254(2) of the Act and held as under (page 687) :

"The language used in Section 254(2) makes it dear that only ''amendment'' to the order passed u/s 254(1) is permissible, where it is brought to the notice of the Tribunal that there is any mistake apparent from the record. In our view, ''amendment'' of an order does not mean obliteration of the order originally passed, and its substitution by a new order. Recalling the entire order obviously would mean passing of a fresh order. That does not appear to be the legislative intent. The order passed by the Tribunal u/s 254(1) is the effective order so far as the appeal is concerned. Any order passed u/s 254(2) either allowing an amendment or refusing to amend gets merged with the original order passed. The order as amended or remaining unamended is the effective order for all practical purposes. The same continues to be an order u/s 254(1). That is the final order in the appeal. An order u/s 254(2) does not have existence de hors the order u/s 254(1). Recalling of the order is not permissible u/s 254(2). Recalling of an order automatically necessitates rehearing and readjudication of the entire subject-matter of appeal. The dispute no longer remains restricted to any mistake sought to be rectified. Power to recall an order is prescribed in terms of Rule 24 of the Income Tax (Appellate Tribunal) Rules, 1963, and that too, only in cases where the assessee shows that it had reasonable cause for being absent at a time when the appeal was taken up and was decided ex parte.

We may further add here that there may be cases where the Tribunal itself comes to notice that the order was passed without any issue of notice or there were such procedural lapses which rendered the order illicit. In such cases, the order may be set aside and a rehearing may be directed. This is so because no prejudice should be caused to a party for a wrong committed by the Tribunal. Otherwise, u/s 254(2), an order cannot be recalled in its entirety and a rehearing cannot be directed."

In Commissioner of Income Tax and Another Vs. Income Tax Appellate Tribunal and Another, , a Division Bench of the Andhra Pradesh High Court held as under (page 136) :

"If two views are possible on a point of law, and one of the alternatives is accepted in its previous order, it cannot be held that the mistake is apparent from the record. Unless there are manifest errors which are obvious, clear and self-evident, the Tribunal cannot recall its previous order in an attempt to rewrite the order. Reading the application which the respondent had filed along with the order which the Tribunal made u/s 254(2), we are of the opinion that the attempt of the Tribunal was not to rectify any mistake apparent or self-evident but to review or revise or rewrite its own order. Rectification of mistake will not justify its anxiety to improve upon the earlier order."

In Assistant Commissioner of Income Tax Vs. Ved Prakash and Another, , another Division Bench of the Andhra Pradesh High Court expressed its views on the subject in the following words (page 452) :

"We understand the section to have two parts : (1) The Tribunal recalling the order ; and (2) the Tribunal passing a final order of rectification after hearing the parties. The Division Bench of this court in W. P. No. 14166 of 1991 (see Commissioner of Income Tax and Another Vs. Income Tax Appellate Tribunal and Another, ) has held that the earlier part of the order recalling an order is not subject of a reference u/s 256 of the Income Tax Act, and, therefore, the writ petition challenging such an order is maintainable. The Division Bench, following a number of Supreme Court judgments and judgments of various High Courts in the country, held that rectification of a mistake should not amount to review or rewriting of the previous order either on findings of law or on findings of facts. The Supreme Court in T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, had asserted that it must be an obvious and patent mistake that calls for rectification and not something where there may be two conceivable opinions or on a debatable point of law and the latter would not amount to a mistake which can be rectified."

In Commissioner of Income Tax Vs. Income Tax Appellate Tribunal and Another, , a Division Bench of the Allahabad High Court interpreted Section 254(2) and laid down the following proposition (headnote) :

"The power exercisable by the Tribunal u/s 254(2) of the Income Tax Act, 1961, is subject to two limitations. Firstly, it has to be confined to rectifying any mistake apparent from the record and secondly it has to be confined to an order passed u/s 254(1). Such power is not available to amend any order passed by the Tribunal under any section other than Section 254(1). The power conferred u/s 254(2) on the Tribunal for rectifying any mistake apparent from the record cannot be exercised to recall any order passed u/s 256."

In Shaw Wallace and Co. Ltd. Vs. Income Tax Appellate Tribunal and Others, , a learned single judge of the Calcutta High Court observed that (headnote), "absolute obliteration of its earlier order is not within the jurisdiction of the Tribunal. It cannot totally recall its order u/s 254(2) of the Income Tax Act, 1961, and proceed to rehear the matter on de novo arguments. The words of the said sub-section refer to amendment or rectification and not a total recall. Invocation of Section 254(2) is not proper where the matter needs long drawn arguments."

In Income Tax OFFICER, A-WARD, DEHRA DUN, AND ANOTHER Vs. Income Tax APPELLATE TRIBUNAL, A-BENCH, DELHI, AND ANOTHER., , a learned single judge of the Allahabad High Court held that "where an error is attributable entirely to the Tribu- nal in having lost sight of a material fact at the time of writing its order or judgment would be an error apparent from the record which could be rectified u/s 55 of the Indian Income Tax Act, 1922."

In Commissioner of Income Tax Vs. Mithalal Ashok Kumar, , a Division Bench of the Madhya Pradesh High Court held that (headnote), "though the Appellate Tribunal has no power to review its own order, yet it can certainly correct its mistakes by rectifying the same in case it is brought to its notice that the material which was already on record before deciding the appeal on merits was not considered."

In Laxmi Electronic Corporation Ltd. Vs. Commissioner of Income Tax, , a Division Bench of the Allahabad High Court held that, "the Appellate Tribunal has no power to review, but it has power of rectification and where it fails or omits to deal with an important contention affecting maintainability/merits of an appeal, it will deemed to be a mistake apparent from the record within the meaning of Section 254(2)".

In the light of the above, we shall now determine whether the impugned order is ultra vires Section 254(2) warranting issuance of a writ of certiorari. A perusal of the order dated December 6, 1993, shows that while allowing the petitioner''s claim for deduction, the Commissioner of Income Tax (Appeals) had assigned the following reasons :

"I have carefully considered the rival submission. I find merit in the submissions of learned counsel that referred to the ''profits computed in the proviso to Sub-section (3) of Section 80HHC of the Income Tax Act does not warrant the interpretation that deduction is admissible only if there is a business profit and not in a case where there is business loss excluding export incentives, etc. In my view, the deduction would be admissible even after excluding the export incentives, etc., there is a business loss provided the same is restricted with reference to resultant profits after taking into account export incentives. In the case of the appellant, the deduction has been claimed in the similar mariner and is therefore, held to be admissible. I also find merit in the plea that the scrap sales cannot be termed as Indian turnover as it is not the sale of the profit of the appellant but only of scrap which is by-product, the quantum of scrap sale which is only of Rs. 5,50,374 against the total export sale of more than 1 1/2 crores indicates that the scrap was generated through the manufacturing process and its sales as such actually means reduction of the manufacturing expenses. Therefore, it is held that the sale of scrap, strictly speaking cannot be termed Indian turnover within the meaning of Section 80HHC of the Income Tax Act, though the sale has been made in India. Hence, the appellant is entitled to deduction u/s 80HHC of the Income Tax Act ignoring this scrap sale. Such deduction computed at Rs. 49,80,664 by the appellant is held to be admissible and the Assessing Officer is directed to allow the same."

The Tribunal referred to the aforementioned reasons and the office note recorded by the Income Tax Officer while completing the assessment for the assessment year 1993-94 and then proceeded to observe as under :

"5. The learned Departmental Representative was asked to offer his comments on the office note produced by learned counsel at page 9 of the paper book. He has no comments to offer.

We are of the opinion that the finding given by the learned Commissioner of Income Tax (Appeals) is in accordance with the law and, therefore, no interference is called for."

It is, thus, clear that while affirming the order of the Commissioner of Income Tax (Appeals), the Tribunal had not only taken cognizance of the reasons assigned by him, but had also approved the same. However, without noticing this and without even recording a finding that the order dated December 15, 1997, is vitiated by a mistake apparent from the record, the Tribunal passed the order of recall simply by observing that the merits of the case had not been discussed and the order of the Commissioner of Income Tax (Appeals) had been confirmed by making reference to the office note. In our opinion, the order dated December 15, 1997, satisfied the requirement of a speaking order and the impugned order must be held as vitiated by an error of law, inasmuch as, it fails to satisfy the condition precedent for exercise of power u/s 254(2) of the Act.

In Commissioner of Income Tax, Bangalore Vs. K.Y. Pilliah and Sons, , their Lordships of the Supreme Court held that the Tribunal cannot be said to have committed any illegality or irregularity merely because it did not record independent reasons. Some of the observations made in that decision are extracted below (page 415) :

"The Income Tax Appellate Tribunal is the final fact-finding authority and normally it should record its conclusion on every disputed question raised before it, setting out its reasons in support of its conclusion. But, in failing to record reasons, when the Appellate Tribunal fully agrees with the view expressed by the Appellate Assistant Commissioner and has no other ground to record in support of its conclusion, it docs not act illegally or irregularly, merely because it does not repeat the grounds of the Appellate Assistant Commissioner on which the decision was given against the asses-sees or the Department. The criticism made by the High Court that the Tribunal had ''failed to perform its duty merely affirming the conclusion of the Appellate Assistant Commissioner'' is apparently unmerited."

The issue deserves to be examined from another angle. The Act envisages a pyramid of adjudicating authorities with the Appellate Tribunal at its apex. In discharge of their quasi-judicial and judicial function, these authorities and the Tribunal are bound to act in consonance with the rules of natural justice, one of the facets of which is that every quasi-judicial/ judicial order must be informed by reasons. The requirement of recording of reasons by quasi-judicial authorities and communication thereof to the affected party has been treated as an integral part of the concept of natural justice and the courts have frequently invalidated quasi-judicial orders on the ground that the same do not satisfy the requirement of a speaking order. However, in a given case, it may be quite legitimate for the appellate or revisional authority to approve the reasons recorded by the lower authority instead of independently recording its own reasons on a particular issue and the order passed by such appellate authority or revisional authority cannot be invalidated on the ground of absence of independent reasons.

In S.N. Mukherjee Vs. Union of India, , a Constitution Bench of the Supreme Court dealt with the question as to whether every quasi-judicial authority should record reasons in support of its order. Some of the observations made in paragraph 35 of that decision which are apposite to the point under consideration are extracted below (page 1995) :

"Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances of arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review. It may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under-challenge."

On the basis of the above discussion, we hold that the impugned order is liable to be quashed on the ground that the Tribunal has committed a jurisdictional error by entertaining the application filed by respondent No. 2.

For the reasons mentioned above, the writ petition is allowed. The order dated January 20, 1999, is quashed. However, it is made clear that this order shall not prejudice the reference pending before the court.