2008 (9) TMI 11 - SC - Income Tax

Stock Exchange - HC uphold the order of Tribunal that there was a mistake apparent from the record in its order of denying exemption to assessee u/s 11 as charitable trust - Tribunal directed the Registry to fix the matter for re-hearing as such the appeal will be heard on merits - As and when the Tribunal will hear the matter it will decide the case on its own merit without being influenced by any observations made by it in the impugned order or in the order of the HC or in this judgment

Summary

The core legal questions considered by the Court are twofold: first, whether the Income Tax Appellate Tribunal (ITAT) was justified in exercising its power under sub-section (2) of Section 254 of the Income Tax Act, 1961 (hereinafter "the Act") to rectify a "mistake apparent from the record" and recall its earlier order; and second, whether on the merits, the assessee was entitled to exemption from income tax under Section 11 of the Act as a charitable institution.

Regarding the first issue, the relevant legal framework includes the provisions of Sections 252 to 256 of the Act, particularly Section 254 which governs orders of the ITAT. Section 254(1) empowers the ITAT to pass orders after hearing parties, Section 254(2) permits the ITAT to amend any order within four years to rectify any "mistake apparent from the record," and Section 254(4) declares such orders final except as provided in Section 256. The Court also referred to the principle that the ITAT is a statutory tribunal with no plenary or inherent powers akin to a court of plenary jurisdiction; thus, it cannot review its own decisions unless expressly empowered by statute. The power under Section 254(2) is not a power of review but of rectification limited to mistakes apparent on the record.

The Court examined the nature of a "mistake apparent from the record" by drawing on precedents interpreting similar expressions such as "error apparent on the face of the record" in the context of writ jurisdiction under Articles 32 and 226 of the Constitution. Landmark decisions were cited to elucidate that such an error must be manifest, self-evident, and not require elaborate argument or evidence to establish. Errors that involve complex reasoning or where multiple opinions are possible do not qualify. The Court emphasized that an error apparent on the record is one that strikes on mere looking and does not require extraneous material to demonstrate its incorrectness.

Applying these principles, the Court considered whether the ITAT's failure to consider a binding decision of the jurisdictional High Court of Gujarat (in Hiralal Bhagwati v. Commissioner of Income Tax) in its original order constituted a "mistake apparent from the record." The Court held that non-consideration of a binding judicial precedent by the ITAT indeed amounted to such a mistake. It relied on the reasoning in Suhrid Geigy Limited v. Commissioner of Surtax, where the High Court of Gujarat held that a point covered by a decision of the jurisdictional court, whether rendered prior or subsequent to the order, can constitute a "mistake apparent from the record" warranting rectification under Section 254(2).

The Court further discussed the retrospective effect of judicial decisions, affirming the principle that judicial decisions declare existing law rather than create new law, and thus apply retrospectively unless exceptional doctrines such as prospective overruling apply. This retrospective effect supports the premise that failure to consider binding precedent is a rectifiable mistake.

Regarding the competing arguments, the Revenue contended that the ITAT exceeded its jurisdiction by effectively reviewing its earlier order, a power not conferred by the Act, and that the statutory finality of ITAT orders under Section 254(4) should preclude such rectification. The Revenue also argued that the error in the original order was not "apparent" but required detailed legal reasoning, thus not falling within the scope of Section 254(2). Conversely, the assessee argued that the ITAT's action was strictly within its statutory power to rectify manifest errors, that the High Court of Gujarat was the jurisdictional court with supervisory powers over the ITAT, and that the Tribunal was bound by its decisions. The assessee also maintained that no prejudice was caused to the Revenue as the matter was remanded for re-hearing rather than final disposal.

The Court sided with the assessee's position on the first issue, concluding that the ITAT did not exercise a power of review but rather exercised its statutory power to rectify a mistake apparent from the record by recalling its earlier order. The Court observed that the failure to consider binding precedent was a manifest error justifying rectification. It held that the High Court of Gujarat was correct in dismissing the Revenue's writ petition challenging the ITAT's order. The Court underscored that the finality of ITAT orders under Section 254(4) does not preclude rectification of such mistakes within the four-year period prescribed by Section 254(2).

On the second issue-the merits of whether the assessee was entitled to exemption-the Court refrained from expressing any opinion. It noted that the assessee had not approached the Court on merits and that the appeal was confined to the question of the ITAT's power to recall its order. The Court clarified that the matter was remanded for re-hearing on merits by the ITAT, which would decide the exemption claim afresh uninfluenced by observations in the present judgment or earlier orders.

Significant holdings include the following verbatim legal reasoning:

"A patent, manifest and self-evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction... An error apparent on the face of the record means an error which strikes on mere looking and does not need long-drawn-out process of reasoning on points where there may conceivably be two opinions."

"Non-consideration of a decision of Jurisdictional Court... can be said to be a 'mistake apparent from the record' which could be rectified under Section 254(2)... The Tribunal has not committed any error of law or of jurisdiction in exercising power under sub-section (2) of Section 254 of the Act and in rectifying 'mistake apparent from the record'. Since no error was committed by the Tribunal in rectifying the mistake, the High Court was not wrong in confirming the said order."

"Orders passed by the Appellate Tribunal on appeal shall be final except as otherwise provided in Section 256. The power under Section 254(2) is to rectify any mistake apparent from the record within four years and shall be exercised if such mistake is brought to the notice of the Tribunal by the assessee or Assessing Officer."

"The power to review is not an inherent power. It must be conferred by law either specifically or by necessary implication... If the Government had no power to review its own order, it is obvious that its delegate could not have reviewed its order."

The core principles established are:

• The ITAT has no inherent power of review but may rectify any "mistake apparent from the record" within four years under Section 254(2) of the Act.
• A "mistake apparent from the record" is a manifest, self-evident error that does not require elaborate argument or evidence to establish.
• Failure to consider binding judicial precedent by the ITAT constitutes such a mistake apparent from the record.
• The finality of ITAT orders under Section 254(4) does not preclude rectification of such mistakes within the prescribed period.
• Judicial decisions operate retrospectively, and subsequent binding decisions clarify the correct law to be applied retrospectively.
• The supervisory jurisdiction of the High Court over the ITAT includes ensuring such rectifications are lawful.

On the first issue, the Court upheld the ITAT's exercise of power under Section 254(2) to recall its earlier order due to a mistake apparent from the record. On the second issue, the Court declined to decide on the merits of the exemption claim, leaving it for the ITAT's re-hearing.