Scope of Rectification under Section 254(2) – Whether ITAT Was Right in Modifying Its Earlier Order?

 

M/s Devaraj & Others v. ITO, Coimbatore:-Madras High Court | TCA Nos. 319/2016 & 538/2021 | Judgment dated 27.11.2025**

 

1. Core Issue:-Whether the Income Tax Appellate Tribunal exceeded its jurisdiction under Section 254(2) of the Income Tax Act by revisiting the merits of the appeal and modifying its earlier final order, in the guise of rectification, especially by changing the profit determination from 5% (original order) to 50% of income (rectification order).

 

 2 Facts

                1.            Background search & block assessment

                •              A scam relating to supply of dhotis/sarees under a TN Government scheme led to an Income-tax raid at Tamil Nadu Textile Corporation.

                •              Third-party records revealed dealings of the assessee, triggering 158BD block assessment.

                •              Original block assessment computed undisclosed income at ₹9.25 crore.

                2.            First ITAT round (28.01.2005)

                •              ITAT set aside the block assessment and remanded the matter.

                3.            Fresh assessment on remand (27.03.2006)

                •              AO held assessee belonged to an AOP but was individually engaged.

                •              AO concluded original 120% profit was unrealistic.

                •              Allowed 1/3rd deduction for probable expenses.

                •              Assessed income at ₹6.17 crore.

                4.            Second ITAT round – Final order dated 21.09.2011

                •              ITAT held:

                •              Assessee’s activities were clandestine; ordinary wholesale business profit rate of 2.5% not acceptable.

                •              AO’s working effectively implied roughly 8% profit rate.

                •              Considering the nature of uniform-cloth supply under govt. scheme, 8% was excessive.

                •              ITAT fixed profit rate at 5%.

                5.            Rectification Applications

                •              Assessee’s first MA (2012): Sought clarification whether 5% applied on gross turnover.

                •              ITAT clarified (09.03.2012): Yes, it applies to gross turnover.

                •              Revenue’s MA (2012): Claimed ITAT misunderstood AO’s method.

                •              On 26.03.2013, ITAT:

                •              Re-evaluated entire matter.

                •              Held earlier order was a “mistake”.

                •              Re-determined income at 50% of original assessed income, overriding its earlier 5% decision.

                •              Assessee’s third MA (2014): Sought reconsideration of the above order.

                •              ITAT dismissed the MA on 19.06.2015, holding:

                •              It has no power of review under Section 254(2).

                •              Only “mistakes apparent from record” can be rectified.

                6.            Revenue’s challenge to the main order

                •              Revenue’s appeal against the final order (TCA 114/2015) later withdrawn due to low tax effect.

                •              Thus, the original ITAT order dated 21.09.2011 (fixing 5% profit) attained finality.

                7.            Present appeals

                •              Assessee challenged both rectification orders.

                •              Main dispute: Whether ITAT had the power to recall and rewrite its earlier final decision through rectification.

 

4. Arguments

Assessee’s Arguments

                •              Section 254(2) empowers only rectification of an obvious, patent mistake.

                •              ITAT cannot:

                •              Re-appreciate facts,

                •              Re-write reasoning, or

                •              Substitute the entire earlier order.

                •              The 26.03.2013 order is effectively a review, not a rectification.

                •              Tribunal itself acknowledged in 2014 MA (rejecting assessee’s rectification petition) that it had no power to revisit merits, which contradicts its 2013 rectification order.

                •              Therefore, the rectification order is void and deserves to be quashed.

 

Revenue’s Arguments

                •              ITAT overlooked a “crucial mistake” in the earlier order.

                •              Profit rate adopted at 5% was based on a misunderstanding of AO’s method.

                •              Tribunal was entitled to correct such “mistake”.

 

5. Findings of the Madras High Court

                1.            Scope of Section 254(2:-Limited to rectifying mistakes apparent from the record.

                •              Does not permit:

                •              Reviewing merits,

                •              Re-adjudication, or

                •              Substitution of earlier order with a new one.

                2.            Reference to Supreme Court – Reliance Telecom Ltd. (2021) 133 Taxmann.com 41

                •              Section 254(2) is analogous to Order 47 Rule 1 CPC.

                •              ITAT cannot re-hear the entire matter under the guise of rectification.

                •              Only patent, obvious errors can be corrected.

                3.            Reference to Express Newspapers (Madras HC, 2010)

                •              Mistake must be manifest, self-evident.

                •              Cannot involve two possible opinions or detailed reasoning.

                •              Rectification cannot “obliterate” the original order.

                4.            Application to present case

                •              By re-appreciating the profit estimation and replacing the 5% order with a 50% income determination, ITAT:

                •              Reviewed its own decision,

                •              Exceeded its jurisdiction,

                •              Passed a perverse order beyond Section 254(2).

                5.            ITAT’s own contradictory stance

                •              When dismissing assessee’s rectification MA (2014), ITAT admitted it had no review power.

                •              The same logic applied to its earlier rectification of revenue’s MA, making that order unsustainable.

 

6. Decision

                •              The High Court set aside the ITAT rectification order dated 26.03.2013 (which imposed 50% income).

                •              Restored the original ITAT order dated 21.09.2011 fixing 5% profit.

                •              TCA 538/2021 (assessee) allowed.

                •              TCA 319/2016 dismissed as infructuous, since the rectification order itself was quashed.

                •              Result: Assessee succeeds; Revenue fails.

 

 

7. Summary of All Cases Referred (Gist)

(A) Supreme Court – Reliance Telecom Ltd. (2021) 133 Taxmann.com 41

                •              Section 254(2) is parallel to Order 47 Rule 1 CPC.

                •              Tribunal cannot re-hear appeal on merits under rectification powers.

                •              Only patent mistakes can be corrected; otherwise remedy is appeal.

 

(B) Express Newspapers Ltd. v. DCIT (2010) 320 ITR 12 (Madras HC)

                •              Mistake must be manifest, plain, and self-evident.

                •              Two possible opinions = debatable = not rectifiable.

                •              Rectification cannot rewrite or substitute the original order.

 

(C) Saurashtra Kutch Stock Exchange (2008) 305 ITR 227 (SC)

                •              Error apparent includes failure to follow binding precedents.

                •              Yet, must be visible without long reasoning.

 

(D) Honda Siel Power Products (2007) 295 ITR 466 (SC)

                •              Rectification justified where prejudice is caused by ITAT’s omission.

                •              But cannot be used for review.

 

Other supportive citations noted by the Court

                •              Hari Vishnu Kamath (1955 SC) – review vs. rectification distinction.

                •              Hero Cycles (1997 SC) – debatable issues not rectifiable.

                •              Multiple High Court rulings reaffirming narrow scope of rectification under income-tax law.

 

Final Synthesis

The Madras High Court has reaffirmed an essential principle: Section 254(2) does not empower ITAT to rewrite its judgment. It may only correct obvious mistakes, not reconsider issues requiring reasoning, evaluation, or judgment.

 

In the present case, ITAT’s rectification order effectively substituted its earlier reasoned conclusion of 5% profit with a fresh profit determination equivalent to 50% of assessed income. This amounted to a review, which is expressly forbidden under 254(2).

 

Scope of Rectification under Section 254(2) – Whether ITAT Was Right in Modifying Its Earlier Order?

 

M/s Devaraj & Others v. ITO, Coimbatore:-Madras High Court | TCA Nos. 319/2016 & 538/2021 | Judgment dated 27.11.2025**

 

1. Core Issue:-Whether the Income Tax Appellate Tribunal exceeded its jurisdiction under Section 254(2) of the Income Tax Act by revisiting the merits of the appeal and modifying its earlier final order, in the guise of rectification, especially by changing the profit determination from 5% (original order) to 50% of income (rectification order).

 

 

2 Facts

                1.            Background search & block assessment

                •              A scam relating to supply of dhotis/sarees under a TN Government scheme led to an Income-tax raid at Tamil Nadu Textile Corporation.

                •              Third-party records revealed dealings of the assessee, triggering 158BD block assessment.

                •              Original block assessment computed undisclosed income at ₹9.25 crore.

                2.            First ITAT round (28.01.2005)

                •              ITAT set aside the block assessment and remanded the matter.

                3.            Fresh assessment on remand (27.03.2006)

                •              AO held assessee belonged to an AOP but was individually engaged.

                •              AO concluded original 120% profit was unrealistic.

                •              Allowed 1/3rd deduction for probable expenses.

                •              Assessed income at ₹6.17 crore.

                4.            Second ITAT round – Final order dated 21.09.2011

                •              ITAT held:

                •              Assessee’s activities were clandestine; ordinary wholesale business profit rate of 2.5% not acceptable.

                •              AO’s working effectively implied roughly 8% profit rate.

                •              Considering the nature of uniform-cloth supply under govt. scheme, 8% was excessive.

                •              ITAT fixed profit rate at 5%.

                5.            Rectification Applications

                •              Assessee’s first MA (2012): Sought clarification whether 5% applied on gross turnover.

                •              ITAT clarified (09.03.2012): Yes, it applies to gross turnover.

                •              Revenue’s MA (2012): Claimed ITAT misunderstood AO’s method.

                •              On 26.03.2013, ITAT:

                •              Re-evaluated entire matter.

                •              Held earlier order was a “mistake”.

                •              Re-determined income at 50% of original assessed income, overriding its earlier 5% decision.

                •              Assessee’s third MA (2014): Sought reconsideration of the above order.

                •              ITAT dismissed the MA on 19.06.2015, holding:

                •              It has no power of review under Section 254(2).

                •              Only “mistakes apparent from record” can be rectified.

                6.            Revenue’s challenge to the main order

                •              Revenue’s appeal against the final order (TCA 114/2015) later withdrawn due to low tax effect.

                •              Thus, the original ITAT order dated 21.09.2011 (fixing 5% profit) attained finality.

                7.            Present appeals

                •              Assessee challenged both rectification orders.

                •              Main dispute: Whether ITAT had the power to recall and rewrite its earlier final decision through rectification.

 

4. Arguments

Assessee’s Arguments

                •              Section 254(2) empowers only rectification of an obvious, patent mistake.

                •              ITAT cannot:

                •              Re-appreciate facts,

                •              Re-write reasoning, or

                •              Substitute the entire earlier order.

                •              The 26.03.2013 order is effectively a review, not a rectification.

                •              Tribunal itself acknowledged in 2014 MA (rejecting assessee’s rectification petition) that it had no power to revisit merits, which contradicts its 2013 rectification order.

                •              Therefore, the rectification order is void and deserves to be quashed.

 

Revenue’s Arguments

                •              ITAT overlooked a “crucial mistake” in the earlier order.

                •              Profit rate adopted at 5% was based on a misunderstanding of AO’s method.

                •              Tribunal was entitled to correct such “mistake”.

 

5. Findings of the Madras High Court

                1.            Scope of Section 254(2:-Limited to rectifying mistakes apparent from the record.

                •              Does not permit:

                •              Reviewing merits,

                •              Re-adjudication, or

                •              Substitution of earlier order with a new one.

                2.            Reference to Supreme Court – Reliance Telecom Ltd. (2021) 133 Taxmann.com 41

                •              Section 254(2) is analogous to Order 47 Rule 1 CPC.

                •              ITAT cannot re-hear the entire matter under the guise of rectification.

                •              Only patent, obvious errors can be corrected.

                3.            Reference to Express Newspapers (Madras HC, 2010)

                •              Mistake must be manifest, self-evident.

                •              Cannot involve two possible opinions or detailed reasoning.

                •              Rectification cannot “obliterate” the original order.

                4.            Application to present case

                •              By re-appreciating the profit estimation and replacing the 5% order with a 50% income determination, ITAT:

                •              Reviewed its own decision,

                •              Exceeded its jurisdiction,

                •              Passed a perverse order beyond Section 254(2).

                5.            ITAT’s own contradictory stance

                •              When dismissing assessee’s rectification MA (2014), ITAT admitted it had no review power.

                •              The same logic applied to its earlier rectification of revenue’s MA, making that order unsustainable.

 

6. Decision

                •              The High Court set aside the ITAT rectification order dated 26.03.2013 (which imposed 50% income).

                •              Restored the original ITAT order dated 21.09.2011 fixing 5% profit.

                •              TCA 538/2021 (assessee) allowed.

                •              TCA 319/2016 dismissed as infructuous, since the rectification order itself was quashed.

                •              Result: Assessee succeeds; Revenue fails.

 

 

7. Summary of All Cases Referred (Gist)

(A) Supreme Court – Reliance Telecom Ltd. (2021) 133 Taxmann.com 41

                •              Section 254(2) is parallel to Order 47 Rule 1 CPC.

                •              Tribunal cannot re-hear appeal on merits under rectification powers.

                •              Only patent mistakes can be corrected; otherwise remedy is appeal.

 

(B) Express Newspapers Ltd. v. DCIT (2010) 320 ITR 12 (Madras HC)

                •              Mistake must be manifest, plain, and self-evident.

                •              Two possible opinions = debatable = not rectifiable.

                •              Rectification cannot rewrite or substitute the original order.

 

(C) Saurashtra Kutch Stock Exchange (2008) 305 ITR 227 (SC)

                •              Error apparent includes failure to follow binding precedents.

                •              Yet, must be visible without long reasoning.

 

(D) Honda Siel Power Products (2007) 295 ITR 466 (SC)

                •              Rectification justified where prejudice is caused by ITAT’s omission.

                •              But cannot be used for review.

 

Other supportive citations noted by the Court

                •              Hari Vishnu Kamath (1955 SC) – review vs. rectification distinction.

                •              Hero Cycles (1997 SC) – debatable issues not rectifiable.

                •              Multiple High Court rulings reaffirming narrow scope of rectification under income-tax law.

 

Final Synthesis

The Madras High Court has reaffirmed an essential principle: Section 254(2) does not empower ITAT to rewrite its judgment. It may only correct obvious mistakes, not reconsider issues requiring reasoning, evaluation, or judgment.

 

In the present case, ITAT’s rectification order effectively substituted its earlier reasoned conclusion of 5% profit with a fresh profit determination equivalent to 50% of assessed income. This amounted to a review, which is expressly forbidden under 254(2).

 

Thus, the High Court restored the earlier ITAT order and protected the taxpayer from an unlawful enhancement made through rectification proceedings.