Summary: Section 254(2) of the Income Tax Act, 1961, provides power to the Income Tax Appellate Tribunal to amend its order to rectify any mistake apparent on record to ensure fairness without re-visiting the entire case and prolonging litigation. This blog analyses a recent decision of the Hon’ble Bombay High Court where the extent of exercise of rectification powers was discussed. It held that a subsequent Supreme Court decision on the issue cannot be grounds for rectification of orders.
The Income Tax Appellate Tribunal (“ITAT”) can only exercise its powers of rectification to amend its orders under Section 254(2) of the Income Tax Act, 1961 (“IT Act”), if there is any mistake apparent from records, the Hon’ble Bombay High Court (“HC”) held in Prakash D Koli v. ITAT[1].The ITAT had amended its order under Section 254(2), noting that a subsequent Supreme Court (“SC”) decision on the same issue had changed the legal position established by its earlier order. The Bombay HC held that ITAT cannot exercise its powers of rectification to amend orders on grounds of subsequent judicial decisions.
Factual background
Prakash Koli (“Assessee”) was an employer who had deposited his employees’ share of Employees’ Provident Fund (“EPF”) and Employees’ State Insurance (“ESI”) contributions from their salaries with the relevant authorities, but not within the due dates prescribed by EPF Act and ESI Act. Despite this delay, the Assessee claimed a tax deduction for these contributions under Section 36(1)(va) of the IT Act. The Assessing Officer (“AO”) disallowed the deduction claim on the ground that the contributions were not made within the due dates prescribed under the statutes. The disallowance was subsequently confirmed by the Commissioner of Income Tax (Appeals) (“CIT(A)”).
Aggrieved, the Assessee preferred an appeal to the ITAT. The ITAT passed an order dated June 22, 2022, in favour of the Assessee, allowing these deductions, relying on the precedent laid down by the Hon’ble Himachal Pradesh High Court in CIT v. Nipso polyfabriks Limited[2] (“Nipso polyfabriks case”). The ITAT observed that the deductions under Section 36(1)(va) shall be available to the Assessee as the deposits were made prior to the due date of filing income tax returns under Section 139(1) of the IT Act.
However, subsequently, the SC in Checkmate Services Private Limited v. CIT[3] (“Checkmate case”), overruled the Hon’ble Himanchal Pradesh High Court’s Nipso polyfabriks decision. The Apex Court held that deductions under Section 36(1)(va) for employees’ contributions to EPF and ESI can only be allowed if the deposits are made within the due dates specified by the respective statutes, and not if it is deposited only prior to the due date of filing returns under Section 139(1) of the IT Act.
Pursuant to the SC decision, the revenue filed a rectification application before the ITAT under Section 254(2) of the IT Act on the ground that the ITAT’s original decision in the Assessee’s favour was incorrect, thereby constituting it as a “mistake apparent from the record”. The ITAT agreed with the tax authorities and rectified its earlier order by upholding the AO’s disallowance of the deduction.
Decision of the HC
Basis the ITAT’s recent decision, the Assessee filed a writ petition before the Hon’ble Bombay HC. The core issue before the HC was whether the ITAT had the jurisdiction to allow the rectification application under Section 254(2) based on a subsequent SC decision.
The Assessee argued that the ITAT’s original decision reflected the legal position at the time, which allowed deductions for contributions deposited before the income tax return deadline. Therefore, there was no “mistake apparent from the record” in the original ITAT order. The SC’s subsequent decision cannot retrospectively render the ITAT’s order erroneous.
The HC agreed with the Assessee and held that there was no apparent error on the date of passing of the original ITAT order. It ruled that the ITAT’s original decision was consistent with the prevailing legal interpretations at the time and hence jurisdiction under Section 254(2) could not be invoked.
A subsequent SC ruling that changes the legal position does not automatically make a prior decision erroneous retrospectively, as a “mistake apparent from the record”. The HC emphasised that rectification under Section 254(2) is meant for rectification of errors only, and not for revisiting decisions due to subsequent judicial developments.
Significant Takeaways
It is pertinent to note that Section 36(1)(va) of the IT Act lays down that in computing business income of a taxpayer, any sum received by the taxpayer from his employees for contribution into EPF and ESI shall be allowed as deduction if the sum is credited to the relevant fund accounts “on or before the due date”. Explanation 1 to Section 36(1)(va) clearly defines “due date” as the date by which the assessee employer must credit the contributions to the employee’s account in the relevant fund, as prescribed under any statute, rule, order or notification thereunder.
The law is clear on the fact that if the contributions are not credited within the due dates prescribed under the relevant statutes, then such contributions would not be allowed as deductions and would be included in the computation of business income of the assessee. Basis this, it could be contended that the ITAT made an apparent mistake in its order dated June 22, 2022, by not following the clear provisions of law.
However, it cannot be ignored that the ITAT’s original order was basis interpretations and legal position during that time. Prior to the SC’s decision, the legal position was as laid down in Nipso polyfabriks, which held that deductions under Section 36(1)(va) were permissible for delayed contributions provided they were made before the income tax return filing deadline. Therefore, the Bombay HC clarified that the ITAT’s original order was in accordance with the law at the time and there was no apparent mistake to warrant rectification jurisdiction under Section 254(2). Subsequent decisions clarifying the correct position of law cannot be a ground for exercising such jurisdiction.
This case reiterates that Section 254(2) is not a tool for re-evaluating decisions basis new judicial rulings. Rectification is strictly for correcting obvious errors that are prima facie apparent without extensive legal analysis. It must not be used as a tool for challenging settled cases basis evolving case law and disregarding the finality of decisions.
This case is a compelling example of how tax laws may evolve with time. However, clarifications and changes in legal interpretations cannot be the basis for re-litigating cases that have been settled and/ or have attained finality. The Bombay HC’s ruling ensures that rectification applications are not used to undermine decisions that were valid when they were made.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] Prakash D Koli v. ITAT, Pune Bench, [TS-902-HC-2025(BOM)].
[2] CIT v. Nipso polyfabriks Limited, [(2013) 350 ITR 327 (HP)].
[3] Checkmate Services Private Limited v. CIT, [(2022) 448 ITR 518 (SC)].
