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Assistant Commissioner Of I.T Bangalore v. C.N Ananthram
Structured Summary of the Opinion (as provided)
Factual and Procedural Background
The assessee owned a residential site in Seshadripuram, Bangalore, obtained by family settlement, and constructed a three‑storey building (ground, first and second floors). Construction was completed in 1994–95 at a total cost of Rs. 17.40 lakhs (ground floor Rs. 8.40 lakhs; first floor Rs. 4.25 lakhs; second floor Rs. 4.75 lakhs). During the relevant assessment year 1996–1997 the assessee sold the first and second floors together with undivided shares in the land to two purchasers for Rs. 9.60 lakhs.
For taxation the assessee treated the building component as subject to short‑term capital gains (held for less than 36 months) and treated the undivided land portion as long‑term capital gains (held for more than 36 months), claiming exemption under the relevant provision(s) of the Income Tax Act.
The Assessing Officer rejected the exemption claim and that order was affirmed by the Commissioner of Income Tax (Appeals) by order dated 31.8.1998. On appeal the Income Tax Appellate Tribunal (Tribunal) initially dismissed the appeal by order dated 28.1.1999, holding inter alia that Section 54 relief was not available because benefit under Section 54 arises only when sale proceeds are reinvested in construction of a residential building and that Section 54‑F conditions were not satisfied because the assessee owned several residential properties (including the ground floor).
The assessee filed an application under Section 254(2) of the Income Tax Act for rectification/amendment of the Tribunal's order; that application was treated as Misc. Petition No. 88.Bang/99. The Tribunal accepted the miscellaneous petition, held that vital documents had not been brought out in its earlier order and directed that the matter be heard afresh by a fresh order dated 29.3.2001. The Revenue challenged that acceptance and the recall/rehearing order before this Court under Section 260A of the Income Tax Act.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Tribunal was correct in law in recalling its earlier order dated 28.1.1999 which had been passed after consideration of the issues?
- Whether, on the facts and circumstances of the case, the Tribunal was correct in recalling its earlier order and directing the matter to be heard afresh where the earlier order was not shown to have been obtained by fraud or similar vitiating circumstances?
Arguments of the Parties
Appellant's (Revenue) Arguments — Sri Indra Kumar, learned Counsel
- The impugned order (29.3.2001) contains no finding that the earlier order dated 28.1.1999 suffered from a "mistake apparent on the record", and therefore the Tribunal had no jurisdiction to pass the impugned order under Section 254(2).
- The procedure adopted by the Tribunal was illegal: Section 254(2) does not contemplate passing two separate orders — the proper course, if the Tribunal is satisfied that the earlier order suffers from a mistake apparent on the record, is to record that finding and amend the earlier order (i.e., a single amended order), not to recall and replace the earlier order by a fresh order.
- Relied on precedents in support: Karan & Co v. Income‑Tax Appellate Tribunal (253 ITR 131), Commissioner of Income Tax v. Income Tax Appellate Tribunal (196 ITR 640), and Commissioner of Income Tax v. Income Tax Appellate Tribunal (227 ITR 1997).
Respondent's (Assessee) Arguments — Sri Kiresur, learned Counsel
- The Tribunal found that the earlier order dated 28.1.1999 suffered from a mistake apparent from the record and therefore directed a rehearing; that factual and legal conclusion by the Tribunal should not be interfered with by this Court under Section 260A.
- The Tribunal specifically found that certain vital facts necessary for adjudication were not brought on record in the 28.1.1999 order and the matter required rectification; this amounts to a mistake apparent on the record and justified the impugned order directing rehearing.
- Relied on precedents in support: Commissioner of Income Tax v. Ballabh Prasad Agarwalla (1998 142 Taxation 476), Commissioner of Income Tax v. Ramesh Chand Modi (249 ITR 323), Commissioner Of Income‑Tax v. Dr. T.K. Jairaj (256 ITR 252), and Commissioner Of Income‑Tax v. U.P. Shoe Industries (235 ITR 1999).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court (as stated in the opinion) |
|---|---|---|
| Karan & Co v. Income‑Tax Appellate Tribunal, 253 ITR 131 | Scope of Section 254(2): limited to rectification of mistakes apparent from the record; recalling an entire order (i.e., passing a fresh order) is not permissible under s.254(2); an order under s.254(2) merges with the original order. | The Court expressly agreed with the observations in Karan & Co, quoted them, and held that on this ground the impugned order is liable to be set aside. |
| Commissioner of Income Tax v. Income Tax Appellate Tribunal, 196 ITR 640 | Cited by parties in relation to the principles governing recall/amendment/rectification under Section 254(2) (the opinion references this decision in the context of the limited scope of s.254(2)). | Referred to as supporting the proposition that recalling an order is not permissible under s.254(2); the Court noted the decision in its reasoning via the Karan & Co. discussion and treated it as supportive of the one‑order/rectification view. |
| Commissioner of Income Tax v. Income Tax Appellate Tribunal, 227 ITR 1997 | Cited by the appellant (Revenue) in support of the submission concerning the proper exercise of power under Section 254(2). | The opinion records that the appellant relied on this decision; the Court's analysis emphasizes the need for the Tribunal to record satisfaction of a mistake apparent before amending an order under s.254(2). |
| Commissioner of Income Tax v. Ballabh Prasad Agarwalla, 1998 142 Taxation 476 | Cited by the respondent as authority supporting the proposition that the Tribunal may recall/recall and rehear in appropriate circumstances. | The opinion notes the respondent relied on this decision; the Court observed that some decisions support the Tribunal's power to recall and rehear, but contrasted those with the Karan & Co. approach on the limits of s.254(2). |
| Commissioner of Income Tax v. Ramesh Chand Modi, 249 ITR 323 | Cited by the respondent in support of permitting recall/rehearing in certain situations. | The Court recorded reliance by the respondent; the opinion distinguishes the approach in these decisions from the one‑order/rectification requirement emphasized by Karan & Co. |
| Commissioner Of Income‑Tax v. Dr. T.K. Jairaj, 256 ITR 252 | Cited by the respondent as authority relevant to recalling/rehearing by the Tribunal. | The opinion notes this citation as part of the respondent's supporting authorities; the Court nevertheless found the impugned order defective on the ground that the Tribunal did not record satisfaction of a mistake apparent on the record as required by s.254(2). |
| Commissioner Of Income‑Tax v. U.P. Shoe Industries, 235 ITR 1999 | Cited by the respondent (and also referenced by the Court) regarding the Tribunal's procedures for recall/rehearing/amendment. | Recorded as relied upon by parties; the Court distinguished the permissive reading of these authorities from the restrictive interpretation of s.254(2) endorsed in Karan & Co and applied that restrictive view to set aside the impugned order. |
| CIT v. Income Tax Appellate Tribunal (Orissa), (1992) 196 ITR 640 | Discussed within the Karan & Co reasoning: highlights that power to recall is provided by Rule 24 of the Income Tax (Appellate Tribunal) Rules, 1963 and is limited to situations such as an ex parte decision where reasonable cause for absence is shown. | Quoted in the Karan & Co passage relied upon by this Court. The Court expressed respectful agreement with the view that recalling an order is not permissible under s.254(2) and used that view to find the impugned order indefensible. |
Court's Reasoning and Analysis
The Court framed the narrow question as whether the impugned order (29.3.2001) is liable to interference under Section 260A.
The Court concluded that the impugned order must be set aside for two principal, interrelated reasons:
- The Tribunal did not record the requisite finding that the earlier order dated 28.1.1999 "suffers from mistake apparent from the record". Section 254(2) expressly empowers the Tribunal to amend an earlier order only if it is satisfied that the earlier order suffers from a mistake apparent on the record. Before exercising the s.254(2) power, the Tribunal must identify and refer to materials on the record which were not considered or were misread and which led to a patently wrong order. The impugned order merely stated that "certain vital facts" were not brought out in the earlier order and directed rehearing without the Tribunal applying its mind to the specific statutory threshold of a "mistake apparent on the record."
- The Tribunal acted as though it could recall the entire earlier order and substitute a new order. The Court relied on the reasoning in Karan & Co (and related authority) that the scheme of Section 254(2) is restricted to rectification/amendment (i.e., a single amended order) and does not contemplate recalling an order in its entirety so as to rehear and readjudicate the entire appeal. Recalling an order effectively necessitates rehearing of the whole matter and moves beyond the limited legislative intent of s.254(2). Rule 24 of the Appellate Tribunal Rules (as discussed in the Karan & Co passage) provides the appropriate route for recall in limited ex parte situations, not s.254(2).
The Court observed that while some decisions relied upon by the respondent indicate that the Tribunal may recall and rehear in certain circumstances, those decisions did not address the precise question whether an application under s.254(2) should result in two orders or a single amended order. The Court therefore took the view consistent with Karan & Co and the cited Orissa High Court decision that s.254(2) must be read restrictively and that the Tribunal should record a finding of mistake apparent before amending an order; it should not simply wipe out the earlier order and replace it by a fresh order without the statutory satisfaction.
On that basis the Court held that there was "no application of mind" by the Tribunal to the statutory standard and therefore the impugned order was unsustainable.
Holding and Implications
Holding (core ruling): The appeal is allowed; the impugned order dated 29.3.2001 in Misc. Petition No. 88.Bang/99 is set aside and the matter is remitted to the Tribunal to reconsider the miscellaneous petition filed under Section 254(2) of the Income Tax Act on merits and in accordance with law.
The Court directed that the Tribunal take a fresh decision in the matter within four months from receipt of this order and left all contentions on merits open to be urged before the Tribunal. The Court answered the questions of law raised by the appellant in favour of the Revenue and against the assessee. No order was made as to costs.
Implications (direct consequences as stated in the opinion):
- The impugned recall/rehearing order is vacated and the Tribunal must reconsider the s.254(2) application by applying the correct statutory test (i.e., be satisfied that the earlier order suffers from a mistake apparent from the record and refer to the materials that were not considered or were misread).
- The Tribunal must exercise its rectification/amendment power in accordance with the restrictive interpretation of Section 254(2) endorsed by the Court (consistent with Karan & Co and the Orissa High Court decision), rather than simply recalling and replacing its earlier order without the requisite statutory finding.
- The Court left substantive issues on merits undecided so that they may be argued afresh before the Tribunal; the decision does not finally adjudicate the underlying capital gains/exemption questions between the parties.
Note: This summary is confined to the content and legal reasoning expressly contained in the provided opinion and does not add or infer facts or legal conclusions beyond that source.
Vishwanatha Shetty, J.:—
This appeal is by the Revenue. In this appeal, filed under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act), the appellant has called in question the correctness of the order dated 29.3.2001 passed by the Income Tax Appellate Tribunal, Bangalore (hereinafter referred to as Tribunal) in Misc. Petition No. 88.Bang/1999 in ITA No. 744.Bang/1998.
2. The facts of the case in brief which are relevant for the purpose of disposal of this appeal may be stated as follows:
The assessee was the owner of a residential site No. 4 (old No. 71), 4th main, Sripuram Extension, Seshadripuram, Bangalore having acquired the same as a result of family settlement. The assessee started putting up construction of ground floor, first floor and second floor on the site in question. The construction was completed in the year 1994-1995 at a total cost of Rs. 17.40 lakhs, the break up as under:
Ground floor Rs. 8.40 lakhs; First floor Rs. 4.25 lakhs; Second floor Rs. 4.75 lakhs; Total Rs. 17.40 lakhs
The assessee during the relevant assessment year 1996-1997 transferred and sold the first and second floors of the said building together with undivided share in the land for a consideration of Rs. 9.60 lakhs to two different purchasers. Since the building was not held for a period of exceeding 36 months, the assessee offered the difference for taxation in respect of the sale proceeds received on account of transfer of building under the ‘short-term capital gains’. But however in so far as the undivided portion of the land, according to the assessee, it being held for a period of more than 36 months, the income from sale of the said land was offered under the head ‘long term capital gains’ and claimed exemption.
3. The Assessing Officer did not allow the assessee's claim on the ground that the income offered under the head ‘long term capital gains’ is in respect of land portion only and concluded that he was not entitled for exemption. The said order of the Assessing Officer was challenged before the Commissioner of Income Tax (Appeals)-II, Bangalore. The Commissioner of Income-Tax (Appeals) by order dated 31.8.1998, a copy of which is produced as Annexure-B, dismissed the appeal on the ground that for the purpose of computing the capital gains, the assessee could not have considered the land separate from the building and computed the long term capital gains and short term capital gains seperately while in the context of claiming exemption under Section 54 of the Act. The Appellate Authority further found that the income from the land in respect of which long term capital gains income has been computed by the assessee is not chargeable under the head ‘income from house property’. He confirmed the order of the Assessing Officer and held that the claim for exemption under Section 54 of the Act was rightly rejected. The said order of the Assessing Officer as well as the Appellate Authority was carried in appeal before the Tribunal. The Tribunal at the first instance by its order dated 28.1.1999, a copy of which is produced as Annexure-C, dismissed the appeal holding that in so far as the benefit under Section 54 of the Act is concerned, the deduction is available only when out of the sale proceeds, the assessee makes an investment in the construction of a residential building. Since the case of the assessee was not that he had constructed a residential building after the sale and by utilizing the sale proceeds, the benefit of Section 54 was not available to the assessee. In so far as the benefit under Section 54-F is concerned, the Tribunal held that the assessee did not satisfy the conditions as the assessee owns several residential properties including the ground floor of the building in which the first and second floors were constructed. Consequently, dismissed the appeal as one devoid of merits. The assessee filed an application for rectification and for amendment of the order under Section 254(2) of the Act. The said application was treated as a Miscellaneous Petition which was numbered as Misc. Petition No. 88.Bang/99. The Tribunal accepted the said miscellaneous petition on the ground that on a careful examination of the Assessment Order, the order of the Appellate Authority and the earlier order of the Tribunal passed on 28.1.1999 it is found that certain vital documents necessary for adjudicating the grounds of appeal were not brought out in the order dated 28.1.1999 and felt that it requires further clarification and directed that the entire matter be heard afresh. The said order of accepting the miscellaneous petition is challenged in the above appeal under Section 260-A of the Act.
4. Sri Indra Kumar, learned Counsel for the appellant has raised the following questions of law for our consideration:
(a) “Whether, on the facts and circumstances of the case, the Tribunal is correct in law in recalling its earlier order and dated 28.1.1999 which was passed after due consideration of all the issues thereto?”
(b) “Whether, on the facts and circumstances of the case, the Tribunal is correct in law in recalling its earlier order and directing the matter to be heard afresh when the Tribunal had passed its earlier order and such order was not obtained by fraud etc.?”
5. Sri Indra Kumar, learned Counsel appearing for the appellant challenging the correctness of the order passed by the Tribunal, made two submissions. Firstly he submitted that since there is no finding recorded in the order impugned that the earlier order dated 28.1.1999, a copy of which has been produced as Annexure-C, suffers from mistake apparent on the record, it was not permissible for the Tribunal to pass the impugned order. Secondly, he submitted that the procedure adopted by the Tribunal while passing the impugned order is totally illegal. According to the learned Counsel Section 254(2) of the Act does not contemplate passing of two orders. According to him, if the Tribunal is satisfied that the earlier order passed by it suffers from mistake apparent on the record, it could record such a finding and amend the earlier order. Therefore, he submits that the order impugned is liable to be set aside solely on the ground that the same came to be passed in total disregard to Section 254(2) of the Act. In support of his contentions, he referred to us the decisions in the case of Karan & Co v. Income-Tax Appellate Tribunal. . 253 ITR 131.; Commissioner of Income Tax v. Income Tax Appellate Tribunal . 196 ITR 640. and Commissioner of Income Tax v. Income Tax Appellate Tribunal . 227 ITR 1997..
5. However, Sri Kiresur, learned Counsel appearing for the respondent submitted that since the Tribunal has found that the earlier order dated 28.1.1999 passed by it suffers from mistake apparent from the record and directed that the matter should be heard afresh on merits, there is absolutely no justification for this Court to interfere with the said order while exercising powers under Section 260A of the Act. According to the learned Counsel the order passed by the Tribunal does not suffer from any substantial error of law. He further pointed out that since the Tribunal has. found that certain vital facts which are necessary for adjudicating the grounds of appeal were not brought on record in order dated 28.1.1999 passed by the Tribunal and the matter required further rectification, the impugned order was passed, the said conclusion reached by the Tribunal must be held to be a mistake apparent on the record. In support of his submission he referred to us the decisions in the case of Commissioner of Income Tax v. Ballabh Prasad Agarwalla . 1998 142 Taxation 476.; Commissioner of Income Tax v. Ramesh Chand Modi . 249 ITR 323.; Commissioner Of Income-Tax v. Dr. T.K Jairaj . 256 ITR 252. and Commissioner Of Income-Tax v. U.P Shoe Industries. . 235 ITR 1999..
6. In the light of the rival contentions, the only question that would arise for consideration in this appeal is as to whether the order impugned is liable to be interfered by us in exercise of the power conferred under Section 260-A of the Act?
7. We are of the view that the order impugned is liable to be set aside on both the grounds urged by Sri Indra Kumar, learned Counsel for the appellant. As rightly pointed out by Sri Indrakumar, the Tribunal except pointing out in the impugned order that certain vital facts which are necessary for adjudicating the grounds of appeal were not brought out in the order dated 28.1.1999 and therefore the matter requires clarification, the Tribunal has not given a finding in the impugned order that the order dated 28.1.1999 passed by it suffers from mistake apparent from the record. Sub-Section 2 of Section 254 empowers the Tribunal to amend the earlier order passed by it provided the Tribunal is satisfied that the earlier order passed by it suffers from mistake apparent from the record. Therefore, before an order is made by the Tribunal amending the earlier order, it must be satisfied that the earlier order suffers from mistake apparent from the record. As noticed by us earlier, the Tribunal in its entire order has not adverted to this aspect of the matter. The language used in Section 254(2) makes it abundantly clear that the Tribunal is conferred with power to amend the order passed under Section 254(1) of the Act, if the Tribunal is satisfied that the order made under Section 254(1) of the Act suffers from a mistake apparent from record. It is necessary to point out that the object of the power conferred under Section 254(2) of the Act is to rectify the mistake apparent on the record. Therefore, the Tribunal before it exercise the power conferred on it under Section 254(2) of the Act must refer to the materials on record which were not considered or misread which led to passing of a patently wrong order under Section 254(1) of the Act. There is no application of mind by the Tribunal on this aspect of the matter. Amendment of an order does not mean wiping out the order earlier passed and substitution by a new order. Therefore, as rightly pointed out by Sri Indrakumar, the order impugned is liable to be set aside on the short ground that there is no application of mind by the Tribunal with regard to its power to rectify/amend the earlier order passed by it. Further, no doubt the decision relied on by Sri Kiresur in the cases stated supra supports his contention that is permissible for the Tribunal first to recall the earlier order and proceed to hear the parties afresh and pass a fresh order amending the earlier order passed by it. But in the said decisions, there is no discussion with regard to the question as to whether the Tribunal is required to make only one order on an application filed under Section 254(2) of the Act or whether it should pass two orders. However, the decisions in the case of Karan & Co v. Income-Tax Appellate Tribunal. (supra); Commissioner of Income Tax v. Income Tax Appellate Tribunal and Commissioner Of Income-Tax v. U.P Shoe Industries. (Supra) relied on by Sri Indrakumar, it is clearly stated that the Tribunal should pass only one order amending the earlier order if it is satisfied that the earlier order suffers from mistake apparent from the record. In this connection, it is useful to refer to the observations of the Delhi High Court in the case of Karan and Company (supra) at page 135 of the Judgment which reads as follows:
“The scope and ambit of application of Section 254(2) is very limited. The same is restricted to rectification of mistakes apparent from the record. We shall first deal with the question of the power of the Tribunal to recall an order in its entirety. 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 under Section 254(1) is the effective order so far as the appeal is concerned. Any order passed under Section 254(2) either allowing the 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 under Section 254(1). That is the final order in the appeal. An order under Section 254(2) does not have existence de hors the order under Section 254(1). Recalling of the order is not permissible under Section 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 a reasonable cause for being absent at a time when the appeal was taken up and was decided ex parte. This position was highlighted by one of us (Justice Arijit Pasayat, Chief Justice) in CIT v. Income tax Appellate Tribunal (1992) 196 ITR 640 (Orissa). Judged in the above background the order passed by the Tribunal is indefensible”.
We are in respectful agreement with the view taken by the Delhi High Court in the case of Karan and Company and Orissa High Court in the case of Commissioner of Income Tax (supra). Therefore, on this ground also the impugned order is liable to be set aside.
8. In the light of the discussion made above, the order dated 29.3.2001 made in Misc. Petition No. 88.Bang/99 is hereby set aside and the matter is remitted to the Tribunal to reconsider the miscellaneous petition filed by the respondent under Section 254(2) of the Act on merits and in accordance with law in the light of the observations made above. The Tribunal is directed to take a fresh decision in the matter as directed by us, within four months from the date of receipt of a copy of this order. All contentions on merits are left open to be urged before the Tribunal.
In terms stated above, the appeal is allowed and disposed of. The questions of law raised by the appellant is answered in favour of the Revenue and against the assessee. No order is made as to costs.
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