Court allows Tribunal to fix lawyer’s mistake in withdrawn tax appeal

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Case Name

Federal Mogul Goetze (India) Limited Through A.R. vs Assistant Commissioner of Income Tax (High Court of Delhi)

W.P.(C) 11330/2021

Date: 22nd October 2021

Key Takeaways

• Tribunals can fix lawyer mistakes: The Income Tax Appellate Tribunal has power under Section 254(2) (of Income Tax Act, 1961) to correct errors even when they’re caused by counsel’s mistakes, not just the Tribunal’s own errors
• Apparent errors must be corrected: When a mistake is obvious from the record, the Tribunal should use its rectification powers to ensure justice
• Withdrawal doesn’t mean everything is resolved: Just because an appeal is withdrawn for one issue doesn’t mean all grounds in that appeal are automatically disposed of
• Justice over technicalities: Courts prioritize fairness and justice over strict procedural rules when genuine mistakes occur

Issue

Can the Income Tax Appellate Tribunal use its power under Section 254(2) (of Income Tax Act, 1961) to rectify its order when a taxpayer’s counsel mistakenly withdrew an appeal without realizing that some grounds were still pending adjudication?

Facts

Federal Mogul Goetze (India) Limited had filed an income tax appeal (ITA No.1909/Del/2016) with several grounds of challenge. The main issue was about transfer pricing adjustments for the assessment year 2011-12.

Here’s where it gets interesting - the company managed to resolve the transfer pricing issue by entering into an Advance Pricing Agreement with the tax authorities. Thinking everything was sorted, their lawyer withdrew the entire appeal.

The lawyer forgot that grounds 6 and 7 of the appeal were still outstanding and had nothing to do with transfer pricing:

• Ground 6: About disallowance of advances written off worth ₹52,53,000 under Section 36(2) (of Income Tax Act, 1961)
• Ground 7: About additional MAT credit of ₹1,36,75,898 that wasn’t allowed

When the company realized this mistake, they filed a miscellaneous application (MA No.555/Del/2019) asking the Tribunal to correct the error and hear these pending grounds. Unfortunately, the Tribunal dismissed this application on September 23, 2020.

Arguments

Company’s Arguments (Petitioner):

The company’s lawyer, Mr. Vivek Sarin, argued that:

• The Tribunal has power under Section 254(2) (of Income Tax Act, 1961) to rectify mistakes that are apparent from the record
• The counsel’s inadvertent withdrawal of the appeal when some issues were still pending was a clear mistake
• The Tribunal should exercise its rectification power to ensure justice and allow the pending grounds to be heard

Revenue’s Position (Respondent):

The revenue department’s counsel, Mr. Kunal Sharma, was given time to examine the case law cited by the company but didn’t file any counter-affidavit to oppose the petition. Essentially, they didn’t dispute that no decision could be made on grounds 6 and 7 since the appeal was withdrawn, and they accepted that the Tribunal has rectification powers under Section 254(2) (of Income Tax Act, 1961).

Key Legal Precedents

The court relied heavily on these important precedents:

1. Lachman Dass Bhatia Hingwala (P.) Ltd. v. Assistant Commissioner of Income Tax, 2010 SCC OnLine Del 4617

This Delhi High Court full bench decision was crucial. The court specifically referenced paragraph 27, which discussed the Tribunal’s rectification powers.

2. Assistant Commissioner of Income-Tax v. Saurashtra Kutch Stock Exchange Ltd., [2003] 262 ITR 146 (Gujarat High Court)

This case established key principles about rectification powers:

• Tribunals can rectify mistakes apparent from record on their own or on application
• The power can be exercised even if mistake is by the Tribunal or by a party
• Non-consideration of jurisdictional High Court judgments constitutes mistake apparent from record

3. ACIT v. Saurashtra Kutch Stock Exchange Ltd., [2008] 305 ITR 227 (Supreme Court)

The Supreme Court upheld the Gujarat High Court’s decision and emphasized:

• “Rectification of an order stems from the fundamental principle that justice is above all”
• Courts have constitutional and legal obligation to set right injustice by recalling orders
• The Tribunal didn’t commit any error in exercising rectification power under Section 254(2) (of Income Tax Act, 1961)

4. S. Nagaraj v. State of Karnataka, 1993 Supp (4) SCC 595

Quoted for the principle: “Justice is a virtue which transcends all barriers. Neither the rules of procedure nor technicalities of law can stand in its way.”

Judgement

The Delhi High Court ruled completely in favor of Federal Mogul Goetze. Here’s what they decided:

Court’s Reasoning:

The court held that the Tribunal’s rectification power under Section 254(2) (of Income Tax Act, 1961) is not limited to mistakes made by the Tribunal itself. It extends to mistakes made by counsel for the parties as well.

The court explained: “once a mistake/error is brought to the notice of the Tribunal, which is apparent on face of record, either by the assessee or the assessing officer, the Tribunal would have the necessary power to rectify/amend its order.”

Specific Orders:

1. Set aside the Tribunal’s order: The court set aside the Tribunal’s order dated September 23, 2020, which had dismissed the company’s miscellaneous application
2. Directed the Tribunal to hear pending grounds: The court specifically requested the Tribunal to take up grounds 6 and 7 of the original appeal and decide them after hearing both parties
3. Disposed of the writ petition: The matter was resolved in favor of the company

FAQs

Q1: What does this case mean for taxpayers whose lawyers make similar mistakes?

A: This case provides hope! If your lawyer accidentally withdraws an appeal or makes a similar obvious mistake, you can approach the Tribunal under Section 254(2) (of Income Tax Act, 1961) to get it corrected. The Tribunal has the power to fix such errors to ensure justice.

Q2: Does this apply only to Income Tax Tribunals?

A: While this specific case deals with the Income Tax Appellate Tribunal, the principles about rectification of apparent mistakes would likely apply to other tribunals with similar rectification powers.

Q3: What makes a mistake “apparent from the record”?

A: Based on the precedents cited, a mistake is apparent from the record when it’s self-evident and doesn’t require detailed investigation. In this case, it was clear from the record that grounds 6 and 7 were different from the transfer pricing issue that got resolved.

Q4: Can the revenue department challenge this decision?

A: They could potentially appeal to the Supreme Court, but given that they didn’t even file a counter-affidavit opposing the petition, and the legal principles are well-established by Supreme Court precedents, it seems unlikely to succeed.

Q5: How long did this entire process take?

A: The Tribunal dismissed the application in September 2020, and the High Court decided the matter in October 2021 - about a year to get justice for what was essentially a clerical error.

Q6: What should lawyers learn from this case?

A: Lawyers should be extremely careful when withdrawing appeals to ensure all grounds are properly considered. However, the case also shows that genuine mistakes can be corrected through the legal system’s rectification mechanisms.

1. On the previous date i.e., 11.10.2021, we had passed the following order, whereby the controversy obtaining in the matter had been crystallized:

“2. This writ petition is directed against the order dated 23.09.2020, passed by the Income Tax Appellate Tribunal (in short „the Tribunal‟), whereby the Miscellaneous Application i.e., M.A. No.555/Del/2019 was dismissed.

2.1. The aforementioned M.A. was filed by the assessee/petitioner seeking adjudication qua additional grounds i.e., Ground Nos. 6 and 7, which formed part of its appeal i.e., ITA No.1909/Del/2016. For the sake of convenience, the said grounds are extracted hereafter:

“Ground No. 6

The Ld. AO, on facts and in law, has erred in disallowing the advances written off amounting to INR 52,53,000 under the provisions of Section 36(2) (of Income Tax Act, 1961)

of the Act. In doing so, the Ld. AO has failed to appreciate that such advances were given during the normal course of business and their subsequent non-Digitally Signed recovery and consequent write-off in the books of accounts by the Appellant constituted a valid business expenditure to be allowed to the Appellant.

Ground No. 7

7.1 The Ld. AO has erred, on the facts and circumstances of the case and in law, in not allowing additional MAT credit (amounting to INR 1,36,75,898) as claimed by the Appellant during the course of assessment proceedings. In doing so, the Ld. AO has failed to appreciate that the aforesaid claim was a revision of an existing claim already claimed in the return of income, on account of an inadvertent error and not a fresh claim on account of omission on the part of the Appellant.

7.2 Further, the Hon’ble DRP has grossly omitted in addressing the objection raised by the appellant on the aforesaid action of the Ld. AO while issuing

directions to the Ld. AO.”

3. The record shows that, the assessee/petitioner withdrew its appeal, as the issue pertaining to transfer pricing adjustment, concerning the assessment year (AY) in issue i.e., AY 2011-2012 stood resolved.

3.1 The resolution took place as the assessee/petitioner had entered into

an Advance Pricing Agreement with the respondent/revenue.

4. Mr. Vivek Sarin, who appears on behalf of the assessee/petitioner, in support of his plea, says that, the Tribunal could have exercised its power under Section 254(2) (of Income Tax Act, 1961).

4.1. Inter alia, in this context, Mr. Sarin has placed reliance upon a full bench judgement of this Court, rendered in Lachman Dass Bhatia Hingwala (P.) Ltd. v. Assistant Commissioner of Income Tax, 2010 SCC OnLine Del 4617. In particular, reliance is placed on paragraph 27 of the said judgement. For the sake of convenience, the same is extracted hereafter:

“27. In this context, we may refer with profit to the decision in Assistant Commissioner of Income-Tax v. Saurashtra Kutch Stock Exchange Ltd., [2003] 262 ITR 146 wherein a Division Bench of the Gujarat High Court was dealing with a writ petition preferred under Articles 226 and 227 of the Constitution of India. In the said case, the assail was to the order dated 5.9.2001 passed by the tribunal whereby the tribunal had recalled the earlier order dated 27.10.2000. The Division Bench dealt with the contention canvassed by the revenue that the tribunal cannot obliterate its earlier findings/reasonings/order and the original order cannot be wiped out and came to hold as follows:

“(a) The Tribunal has power to rectify a mistake apparent from the record on its own motion or on an application by a party under section 254(2) (of Income Tax Act, 1961);

(b) An order on appeal would consist of an order made under section 254(1) (of Income Tax Act, 1961) or it could be an order made under sub-section (1) as amended by an order under sub-section (2) of section 254 (of Income Tax Act, 1961);

(c) The power of rectification is to be exercised to remove an error or correct a mistake and not for disturbing finality, the fundamental principle

being, that power of rectification is for justice and fair play;

(d) That power of rectification can be exercised even if a mistake is committed by the Tribunal or even if a mistake has occurred at the instance of party to the appeal;

(e) A mistake apparent from record should be self-evident, should not be a debatable issue, but this test might break down, because judicial opinions

differ, and what is a mistake apparent from the record cannot be defined precisely and must be left to be determined judicially on the facts of each case;

(f) Non-consideration of a judgment of the jurisdictional High Court would always constitute a mistake apparent from the record, regardless of the judgment being rendered prior to or subsequent to the order proposed to be rectified;

(g) After the mistake is corrected, consequential order must follow, and the Tribunal has power to pass all necessary consequential orders.”

On the basis of the said conclusions, the writ court affirmed the order of recall passed by the tribunal. The aforesaid decision was challenged by the revenue before the Apex Court and their Lordships in ACIT v. Saurashtra Kutch Stock Exchange Ltd., [2008] 305 ITR 227 (SC) came to hold as follows:

“The core issue, therefore, is whether non-consideration of a decision of jurisdictional court (in this case a decision of the High Court of Gujarat) or of the Supreme Court can be said to be a “mistake apparent from the

record”?

In our opinion, both-the Tribunal and the High Court-were right in holding that such a mistake can be said to be a “mistake apparent from the record” which could be rectified under section 254(2) (of Income Tax Act, 1961).”

[Emphasis supplied]

Thereafter, their Lordships proceeded to state as follows:

“Rectification of an order stems from the fundamental principle that justice is above all. It is exercised to remove the error and to disturb the finality.

In S. Nagaraj v. State of Karnataka1993 Supp (4) SCC 595, 618, Sahai, J. stated:

“Justice is a virtue which transcends all barriers. Neither the rules of procedure nor technicalities of law can stand in its way. The order of the court should not be prejudicial to anyone. Rule of stare decisis is adhered for consistency but it is not as inflexible in Administrative Law as in Public Law. Even the law bends before justice. Entire concept of writ jurisdiction exercised by the higher courts is founded on equity and fairness. If the court finds that the order was passed under a mistake and it would not have exercised the jurisdiction but for the erroneous assumption which in fact did not exist and its perpetration shall result in miscarriage of justice then it cannot on any principle be precluded from rectifying the error. Mistake is accepted as valid reason to recall an

order. Difference lies in the nature of mistake and scope of rectification, depending on if it is of fact or law. But the root from which the power flows is the anxiety to avoid injustice. It is either statutory or inherent. The latter is available where the mistake is of the court.

In Administrative Law, the scope is still wider. Technicalities apart if the court is satisfied of the injustice then it is its constitutional and legal obligation to set it right by recalling its order.”

In the present case, according to the assessee, the Tribunal decided the matter on October 27, 2000. Hiralal Bhagwati, [2000] 246 ITR 188 (Guj) was decided a few months prior to that decision, but it was not brought to the attention of the Tribunal. In our opinion, in the circumstances, the Tribunal has not committed any error of law or of jurisdiction in exercising

power under sub-section (2) of section 254 (of Income Tax Act, 1961) and in rectifying the “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. Both the orders, therefore, in our opinion, are strictly in consonance with law and no interference is called for.”

4.2. Mr. Kunal Sharma, who appears on advance notice on behalf of the respondent/revenue, seeks time to examine the aforementioned judgement, cited by the counsel for the assessee/petitioner.

5. Since we are standing over the matter, we are inclined to issue a formal notice in the matter. It is ordered accordingly.

5.1. Mr. Sharma accepts notice on behalf of the respondent/revenue.

In case instructions are received to resist the writ petition, a counter-affidavit will be filed before the next date of hearing.

6. List the matter on 22.10.2021.”

2. The aforementioned extract shows that Mr. Kunal Sharma, learned counsel for the respondent/revenue, was to revert with instructions today.

2.1. Furthermore, as would be evident from the order dated 11.10.2021, Mr. Sharma was also given leave to file a counter-affidavit, in case he were to receive instructions, to resist the petition.

2.2. Concededly, counter-affidavit has not been filed.

2.3. Mr. Sharma, however, does not dispute the fact [as he cannot in view of the fact that no counter affidavit has been filed] that, no decision could be rendered on the issues raised before the Income Tax Appellate Tribunal (in short “the Tribunal”) by way of additional ground nos. 6 and 7, in view of the fact that the appeal had been withdrawn by the petitioner.

2.4. Mr. Sharma also cannot but accept the position that, the Tribunal has

the power to amend its order to rectify mistakes, which are apparent on the

face of the record, in exercise of its power under sub-section (2) of Section 254 (of Income Tax Act, 1961) (in short “the Act”).

3. It is our view that, the power available to the Tribunal under sub-section (2) of Section 254 (of Income Tax Act, 1961) is not limited to a mistake committed

by the Tribunal. The amendment to the order of the Tribunal can also be made, if it is triggered on account of a mistake of the counsel for the parties.

3.1. In other words, once a mistake/error is brought to the notice of the

Tribunal, which is apparent on face of record, either by the assessee or the

assessing officer, the Tribunal would have the necessary power to rectify/ amend its order. This power will also extend to a situation, such as the one obtaining in the present case, where the petitioner’s counsel withdrew the appeal, for the reason that, the issue concerning transfer pricing adjustment in respect of the assessment year (AY) in issue i.e., AY 2011-12, stood resolved.

3.2. The petitioner’s counsel, inadvertently, failed to bring to the notice of the Tribunal, that the issues raised in ground nos. 6 and 7 of the appeal were outstanding, and that they needed to be adjudicated upon.

4. Thus, having regard to the aforesaid, we are of the view that the impugned order dated 23.09.2020, passed by the Tribunal in the miscellaneous application i.e., MA No.555/Del/2019 deserves to be set aside.

4.1 It is ordered accordingly.

5. The Tribunal is requested to take up the petitioner’s appeal, insofar as

the issues pertaining to grounds 6 and 7 are concerned, and adjudicate upon

the same, after hearing the concerned parties and/or their authorized representative.

6. The writ petition is disposed of in the aforesaid terms.

RAJIV SHAKDHER, J

TALWANT SINGH, J

OCTOBER 22, 2021