M/s Devaraj & Others v. ITO, Coimbatore – Madras High Court (27 November 2025)
The Madras High Court has once again clarified the narrow contours of the rectification jurisdiction vested in the Income Tax Appellate Tribunal under Section 254(2). The decision in M/s Devaraj & Others v. ITO, Company Ward–I, Coimbatore is significant not merely for the parties involved but for its reaffirmation of an established yet frequently tested principle: rectification is not a substitute for appeal, nor can it serve as an avenue for reviewing an earlier decision on merits.
Background of the dispute
The litigation arose from a block assessment that followed a major investigation into alleged irregularities in the supply of dhotis and sarees under a Government of Tamil Nadu scheme. Information gathered during a search at Tamil Nadu Textile Corporation led to proceedings under Section 158BD against the assessee group. The original block assessment quantified undisclosed income at ₹9.25 crore. On the first round, the Tribunal remanded the matter. The Assessing Officer, on remand, reduced the figure to ₹6.17 crore after allowing a one-third deduction for estimated expenses. When the matter reached the Tribunal again, it examined the nature of the assessee’s supply arrangements and the manner in which uniform-cloth trading was carried out. The AO had effectively worked out the income on the basis of roughly 8 per cent profit. The Tribunal found that rate excessive and, by its order dated 21 September 2011, determined that a 5 per cent profit on the gross turnover would meet the ends of justice.
This order was accepted by neither side. The assessee sought a small clarification, which the Tribunal granted: the 5 per cent was indeed to be applied on the gross turnover.The Revenue, however, filed its own rectification petition contending that the Tribunal had misunderstood the manner in which the AO computed the income. Acting on this petition, the Tribunal passed a fresh order on 26 March 2013, effectively undoing its earlier conclusion and substituting the 5 per cent profit determination with a computation that elevated the income to 50 per cent of what the AO had initially assessed. The assessee challenged this rectification order before the High Court.
The Tribunal, in a later order passed in response to another rectification application by the assessee, candidly admitted that it had no power to review its own order under Section 254(2).The High Court viewed this internal inconsistency as further evidence of overreach.
Arguments advanced
For the assessee, it was urged that Section 254(2) is confined to correcting a patent, obvious mistake and does not authorise the Tribunal to revisit the merits of the appeal. The 26 March 2013 order, it was argued, amounted to a rehearing of the matter and the substitution of a fully reasoned earlier decision with an entirely fresh adjudication. Such an exercise, the assessee submitted, was plainly beyond jurisdiction.
The Revenue attempted to justify the Tribunal’s action on the footing that the earlier order contained a “mistake” in the appreciation of the AO’s computation. According to the Department, the Tribunal was within its powers to correct that error.
High Court’s observations
The Court reiterated that rectification under Section 254(2) is analogous to the limited power of correction under Order XLVII Rule 1 of the Code of Civil Procedure, as recognised by the Supreme Court in Reliance Telecom Ltd.v. CIT (2021).A mistake that can be rectified must be self-evident and not one that requires a fresh examination of facts, re-appraisal of evidence or a new line of reasoning. A rectification power is not a review jurisdiction.
Reference was also made to the Court’s earlier ruling in Express Newspapers Ltd. v. DCIT (2010), where it was held that a rectification cannot obliterate or rewrite the original adjudication. If two interpretations are possible or if the issue is debatable, it necessarily falls outside the ambit of Section 254(2).Applying these principles to the case at hand, the High Court held that the Tribunal had exceeded its jurisdiction. The rectification order of 26 March 2013 did not merely correct an accidental slip; it reassessed the entire factual matrix and replaced the Tribunal’s own earlier finding with a wholly new quantum determination. The High Court observed that the Tribunal had, in substance, reviewed its original order—something Section 254(2) explicitly does not allow.
It was also noted that the Revenue’s appeal against the original 2011 order was dismissed on account of low tax effect, and therefore the 5 per cent determination had attained finality.A rectification proceeding cannot become a collateral means of reviving an issue that the Department chose not to pursue in appeal.
Decision
The High Court allowed the assessee’s appeal and quashed the rectification order dated 26 March 2013. The Tribunal’s earlier order of 21 September 2011, fixing the profit at 5 per cent of gross turnover, was restored. The companion appeal (TCA 319 of 2016) was dismissed as infructuous.
Significance of the ruling
The judgment reinforces a crucial discipline within the appellate structure. Section 254(2) is meant to correct only an apparent error, not to permit parties—whether assessee or Revenue—to re-litigate matters through the backdoor. The Tribunal’s tendency to revisit its own conclusions in the course of rectification proceedings has been a recurrent source of controversy. The High Court has ensured that the finality of appellate orders is not lightly disturbed.
By,
Ajay Kumar Agarwal, FCA
Sr. Partner
Ajay K. Agarwal & Associates Chartered Accountants, New Delhi
(N.B: All statements, opinions, and analysis presented in this article represent the independent personal views of the author and do not necessarily reflect the views of publication or its editorial team.)
