Madras HC: Tribunal Exceeded Its Powers in Devaraj Income Tax Case

In a recent decision from the Madras High Court, a complicated tax case involving M/s. Devaraj & Others and the Income Tax Officer was settled. The court dealt with applications to fix mistakes and appeals related to income checks and tribunal decisions.

Background: The Dhotis and Sarees Plan

This case goes back to a plan by the Tamil Nadu government to give dhotis and sarees to the poor. The Tamil Nadu Textile Corporation (TNTC) was involved, and a major scam led to an Income Tax Department investigation. Details of deals involving M/s. Devaraj & Others were found, leading to evaluations of hidden income.

Initial Checks and Appeals

On February 21, 1997, M/s. Devaraj & Others filed a report showing hidden income. This was revised in August 1997, and the final hidden income was assessed at Rs. 9,25,52,290. M/s. Devaraj & Others challenged this, and the Income Tax Appellate Tribunal (ITAT) canceled the block assessment, sending it back for re-evaluation.

Tribunal Changes: Profit Percentage Adjustments

The re-evaluation by the Assessing Officer (AO) set the hidden income at Rs. 6,17,00,860, allowing cuts for expenses. The ITAT later changed the profit rate from 8% to 5%, considering the nature of the business and its illegal aspects.

"The profit rate of 2.5% disclosed by the assessee might be acceptable only to a wholesale dealer carrying on the business in a lawful manner."

Fixing Mistake Applications: Confusion and Clarifications

Several applications to fix mistakes followed. On March 9, 2012, the ITAT clarified the profit rate applied to total sales. However, a later correction by the ITAT on March 26, 2013, changed the income to 50% of the original assessment, which was challenged.

Court's Decision: Overstepping Limits

The Madras High Court, led by Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan, found that the ITAT went beyond its limits. The court decided that the ITAT's correction order was beyond its powers, as it effectively re-evaluated the case instead of fixing an obvious mistake.

"In our considered opinion, the rectification order dated 26.03.2013 by ITAT is erroneous, perverse and clearly exceeding its jurisdiction."

Order Restored

The court restored the ITAT's original order from September 21, 2011, which had set the profit ratio at 5%. The appeals by the tax authorities were dismissed, and M/s. Devaraj & Others' appeal was allowed, ending this long-standing dispute.

This case highlights the complexities involved in tax assessments and the limits of tribunal powers in fixing mistakes.