Orders of Appellate Tribunal (ITAT) [Section 254]

The Income Tax Appellate Tribunal (ITAT) derives its adjudicatory powers from Section 254 of the Income Tax Act, 1961. This section governs the nature, scope and procedure of orders passed by the Tribunal.

1. Types of Orders Under Section 254

(A) Final Appellate Orders [Section 254(1)]

The ITAT may pass orders to:

✔ Confirm the order under appeal

✔ Modify the assessment/penalty

✔ Set aside the order and remand to AO/CIT(A)

✔ Annul the assessment if found invalid

Example: If CIT(A) wrongly sustained a disallowance, ITAT may delete it.

(B) Interim Orders

• Stay orderson tax recovery during appeal pendency
• Directionsfor preservation of assets

(C) Rectification Orders [Section 254(2)]

• Corrects mistakes apparent from record
• Must be filed within 4 yearsfrom original order
• The ITAT can amend its orders within six months from the end of the month in which the order was passed to correct any mistake apparent from the record, if brought to its notice by the assessee or the Assessing Officer.
• If the amendment increases the assessee’s liability (e.g., higher tax or reduced refund), the ITAT must notify the assessee and provide a reasonable opportunity to be heard.
• Applications for rectification filed by the assessee on or after October 1, 1998, require a fee of fifty rupees.
• The Supreme Court has clarified that the ITAT’s power under this section is limited to correcting apparent errors and does not extend to rehearing the case or recalling orders.

2. Key Characteristics of ITAT Orders

(1) Speaking Orders

• Must contain:
  • Points for determination
  • Reasons for decision
  • Findings on each issue

(2) Binding Nature

• Final on questions of fact
• Creates judicial precedentfor lower authorities

(3) Enhancement Restrictions

ITAT cannot:

❌ Make a new assessment

❌ Enhance income suo moto

❌ Consider new sources of income

Exception: Can enhance penalty after notice.

(4)  Time Limit for Disposal and Stay Orders (Section 254(2A)):

• The ITAT aims to resolve appeals within four years from the end of the financial year in which the appeal is filed.
• The ITAT may grant a stay on proceedings (e.g., tax recovery) for up to 180 days, extendable to a maximum of 365 days, provided the delay is not attributable to the assessee. If the appeal is not resolved within this period, the stay is automatically vacated, even if the delay is not the assessee’s fault.
• The Finance Bill, 2020, introduced a requirement for the assessee to deposit or secure at least 20% of the tax, interest, fee, or penalty amount for a stay to be granted.

(5)  Costs of Appeal (Section 254(2B)):

• The ITAT has discretion to decide who bears the costs of the appeal.

(6)  Communication of Orders (Section 254(3)):

• Copies of ITAT orders must be sent to both the assessee and the Principal Commissioner or Commissioner of Income Tax. The Bombay High Court has ruled that orders must be served directly on the assessee, not just their authorized representative (e.g., a Chartered (7)  Accountant), unless specific authorization is provided.

(7)  Finality of Orders (Section 254(4)):

• ITAT orders are final unless appealed to the High Court under Section 260A or, in specific cases, to the Supreme Court.

3. Procedure for Passing Orders

1. Hearing Process
   • Both parties heard
   • Additional evidence allowed under Rule 29
2. Bench Decisions
   • Single Member: Cases with ≤ ₹50 lakh tax effect
   • Division Bench: Other cases
3. Pronouncement
   • Normally within 1-3 monthsof final hearing
   • Uploaded to ITAT e-dashboard

4. Post-Order Compliance

5.   Additional Powers and Limitations:

• The ITAT has plenary powers to entertain new claims during hearings, even if not raised earlier, provided they are explicitly considered and recorded in the order. However, it cannot direct the Assessing Officer to consider claims barred by limitation (e.g., in a revised return filed after the deadline).
• The ITAT cannot substitute its own views or entertain new pleas not raised before lower authorities unless justified.
• The Madras High Court has held that failing to give the assessee an opportunity to address issues overlooked in the original order violates principles of natural justice.

Example:

Suppose an assessee, Mr. Kumar, appeals to the ITAT against an assessment order. The ITAT hears both parties and passes an order. If Mr. Kumar later identifies a computational error, he can request rectification within six months, paying a ₹50 fee. If the correction increases his tax liability, he must be given a chance to respond. The ITAT may also grant a stay on tax recovery for up to 180 days, extendable to 365 days, if Mr. Kumar deposits 20% of the disputed amount. The final order is sent to Mr. Kumar and the Commissioner, and unless appealed under Section 260A, it is binding.