Before we discuss about the power to recall an order by the Income Tax Appellate Tribunal under Section 254(2) of the Act, lets take a quick overview of this Section.
Section 254(2) of the I.T. Act, lays down the power of the Income Tax Appellate Tribunal to rectify an order passed under Section 254(1), if there is an error, which is, "apparent on the face of record." For the sake of convenience, the same is extracted hereafter:
"254. Orders of Appellate Tribunal
(1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
(2) The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub- section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the 2 Assessing] Officer: Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this. sub- section unless the Appellate Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard.
Application of doctrine of merger
The doctrine of merger, which is a common law doctrine, is founded on a principle that 'there cannot be more than one operative order governing the same subject matter at a given point of time'. Merger in law is defined as the absorption of a thing of lesser importance by a greater, whereby the lesser ceases to exist, but the greater is not increased; an absorption or swallowing up so as to involve a loss of identity and individuality. [ See: Kunhayammed v. State of Kerala, 113 Taxman 470 (SC)]. This doctrine is frequently applied in taxation statutes, and thus, by way of same, any order passed under Section 254(2) either allowing the amendment or refusing to amend gets merged with the original order passed under Section 254(1) of the I.T. Act.. The order, whether amended or not, is the effective order for all practical purposes. The same continues to be the governing-cum-operative 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) [See: Karan & Co. v. ITAT (2002) 253 ITR 131 (Del)].
Power to rectify is not equivalent to power to review
The Supreme Court has held in Patel Narshi Thakershi v. Pradyumansinghji Arjunsinghji, (1971) 3 SCC 844, that the power to review is not an inherent power. It must be conferred by law either specifically or by necessary implication. Since, Section 254(2) of the I.T. Act envisages only a power of rectification, and not the power of review, and since, if the power of review cannot be exercised directly, then, it cannot be done indirectly. Thus, the said power can be exercised only on the parameters stipulated in the said provision i.e. when there is a mistake "apparent from the record"; such mistake should be self-evident, should not be a debatable issue [See: Assistant Commissioner of Income-Tax v. Saurashtra Kutch Stock Exchange Ltd.,  262 ITR 146 (Guj)]. Power of rectification cannot be invoked to hear a case on merits. However, there cannot be any precise definition of this expression and thus, will differ from case to case basis due to the facts and circumstances obtaining in each matter.
Q. Can power of rectification of the ITAT under Section 254(2) be interpreted as including power to recall its own order?
However, before we look at what have the Courts have observed, lets look at some of the obvious doubts on this aspect. For example, can it be argued that if the amended order under Section 254(2) of the I.T. Act recalls the order passed under Section 254(1), then won't that order be de hors the original order, which is not permissible in law?; or can the power to recall the order be construed as an act against the 'rule of precedent'?; or can rehearing of a matter on merits after recalling the original order be construed as exercise of power to review by the Tribunal?. All these questions were put to rest by the judgement of Supreme Court rendered in Honda Siel Power Products Ltd. v. Commissioner of Income-Tax  295 ITR 466 (SC) and judgement of the Delhi High Court rendered in Lachman Dass Bhatia Hingwala (P.) Ltd. vs. Asst. CIT (2011) 237 CTR 117.
In Honda Siel Case, the Court made the following observations:
"14. The aforesaid decision was assailed before the Apex Court by the assessee and their Lordships, while dealing with the power of the tribunal under Section 254(2) of the Act, have expressed thus:— “As stated above, in this case we are concerned with the application under section 254(2) of the 1961 Act. As stated above, the expression “rectification of mistake from the record” occurs in section 154. It also finds place in section 254(2). The purpose behind the enactment of section 254(2) is based on the fundamental principle that no party appearing before the Tribunal, be it an assessee or the Department, should suffer on account of any mistake committed by the Tribunal. This fundamental principle has nothing to do with the inherent powers of the Tribunal. In the present case, the Tribunal in its Order dated September 10, 2003 allowing the rectification application has given a finding that Samtel Color Ltd. (supra) was cited before it by the assessee but through oversight it had missed out the said judgment while dismissing the appeal filed by the assessee on the question of admissibility/allowability of the claim of the assessee for enhanced depreciation under section 43A. One of the important reasons for giving the power of rectification to the Tribunal is to see that no prejudice is caused to either of the parties appearing before it by its decision based on a mistake apparent from the record. “Rule of precedent” is an important aspect of legal certainty in rule of law. That principle is not obliterated by section 254(2) of the Income-tax Act, 1961. When prejudice results from an order attributable to the Tribunal's mistake, error or omission, then it is the duty of the Tribunal to set it right. Atonement to the wronged party by the court or Tribunal for the wrong committed by it has nothing to do with the concept of inherent power to review. In the present case, the Tribunal was justified in exercising its powers under section 254(2) when it was pointed out to the Tribunal that the judgment of the coordinate bench was placed before the Tribunal when the original order came to be passed but it had committed a mistake in not considering the material which was already on record. The Tribunal has acknowledged its mistake, it has accordingly rectified its order. In our view, the High Court was not justified in interfering with the said order. We are not going by the doctrine or concept of inherent power. We are simply proceeding on the basis that if prejudice had resulted to the party, which prejudice is attributable to the Tribunal's mistake, error or omission and which error is a manifest error then the Tribunal would be justified in rectifying its mistake, which had been done in the present case.”
In Lachman Dass Case, full bench of the Delhi High Court concluded that, the decision rendered in the Honda Siel Case by the Supreme Court is an authority for the proposition that the Tribunal under certain circumstances can recall its own order and there is no absolute prohibition. The Court further went on to observe that,
"....The tribunal, while exercising the power of rectification under Section 254(2) of the Act, can recall its order in entirety if it is satisfied that prejudice has resulted to the party which is attributable to the tribunal's mistake, error or omission and which error is a manifest error and it has nothing to do with the doctrine or concept of inherent power of review."
A perusal of this extract makes it clear that the Court proceeded on the doctrine of prejudice in this case to extend the power to recall the order of the Tribunal, as failure to exercise the same would prejudice the parties.