Important pointThe conditions mentioned in Section 260A of the Income Tax Act, 1961, must be strictly fulfilled before an appeal can be maintained and an appeal u/s 260A can be only in respect of a ‘substantial question of law’.

Headnote:(i) Income Tax Act, 1961—Section 260A—Appeals to High Court—Manner of disposal of—Appeal to the High Court lies only when a substantial question of law is involved—It is essential for the High Court to first formulate question of law and thereafter proceed in the matter—Conditions mentioned in Section 260A must be strictly fulfilled before an appeal can be maintained u/s 260A of the Act.
       Held : Under Section 260A(2)(c) the appeal under Section 260A shall be (a) in the form of a memorandum of appeal and (b) precisely stating therein the substantial question of law involved. Under Section 260A(3) when the High Court is satisfied that a substantial question of law is involved in any case it shall formulate that question and under Section 260A(4) the appeal is to be heard only on the question formulated under the preceding sub-section. It has to be noted that in terms of Section 260A(4) the respondent in the appeal is allowed to argue at the time of hearing of the appeal that the case does not involve a substantial question of law as formulated. However, proviso to Section 260A(4) specifically lays down that nothing in Section 260A(4) shall be deemed to take away the power of the High Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, in case it is satisfied that the case involves such question. Section 260A(5) provides that the High Court to decide the question of law as formulated and to deliver the judgment thereon containing grounds on which such decision is founded. Sub-section (6) empowers the High Court to determine any such issue which has not been determined by the Appellate Tribunal or has been wrongly determined by the Appellate Tribunal by reasons of a decision of such question of law as is referred to in sub-section (1). (Paras 12 and 13)
       It is important to note that appeal to the High Court lies only when a substantial question of law is involved. It is essential for the High Court to first formulate question of law and thereafter proceed in the matter. Without insisting on the statement of substantial question of law in the memorandum of appeal and formulating the same at the time of admission, the High Court is not empowered to generally decide the appeal under Section 260A without adhering to the procedure prescribed under Section 260A. Further, the High Court must make every effort to distinguish between a question of law and a substantial question of law. In exercise of powers under Section 260A, the findings of fact of the Tribunal cannot be disturbed. It has to be kept in mind that the right of appeal is neither a natural nor an inherent right attached to the litigation. Being a substantive statutory right, it has to be regulated in accordance with law in force at the relevant time. The conditions mentioned in Section 260A must be strictly fulfilled before an appeal can be maintained under Section 260A. Such appeal cannot be decided on merely equitable grounds. An appeal under Section 260A can be only in respect of a ‘substantial question of law’. The expression ‘substantial question of law’ has not been defined anywhere in the statute. But it has acquired a definite connotation through various judicial pronouncements. (Paras 14 to 16)
       (ii) Income Tax Act, 1961—Section 260A—Appeals—Substantial question of law—Failure to formulate at the time of admission of the appeal—Assessees were partners of a firm consisting of thirteen partners—Firm stood dissolved w.e.f. 6-12-1987—However, erstwhile partners continued the business being members of an Association of Persons—This entity continued till the assets of the firm were sold in winding up proceedings to A.O.P. 13 w.e.f. 21-11-1994—For assessment year 1995-96, appellants filed their return of income in the status of individuals—Assessing Officer was of the view that share of income from the Association of Persons was to be included, along with share of income from capital gains—Appeals to High Court—Questions were formulated by the High Court for adjudicating the appeals after the arguments were concluded for the purpose of rendering the judgment—No question was formulated when the appeals were admitted—Matter remitted to the High Court which shall deal with the matter afresh keeping in view prescriptions of Section 260A of the Act.
       Held : On reading of impugned judgment of the High Court it is clear that no substantial question of law was formulated at the time of admission of the appeal. Obviously, the High Court has formulated questions subsequently after conclusion of arguments for the purpose of adjudication. That is clearly against the scheme of Section 260A. Additionally, grievance that certain points which were urged have not been dealt with by the High Court appears to be correct. In the aforesaid background, the impugned judgment of the High Court is set aside. The matter is remitted to the High Court which shall deal with the matter afresh keeping in view the prescriptions of Section 260A of the Act. We make it clear that we have not expressed any opinion on the merits of the case. (Paras 17 and 18)

Judgment

Arijit Pasayat, J.—Leave granted in SLP (C) Nos. 13009-13012/2003, 13021-13022/2003, 2763-2766/2004 and 13015-13016/2003.

2. These appeals have their matrix in a common judgment rendered by a Division Bench of the Karnataka High Court. By the impugned judgment several appeals filed by assessees and revenue purported to be under Section 260A of the Income Tax Act, 1961 (in short ‘the Act’) were disposed of.

3. Detailed reference to the factual aspects would be unnecessary as we propose to dispose of the appeals taking note of submissions made by learned counsel for the appellants to the effect that the manner of disposal as done by the High Court is not in line with the prescriptions of Section 260A of the Act. Suffice it would to only note that the assessees were at some point of time, partners of a partnership firm styled Mangalore Ganesh Beedi Works. The said firm which consisted of thirteen partners stood dissolved in terms of the Deed of Partnership with effect from 6.12.1987, by efflux of time. According to the revenue, thereafter the erstwhile partners continued the business being members of an Association of Persons. This Association of Persons was described by the authorities and the High Court as A.O.P. -13. This entity continued till the assets of the firm were sold pursuant to orders of the High Court in winding up proceedings with effect from 21.11.1994 in terms of a scheme framed. Pursuant to the scheme, several members of the A.O.P.-13 had offered bids either individually or in groups. The bid of three of them, described as A.O.P-3 was accepted by order dated 21.9.1994. After deposit of the bid amount of Rs. 92 crores, it was noted that the assets of the erstwhile firm were treated to have been sold to A.O.P.-3 with effect from 21.11.1994.

4. All these appeals relate to the assessment year 1995-96, for the accounting year ending on 31.3.1995. The appellants had filed their returns of income in the status of individual. The Assessing Officer was of the view that share of income from the association of persons (A.O.P.-13) was to be included, along with share of income from capital gains. The basic dispute relates to the question whether the amount received had an element of capital gain. The assets of the firms were sold pursuant to an order passed by the High Court by invoking provisions of Section 583(4)(a) of the Companies Act, 1956 (in short ‘the Companies Act’). The Revenue Authorities were of the view that the amount received by way of consideration after statutory adjustments amounted to receipt from a slump sale and was, therefore, taxable under the heading ‘capital gain’. The conclusions of the Revenue Authorities were challenged by the assessees before the Income Tax Appellate Tribunal, Bangalore Bench (in short ‘ITAT’). Aggrieved by various conclusions, the assessees as well as the Revenue preferred appeals before the Karnataka High Court which were disposed of by the impugned common judgment.

5. Learned counsel for the assessees-appellants submitted that the arguments raised by them relating to non-applicability of the principle of slump sale were not considered by the High Court. There was even no reference to the plea that before amendment of Section 50B of the Act by Finance Act, 1999 there was no scope for levying any tax under the heading ‘capital gain’ before 1.4.2000. The questions were formulated by the High Court for adjudicating the appeals after the arguments were concluded for the purpose of rendering the judgment. No question was formulated when the appeals were admitted. With reference to Section 260A of the Act it is submitted that the prescriptions of the said Section were not kept in view by the High Court.

6. In response, Mr. M.L. Verma, learned senior counsel for the Revenue supported the judgment of the High Court stating that the issues raised by the parties were elaborately dealt with by the High Court and the appellants cannot have any grievance.

7. Section 260A of the Act read

Click Here to Read the rest of this document

2005 Supreme(SC) 157

Important pointThe conditions mentioned in Section 260A of the Income Tax Act, 1961, must be strictly fulfilled before an appeal can be maintained and an appeal u/s 260A can be only in respect of a ‘substantial question of law’.

Cases Referred (1)