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Interpretation of `substantial question of law' in Income-tax Act 

 
A new Section 260-A has been inserted by the Finance (No 2) Act, 1998 with effect from October 1, 1998 by which an appeal could be filed in the high court against an order passed by the income-tax appellate tribunal.

From this date, no reference to the high court lies against the tribunal's order but the aggrieved party could file an appeal to the high court provided the case involves a substantial question of law. As to what constitutes a substantial question of law has been decided by the Rajasthan high court in DCIT vs Marudhar Hotels (P) Ltd ((1999) 107 Taxman 452).

The facts in this case were that the assessing authority made a disallowance of Rs 3,07,501 being interest attributable to interest free advance to sister concern of the assessee-company. The assessee preferred an appeal before the Commissioner (Appeals), who deleted the disallowance of Rs 15,000 and Rs 3,07,501 holding that no nexus was established between the interest bearing funds raised and the interest free advance.

The department preferred a second appeal before the commissioner (appeals), who deleted the disallowance of Rs 15,000 and Rs 3,07,501 holding that no nexus was established between the interest bearing funds raised and the interest free advance. The department preferred a second appeal before the tribunal, which was dismissed. On an appeal filed before the high court under Section 260-A, the court observed that the insertion of this new provision was felt necessary by Parliament because the existing provisions of making reference to the high court led to plethora of conflicting judgments, which created confusion in the minds of the public with respect to interpretation of various provisions of the Act.

The existing provisions also burdened the high courts and the Supreme Court with an unnecessary large number of references and appeals. Thus, litigation has been confined to cases where a question of law is involved and such question of law is a substantial question of law. The provision provides that the appellant is required to state precisely the substantial question of law in the memo of appeal an when the high court is satisfied that a substantial question of law is involved, it is required to formulate that question.

The high court held that Section 260-A was analogous to the provisions of Section 100 of the Code of Civil Procedure, 1908. Under Section 100 also, the second appeal can be entertained only when a substantial question of law is involved. Such substantial question of law is required to be formulated in the memo of appeal. If the high court is satisfied that a substantial question of law is involved in the case, then the court is also required to formulate that question. The appeal is required to be heard only on the question so formulated.

The Rajasthan high court then referred to the decision of the Constitution Bench of the Supreme Court in Sir Chuni Lal vs Mehta & Sons Ltd vs Century Spg & Mfg Co Ltd (AIR 1962 SC 1314) which has laid down guidelines to determine as to what is `substantial question of law' within the meaning of Section 100. There are also later decisions of the apex court, some of which deserve to be referred, as Mahindra & Mahindra Ltd vs Union of India (AIR 1979 SC 798) and Panchugopal vs Umesh Chandra ((1997) 4 SCC 713).

With a view to ensure that the purpose of introducing Section 260-A is not frustrated, the Rajasthan high court set out the parameters culled out from the aforesaid decisions as follows:

(a) An appeal under Section 260-A cannot be entertained simply because, on a same question of law, a reference has been made and it has been admitted for hearing by the high court.

(b) The finding of fact, howsoever erroneous, cannot be disturbed by the high court in exercise of the powers under Section 260-A.

(c) Whether the substantial question of law raised directly and substantially affects the rights of the parties and, if so, whether it is either an open question in the sense that it is not finally settled by the apex court or by the concerned high court or is not free from difficulty or calls for discussion of alternative views.

(d) If the question is settled by the highest court or the general principles to be applied in determining the question are well-settled and there is a mere question of applying those principles or that the plea raised is palpably absurd, the question would not be a substantial question of law.

(e) It is not within the domain of the high court to investigate the grounds on which the findings were arrived at by the tribunal or the first appellate authority. In a case where, from a given set of circumstances, two inferences are possible, one drawn by the tribunal or the first appellate authority, shall be binding on the high court in appeal under Section 260-A.

The high court cannot substitute its opinion for the opinion of the tribunal unless it is found that conclusions drawn by the tribunal are erroneous, being contrary to the mandatory provisions of law applicable or settled position on the basis of pronouncements made by the apex court, or were based upon inadmissible evidence or arrived at without evidence.

Where a point of law has not been pleaded or is found to be arising between the parties in the absence of any factual format, a litigant would not be allowed to raise that question as a substantial question of law in appeal under Section 260-A. Where it is found that the tribunal or appellate authority has assumed jurisdiction which did not vest in it, the same can be adjudicated in the appeal, treating it as a substantial question of law.

It was contended by the counsel for the department that the question, whether the tribunal was justified in deleting the disallowance in identical circumstances, was considered to be a question of law by the Court in CIT vs Udaipur Mineral Development Syndicate (P) Ltd (211 ITR 555).

At the first instance, the said case was distinguishable from the present case. Even if it was found that the question involved was identical, then also, simply because of question of law was involved in the appeal and on the same question, a reference had been made, it would not be a substantial question of law for the purpose of Section 250-A. The learned counsel had failed to satisfy that a substantial question of law was involved in the present appeal.

Thus, the Rajasthan high court held that the appeal under Section 260-A did not deserve to be entertained. Hence, the appeal filed by the Income-tax Department was dismissed in liminc.

Turning to the procedural aspect of filing an appeal under Section 260-A, the memorandum of appeal has to precisely state the substantial question of law involved. The time limit for filing the appeal is 120 days from the date on which the tribunal's order is received by the appellant. When the appeal is so filed within the prescribed time, the high court would formulate the question if this is satisfied that a substantial question of law is involved. However, at the hearing of the appeal, the opposing party namely, the respondent would be allowed to argue that the case does not involve any substantial question of law.

The court would then decide the question of law formulated by it. The court has also been given the power to hear appeals on any other substantial question of law which was not formulated by it, if it is satisfied that the case involves such additional question. For deciding such additional question, the court is required to record its reasons.

The court is required to give its decision on any substantial question of law which was decided by the tribunal and has also been given the power to decide on an issue which was not determined by the tribunal. Section 260-A(5) requires that the high court should deliver its judgment on the substantial question of law formulated by it an such judgment should contain the grounds on which such decision is founded. The high court is also given the power to award such costs as it deems fit.

It is expected that Section 260-A will result in reducing litigation and, therefore, lessen the backlog of pending cases because the appeal under Section 260-A can only be filed where a substantial question of law is involved. Prior to October 1, 1998 , any question of law arising from a tribunal's order could be referred to the high court under Section 256.

Therefore, even a question of law which was not substantial could be referred to the high court. With the recent amendment discontinuing reference to the high court under Section 256 and insertion of the new Section 260-A for an appeal to the high court from the tribunal's order, but only on a substantial question of law, litigation with the tax department would be kept within reasonable bounds.

The author is a Supreme Court advocate

Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.

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