2005 JTR(SC) 157
2005 27 AIC 615 ; 2005 AIR(Kar)(R) 752 ; 2005 AIR(SC) 1309 ; 2005 AIR(SCW) 1069 ; 2005 4 CompLJ 23 ; 2005 193 CTR 585 ; 2005 273 ITR 50 ; 2005 2 JT 402 ; 2005 1 MhLJ(SC) 1142 ; 2005 2 MPLJ 401 ; 2005 1 Scale 637 ; 2005 2 SCC 324 ; 2005 1 SCR 874 ; 2005 TaxLR 294 ; 2005 142 Taxman 722 ; 2005 1 KLT(Online) 1154 ; 2005 KHC 396 ; 2005 1 Supreme 691
2005(1) Supreme 691
Supreme Court of India
(From Karnataka High Court)
Mrs. Ruma Pal, Arijit Pasayat and C.K. Thakker, JJ.
M. Janardhana Rao —Appellant
versus
Joint Commissioner of Income Tax —Respondent
Civil Appeal No. 4234 of 2003
With
C.A.Nos. 4242/2003, 4237/2003, 4233-34/2003, 4235-36/2003, 4240-41/2003, 4238-39/2003, C.A. Nos. 761-64/2005 (@ SLP (C) Nos. 13009-13012/2003), C.A. Nos. 755-56/2005 (@ SLP (C) Nos. 13021-13022/2003), C.A. No. 5322/2003, C.A. Nos. 757-760/2005 (@ SLP (C) Nos. 2763-2766/2004), C.A. Nos. 765-766 of 2005 (@ SLP (C) Nos. 13015-13016/2003)
Decided on 28-1-2005
Counsel for the Parties :
For the Appearing Parties : R.F. Nariman, S. Ganesh, Harish N. Salve, Joseph Vellapally, M.L. Verma, Sr. Advocates, Dhruv Mehta, A.A. Kulkarni, Mohit Chaudhary, Harsh Vardhan Jha, Gopal Jain, Ashok Kulkarni, Mahesh Agarwal, Ms. Dhanalakshmi, E.C. Agrawala, Manu Nair, Dhruv Dewan, Preetish Kapur, Satya Mitra and B.V. Balaram Das, Advocates.
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’.
Act Referred :INCOME TAX ACT : S.260(a)
(A) Section 260A of the Income Tax Act, 1961, as inserted by the Finance Act, 1998 and amended by the Finance Act, 1999, governs appeals to the High Court against orders of the Appellate Tribunal. An appeal under this provision lies only where the High Court is satisfied that the case involves a substantial question of law, and such appeal must be in the form of a memorandum of appeal precisely stating the question involved. The High Court is mandated to formulate the question of law and decide the appeal only on that formulated question, while allowing the respondent to argue that no such substantial question exists. However, the court retains power to go beyond the formulated question if it is satisfied that a substantial question of law is involved. The procedure is founded on the principles of the Code of Civil Procedure, 1908, read with the provisions of the Act. The present appeals were filed by assessees and revenue challenging a common judgment of the Karnataka High Court concerning the treatment of proceeds from the sale of assets of a dissolved partnership and an associated persons body as a slump sale attracting capital gains tax under the Income Tax Act, with specific reliance on compliance with the procedural mandates of Section 260A.
(B) The key legal principles include that an appeal to the High Court under Section 260A is maintainable only where a substantial question of law is involved and is formulated at the time of admission; the High Court must adhere to the statutory procedure of formulating and deciding only the so-formulated question, although it may, on recorded reasons, consider other substantial questions of law; findings of fact of the Tribunal cannot be disturbed; and the right of appeal is a statutory right, not inherent, and must be strictly complied with. The section operates in pari materia with relevant provisions of the Code of Civil Procedure, 1908.
Facts of the case:
The assessees were partners in a partnership firm called Mangalore Ganesh Beedi Works, which dissolved by efflux of time on 6.12.1987, after which the erstwhile partners continued business as an Association of Persons (A.O.P.-13). The assets of the firm were wound up under the Companies Act, 1956, and the assets were sold to A.O.P.-3 following a scheme. The appeals pertain to the assessment year 1995-96, with the assessees filing returns as individuals, while the revenue included share of income from the A.O.P. as capital gains. The dispute centered on whether the proceeds from the sale had an element of capital gain, specifically whether the transaction qualified as a slump sale.
Findings of Court:
The High Court disposed of the appeals without formulating the substantial question of law at the time of admission, and subsequently formulated questions only after the conclusion of arguments, which is not in accordance with Section 260A. The court also failed to address certain issues raised by the appellants. Consequently, the impugned judgment is set aside, and the matter is remitted to the High Court to re-hear the appeals in compliance with the procedural requirements of Section 260A, without expressing any opinion on the merits.
Issues:
Whether the High Court correctly proceeded with the appeals without formulating the substantial question of law at the time of admission, and whether it complied with the mandatory procedure under Section 260A of the Income Tax Act, 1961.
Ratio Decidendi:
An appeal under Section 260A must be entertained only on a substantial question of law formulated at the time of admission; the High Court must follow the procedure prescribed under Section 260A strictly, and any deviation mandates setting aside the judgment and remitting the matter for fresh disposal in accordance with the statute.
Result:
The appeals are disposed of with the impugned judgment set aside and the matter remitted to the High Court for re-hearing in compliance with Section 260A, with interim protection on tax recovery continuing for three months.
(A) Section 260A of the Income Tax Act, 1961, as inserted by the Finance Act, 1998 and amended by the Finance Act, 1999, governs appeals to the High Court against orders of the Appellate Tribunal. An appeal under this provision lies only where the High Court is satisfied that the case involves a substantial question of law, and such appeal must be in the form of a memorandum of appeal precisely stating the question involved. The High Court is mandated to formulate the question of law and decide the appeal only on that formulated question, while allowing the respondent to argue that no such substantial question exists. However, the court retains power to go beyond the formulated question if it is satisfied that a substantial question of law is involved. The procedure is founded on the principles of the Code of Civil Procedure, 1908, read with the provisions of the Act. The present appeals were filed by assessees and revenue challenging a common judgment of the Karnataka High Court concerning the treatment of proceeds from the sale of assets of a dissolved partnership and an associated persons body as a slump sale attracting capital gains tax under the Income Tax Act, with specific reliance on compliance with the procedural mandates of Section 260A.
(B) The key legal principles include that an appeal to the High Court under Section 260A is maintainable only where a substantial question of law is involved and is formulated at the time of admission; the High Court must adhere to the statutory procedure of formulating and deciding only the so-formulated question, although it may, on recorded reasons, consider other substantial questions of law; findings of fact of the Tribunal cannot be disturbed; and the right of appeal is a statutory right, not inherent, and must be strictly complied with. The section operates in pari materia with relevant provisions of the Code of Civil Procedure, 1908.
Facts of the case:
The assessees were partners in a partnership firm called Mangalore Ganesh Beedi Works, which dissolved by efflux of time on 6.12.1987, after which the erstwhile partners continued business as an Association of Persons (A.O.P.-13). The assets of the firm were wound up under the Companies Act, 1956, and the assets were sold to A.O.P.-3 following a scheme. The appeals pertain to the assessment year 1995-96, with the assessees filing returns as individuals, while the revenue included share of income from the A.O.P. as capital gains. The dispute centered on whether the proceeds from the sale had an element of capital gain, specifically whether the transaction qualified as a slump sale.
Findings of Court:
The High Court disposed of the appeals without formulating the substantial question of law at the time of admission, and subsequently formulated questions only after the conclusion of arguments, which is not in accordance with Section 260A. The court also failed to address certain issues raised by the appellants. Consequently, the impugned judgment is set aside, and the matter is remitted to the High Court to re-hear the appeals in compliance with the procedural requirements of Section 260A, without expressing any opinion on the merits.
Issues:
Whether the High Court correctly proceeded with the appeals without formulating the substantial question of law at the time of admission, and whether it complied with the mandatory procedure under Section 260A of the Income Tax Act, 1961.
Ratio Decidendi:
An appeal under Section 260A must be entertained only on a substantial question of law formulated at the time of admission; the High Court must follow the procedure prescribed under Section 260A strictly, and any deviation mandates setting aside the judgment and remitting the matter for fresh disposal in accordance with the statute.
Result:
The appeals are disposed of with the impugned judgment set aside and the matter remitted to the High Court for re-hearing in compliance with Section 260A, with interim protection on tax recovery continuing for three months.
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 reads as follows:
“Section 260A. Appeal to High Court—(1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal, if the High Court is satisfied that the case involves a substantial question of law.
(2) The Chief Commissioner or the Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be:
(a) filed within one hundred and twenty days from the date on which the order appealed against is received by the assessee or the Chief Commissioner or Commissioner;
(b) omitted
(c) in the form of a memorandum of appeal precisely stating therein the substantial question of law involved.
(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.
(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question;
Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.
(5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit.
(6) The High Court may determine any issue which—
(a) has not been determined by the Appellate Tribunal; or
(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1).
(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section”.
8. This Section was inserted by Finance (No.2) Act, 1998 (21 of 1998) w.e.f. 1.10.1998.
9. The Section was operative when the High Court took up the matter for admission. Certain changes were introduced in the Section by Finance Act, 1999 w.e.f. 1.6.1999. They do not have much relevance so far as present dispute is concerned, except that sub-section (7) has been introduced which provides that the provisions of the Code of Civil Procedure, 1908 (in short ‘the CPC’) relating to appeals to the High Court shall, as far as may be, apply in the case of appeals provided under the Section, save as otherwise provided in the Act.
10. Some of the provisions of Section 260A are in pari materia with various sub-sections of Section 100 CPC. The provisions are Section 260A(1), 260A(2)(c), 260A(3), 260A(4) of the Act corresponding to Section 100(1), 100(3), 100(4) and 100(5) of CPC.
11. Various essentials as culled out from the relevant provisions of the Act are as follows:
12. 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.
13. 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).
14. 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.
15. 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.
16. 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. In Sir Chunilal V. Mehta & Sons Ltd. v. Century Spinning & Mfg. Co. Ltd. (AIR 1962 SC 1314), this Court laid down the following tests to determine whether a substantial question of law is involved. The tests are: (1) whether directly or indirectly it affects substantial rights of the parties, or (2) the question is of general public importance, or (3) whether it is an open question in the sense that issue is not settled by pronouncement of this Court or Privy Council or by the Federal Court, or (4) the issue is not free from difficulty, and (5) it calls for a discussion for alternative view. There is no scope for interference by the High Court with a finding recorded when such finding could be treated to be a finding of fact.
17. 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.
18. 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.
19. For a period of three months the interim protection given by this Court in the matter of recovery of tax shall be operative. It shall be open to the parties to move the High Court for such interim protection as the facts of the case warrant till disposal of the appeals.
20. The appeals are disposed of accordingly with no order as to costs.
Appeals disposed of accordingly.