Supreme Court Remands Income Tax Case: Proper Framing of Questions of Law Required (2019)

Date of the Judgment: April 16, 2019

Citation: 2019 INSC 368

Judges: Abhay Manohar Sapre, J., Dinesh Maheshwari, J.

Can a High Court dismiss an appeal without framing substantial questions of law as required under Section 260A of the Income Tax Act, 1961? The Supreme Court addressed this critical procedural question in a recent income tax case, emphasizing the importance of adhering to the statutory framework. The Court found that the High Court had erred in its procedure, leading to a remand for fresh consideration. The judgment was delivered by a two-judge bench comprising Justices Abhay Manohar Sapre and Dinesh Maheshwari, with Justice Sapre authoring the opinion.

Case Background

The case involves the Revenue-Commissioner of Income Tax, Mumbai (appellant) and M/s A.A. Estate Pvt. Ltd. (respondent), a company engaged in property development. The dispute arose from the assessment year 2008-09.

On December 24, 2009, the Assessing Officer (AO) completed the assessment under Section 143(3) read with Section 153A of the Income Tax Act, 1961, determining the total income at Rs. 7,77,49,790. Subsequently, on September 22, 2010, the AO issued a notice under Section 148 of the Act to reopen the assessment based on information from the ADIT (investigation) Unit II (2), proposing an addition of Rs. 1,70,94,000 towards alleged unaccounted sale proceeds.

This proposed addition was based on a document (Annexure-AB-1) seized during a search operation on November 30, 2007, at the premises of M/s Ashok Buildcom Ltd. The respondent objected to the notice, arguing lack of factual foundation, no “escaped assessment,” and no “reason to believe.” However, on December 30, 2011, the AO overruled these objections and passed a reassessment order adding Rs. 1,70,94,000 to the respondent’s income.

The respondent appealed to the CIT (Appeals), which was dismissed on February 21, 2013. A further appeal to the ITAT resulted in the Tribunal allowing the appeal and setting aside the CIT (Appeals) order on February 5, 2014. The Commissioner of Income Tax then appealed to the High Court under Section 260A of the Act, which was dismissed, leading to the present appeal before the Supreme Court.

Timeline:

Course of Proceedings

The Assessing Officer (AO) initially completed the assessment under Section 143(3) read with Section 153A of the Income Tax Act, 1961. Subsequently, based on information received, the AO issued a notice under Section 148 of the Income Tax Act, 1961, to reopen the assessment, proposing an addition of Rs. 1,70,94,000. The AO overruled the objections of the assessee and passed a re-assessment order. The Commissioner of Income Tax (Appeals) upheld the order of the AO. The Income Tax Appellate Tribunal (ITAT) allowed the appeal of the assessee. The High Court dismissed the appeal of the Commissioner of Income Tax, leading to the appeal before the Supreme Court.

Legal Framework

The case primarily involves the interpretation and application of the following sections of the Income Tax Act, 1961:

• Section 143(3): This section deals with assessment after scrutiny of returns.
• Section 153A: This section pertains to assessment in case of search or requisition.
• Section 148: This section empowers the Assessing Officer to issue notice where income has escaped assessment. The section states: “Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.”
• Section 147: This section deals with income escaping assessment.
• Section 260A: This section provides for appeals to the High Court on questions of law. Specifically, sub-section (3) states: “Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.” and sub-section (4) states: “The appeal shall be heard on the question so formulated and the respondent shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question.”
• Section 132(4A): This section deals with presumption as to assets, books of account, etc., in case of search.

Arguments

Appellant (Revenue-Commissioner of Income Tax) Arguments:

• The Revenue contended that the High Court erred in dismissing the appeal without framing substantial questions of law as mandated under Section 260A of the Income Tax Act, 1961.
• The Revenue argued that the High Court should have framed the questions proposed by the appellant or, if not, should have recorded a finding that no substantial question of law arose.
• The Revenue submitted that the notice under Section 148 was validly issued based on the information received from the ADIT (investigation) unit and the seized document (Annexure-AB-1).
• The Revenue argued that there was a case of escaped assessment, justifying the reopening of the assessment.
• The Revenue asserted that a presumption under Section 132(4A) of the Income Tax Act, 1961 could be drawn against the respondent based on the seized document, even though it was found at the premises of another assessee.

Respondent (M/s A.A. Estate Pvt. Ltd.) Arguments:

• The respondent contended that the notice under Section 148 of the Income Tax Act, 1961, was invalid, arguing that there was no factual basis for its issuance.
• The respondent argued that there was no case of “escaped assessment” and no “reason to believe” that income had escaped assessment.
• The respondent argued that the document (Annexure-AB-1) seized from another assessee could not be the basis for reopening their assessment.
• The respondent argued that the High Court was correct in dismissing the appeal.

Issues Framed by the Supreme Court

The Supreme Court framed the following substantial questions of law:

1. Whether the reasons contained in the notice under Section 148 of the Income Tax Act, 1961, are relevant and sufficient for the issuance of the said notice dated 22.09.2010?
2. Whether any case of escaped assessment within the meaning of Section 147 read with Section 148 of the Income Tax Act, 1961, for the assessment year in question is made out by the Commissioner of Income Tax on the basis of the reasons set out in the notice?
3. Whether a case of presumption as contemplated under Section 132(4A) of the Income Tax Act, 1961, could be drawn against the respondent-assessee on the basis of a document (Annexure AB-1) which was seized in a search operation carried out in the business premises of another assessee – M/s Ashok Buildcom by adding a sum of Rs.1,70,94,000 for determining the total tax liability of the respondent for the year in question as an escaped assessment so as to enable the Department to issue notice dated 22.09.2010 under Section 148 of the Income Tax Act, 1961, to the respondent?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court did not rely on any specific cases or books for its decision. The Court primarily focused on the procedural requirements under Section 260A of the Income Tax Act, 1961. The following legal provisions were considered by the court:

• Section 143(3) of the Income Tax Act, 1961: Assessment after scrutiny of returns.
• Section 153A of the Income Tax Act, 1961: Assessment in case of search or requisition.
• Section 148 of the Income Tax Act, 1961: Issuance of notice where income has escaped assessment.
• Section 147 of the Income Tax Act, 1961: Income escaping assessment.
• Section 260A of the Income Tax Act, 1961: Appeals to the High Court on questions of law.
• Section 132(4A) of the Income Tax Act, 1961: Presumption as to assets, books of account, etc., in case of search.

Judgment

The Supreme Court allowed the appeal, set aside the High Court’s order, and remanded the case back to the High Court for fresh consideration. The Court found that the High Court had not followed the mandatory procedure under Section 260A of the Income Tax Act, 1961, by failing to frame substantial questions of law before dismissing the appeal.

How each authority was viewed by the Court?

• The Court emphasized the mandatory nature of Section 260A of the Income Tax Act, 1961, specifically highlighting that the High Court must frame substantial questions of law before deciding an appeal.
• The Court noted that the High Court did not frame any question of law, which is a mandatory requirement under Section 260A(3) of the Income Tax Act, 1961.

The Court did not express any opinion on the merits of the case, as it was remanding the case to the High Court for fresh consideration. The Supreme Court framed three substantial questions of law and directed the High Court to decide the appeal on these questions.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the procedural lapse on the part of the High Court in not adhering to the mandatory requirements of Section 260A of the Income Tax Act, 1961. The Court emphasized that the High Court must frame substantial questions of law before deciding an appeal under this section. The Court’s reasoning focused on the following points:

• The High Court did not formulate any substantial question of law as required under Section 260A of the Income Tax Act, 1961.
• The questions mentioned in the High Court’s order were merely those urged by the appellant (Revenue) and not framed by the High Court itself.
• There is a clear distinction between questions proposed by the appellant and questions framed by the High Court.
• The High Court should have either framed substantial questions of law or recorded a finding that no such questions arose.
• The High Court did not follow the mandatory procedure prescribed in Section 260A of the Income Tax Act, 1961.

Fact:Law Ratio

The Court’s decision was heavily influenced by the legal procedural requirements under Section 260A of the Income Tax Act, 1961, rather than the factual aspects of the case.

The Supreme Court did not delve into the merits of the case but focused on the procedural error made by the High Court. The Court emphasized that the High Court must follow the mandatory procedure under Section 260A of the Income Tax Act, 1961.

The Court observed: “In our view, there lies a distinction between the questions proposed by the appellant for admission of the appeal and the questions framed by the Court.”

The Court also stated: “The appeal is heard on merits only on the questions framed by the High Court under sub-section (3) of Section 260A of the Act as provided under Section 260A (4) of the Act.”

The Court further noted: “The expression “such question” referred to in sub-section (5) of Section 260A of the Act means the questions which are framed by the High Court under sub-section (3) of Section 260A at the time of admission of the appeal and not the one proposed in Section 260A (2) (c) of the Act by the appellant.”

Key Takeaways

• High Courts must strictly adhere to the procedure outlined in Section 260A of the Income Tax Act, 1961, when dealing with appeals.
• It is mandatory for High Courts to frame substantial questions of law before deciding an appeal under Section 260A of the Income Tax Act, 1961.
• The questions proposed by the appellant for admission of the appeal are distinct from the questions framed by the High Court.
• Failure to frame substantial questions of law can lead to the case being remanded for fresh consideration.
• The High Court should either frame substantial questions of law or record a finding that no such questions arise, if it intends to dismiss the appeal.

Directions

The Supreme Court directed the High Court to decide the appeal afresh on merits, answering the three substantial questions of law framed by the Supreme Court. The High Court was also directed to decide the appeal uninfluenced by any observations made in the impugned order or the Supreme Court’s order.

Development of Law

The ratio decidendi of the case is that the High Court must strictly adhere to the procedure outlined in Section 260A of the Income Tax Act, 1961, which mandates the framing of substantial questions of law before deciding an appeal. This judgment reinforces the procedural requirements for High Courts when dealing with income tax appeals, ensuring that the appeals are decided on the basis of substantial questions of law framed by the court and not merely on the questions proposed by the appellant. This also clarifies the distinction between the questions proposed by the appellant and the questions framed by the High Court.

Conclusion

The Supreme Court’s decision in PR. Commissioner of Income Tax Central 2 vs. M/s A.A. Estate Pvt. Ltd. underscores the importance of procedural compliance by the High Courts when dealing with appeals under Section 260A of the Income Tax Act, 1961. The High Court’s failure to frame substantial questions of law led to the case being remanded for fresh consideration. This judgment serves as a reminder that High Courts must adhere to the statutory framework and ensure that appeals are decided on the basis of substantial questions of law framed by the court, rather than merely on the questions proposed by the appellant.

Category

Parent Category: Income Tax Law

Child Categories:

• Section 260A, Income Tax Act, 1961
• Section 148, Income Tax Act, 1961
• Section 147, Income Tax Act, 1961
• Section 132(4A), Income Tax Act, 1961
• Appeals to High Court
• Reassessment of Income
• Substantial Question of Law

Parent Category: Income Tax Act, 1961

Child Categories:

• Section 260A, Income Tax Act, 1961
• Section 148, Income Tax Act, 1961
• Section 147, Income Tax Act, 1961
• Section 132(4A), Income Tax Act, 1961

FAQ

Q: What is Section 260A of the Income Tax Act, 1961?

A: Section 260A of the Income Tax Act, 1961, deals with appeals to the High Court on questions of law. It outlines the procedure for filing and hearing appeals against the orders of the Income Tax Appellate Tribunal (ITAT).

Q: What is a substantial question of law?

A: A substantial question of law is a legal question that is of significant importance and has a direct impact on the outcome of the case. It is not merely a question of fact but involves the interpretation and application of legal principles.

Q: Why did the Supreme Court remand the case to the High Court?

A: The Supreme Court remanded the case because the High Court did not frame any substantial question of law as required under Section 260A of the Income Tax Act, 1961, before dismissing the appeal. The Supreme Court held that this was a procedural lapse.

Q: What does it mean for a case to be remanded?

A: When a case is remanded, it means that a higher court sends the case back to a lower court for further proceedings. In this case, the Supreme Court sent the case back to the High Court for a fresh hearing following the correct procedure.

Q: What are the implications of this judgment?

A: This judgment emphasizes the importance of adhering to the statutory procedures when dealing with income tax appeals. It clarifies that High Courts must frame substantial questions of law before deciding an appeal under Section 260A of the Income Tax Act, 1961. This ensures that appeals are decided on valid legal grounds.