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M. Janardhana Rao v. Joint Commissioner Of Income Tax .
Factual and Procedural Background
The assessees were formerly partners in the firm “Mangalore Ganesh Beedi Works”, which dissolved on 6-12-1987. According to the Revenue, the erstwhile partners thereafter carried on the business as an Association of Persons referred to as “AOP 13”. In winding-up proceedings, the Karnataka High Court sanctioned a scheme for sale of the firm’s assets. Three members (“AOP 3”) successfully bid for the assets for Rs 92 crores with effect from 21-11-1994.
For Assessment Year 1995-96 the assessing officer treated the consideration received as a “slump sale” taxable under the head “capital gains” and included each partner’s share in his individual assessment. The assessees succeeded in part before the Income Tax Appellate Tribunal. Both the assessees and the Revenue filed appeals under Section 260-A of the Income-tax Act, 1961 before the Karnataka High Court, which dismissed/allowed them by a common judgment. The present Supreme Court appeals arise from that judgment.
Legal Issues Presented
- Whether the Karnataka High Court complied with the mandatory procedure prescribed by Section 260-A of the Income-tax Act, 1961—particularly the formulation of substantial questions of law at the time of admission—when disposing of the appeals.
- Consequentially, whether the High Court’s judgment required interference and remand for fresh consideration in accordance with Section 260-A.
Arguments of the Parties
Appellants’ (Assessees’) Arguments
- The High Court did not formulate any substantial question of law at the admission stage, contrary to Section 260-A(3).
- Certain crucial pleas—especially that the pre-1999 Act contained no provision to tax the transaction as a “slump sale” before 1-4-2000—were not considered.
- Questions were framed only after arguments concluded, vitiating the adjudication process.
Respondent’s (Revenue’s) Arguments
- The High Court had in fact dealt with all issues raised, and its procedure caused no prejudice to the assessees.
- The judgment should therefore be sustained.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sir Chunilal V. Mehta & Sons Ltd. v. Century Spg. & Mfg. Co. Ltd., 1962 Supp (3) SCR 549; AIR 1962 SC 1314 | Tests for determining what constitutes a “substantial question of law”. | Cited to underline the necessity of identifying a substantial question of law before entertaining an appeal under Section 260-A. |
Court's Reasoning and Analysis
The Supreme Court analysed Section 260-A in detail and noted its close parallel with Section 100 of the Code of Civil Procedure. Key statutory requirements highlighted were:
- The memorandum of appeal must “precisely” state the substantial question(s) of law (Section 260-A(2)(c)).
- Upon being satisfied that such a question exists, the High Court “shall formulate” it (Section 260-A(3)).
- The appeal is to be heard “only” on the question(s) so formulated (Section 260-A(4)), subject to the proviso empowering the Court to frame additional questions for recorded reasons.
- The judgment must decide those questions and provide reasons (Section 260-A(5)).
Reviewing the impugned judgment, the Supreme Court found:
- No substantial question of law was formulated when the appeals were admitted; questions were framed only after arguments concluded, contrary to the statute.
- Some contentions—particularly regarding the inapplicability of “slump sale” capital-gains taxation prior to 1-4-2000—were not addressed at all.
Because compliance with Section 260-A is mandatory and a pre-condition to the High Court’s jurisdiction in such appeals, the procedure adopted was illegal, necessitating interference.
Holding and Implications
Holding: The Supreme Court set aside the Karnataka High Court’s common judgment and remitted the appeals to the High Court for fresh disposal strictly in accordance with Section 260-A. Interim protection against tax recovery granted by the Supreme Court will subsist for three months, leaving it open to the parties to seek further relief before the High Court.
Implications: The decision directly restores the status quo ante for the parties and reinforces that High Courts must rigorously follow the statutory framework of Section 260-A when entertaining income-tax appeals. While no new substantive tax law was laid down, the ruling underscores procedural discipline and may influence future appellate practice under Section 260-A.
Arijit Pasayat, J.— Leave granted in SLPs (C) Nos. 13009-12 of 2003, 13021-22 of 2003, 2763-66 of 2004 and 13015-16 of 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 the assessees and the Revenue purported to be under Section 260-A 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 260-A 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 AOP 13. This entity continued till the assets of the firm were sold pursuant to the 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 AOP 13 had offered bids either individually or in groups. The bid of three of them, described as AOP 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 AOP 3 with effect from 21-11-1994.
4. All these appeals relate to 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 the share of income from the Association of Persons (AOP 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 firm 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 appellant assessees 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 50-B of the Act by the 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 260-A 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 260-A of the Act reads as follows:
“260-A. 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 the 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 the Finance Act, 1999 w.e.f 1-6-1999. They do not have much relevance so far as the 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 “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 260-A are in pari materia with various sub-sections of Section 100 CPC. The provisions are Sections 260-A(1), 260-A(2)(c), 260-A(3), 260-A(4) of the Act corresponding to Sections 100(1), 100(3), 100(4) and 100(5) CPC.
11. Various essentials as culled out from the relevant provisions of the Act are as follows:
Under Section 260-A(2)(c) the appeal under Section 260-A shall be (a) in the form of a memorandum of appeal, and (b) precisely stating therein the substantial question of law involved. Under Section 260-A(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 260-A(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 260-A(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, the proviso to Section 260-A(4) specifically lays down that nothing in Section 260-A(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 260-A(5) provides that the High Court is to decide the question of law as formulated and to deliver the judgment thereon containing grounds on which such decision is founded.
12. 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).
13. It is important to note that the 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 a question of law and thereafter proceed in the matter.
14. 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 260-A without adhering to the procedure prescribed under Section 260-A. 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 260-A, 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 260-A must be strictly fulfilled before an appeal can be maintained under Section 260-A. Such appeal cannot be decided on merely equitable grounds.
15. An appeal under Section 260-A can only be 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 Spg. & Mfg. Co. Ltd. 1962 Supp (3) SCR 549, 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 the 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.
16. On reading of the 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 260-A. Additionally, grievance that certain points which were urged have not been dealt with by the High Court appears to be correct.
17. 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 260-A of the Act. We make it clear that we have not expressed any opinion on the merits of the case.
18. 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.
19. The appeals are disposed of accordingly with no order as to costs.
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