Holding

An appeal under Section 260A of the Income Tax Act can be entertained only when a substantial question of law is expressly stated in the memorandum of appeal and formulated at the time of admission; otherwise the High Court is not empowered to decide the appeal.

Summary

The appellants, former partners of a dissolved firm, challenged the taxability of proceeds from the sale of the firm's assets, arguing that the transaction did not constitute a slump sale and that no capital‑gain tax could be levied before the 1999 amendment. They filed appeals under Section 260A of the Income Tax Act, claiming that the Karnataka High Court had decided the appeals without first formulating a substantial question of law at the admission stage. The Supreme Court held that an appeal under Section 260A can be entertained only when a substantial question of law is expressly stated in the memorandum of appeal and formulated at the time of admission; otherwise the High Court lacks jurisdiction to decide the appeal. The Court emphasized the distinction between a mere question of law and a substantial question of law, reiterated that the High Court cannot disturb the Tribunal’s factual findings, and clarified that the right of appeal is a statutory, not inherent, right. Consequently, the Supreme Court set aside the High Court’s judgment and remitted the matter for fresh determination in compliance with Section 260A, without expressing any view on the merits.

Issues considered

Whether an appeal under Section 260A of the Income Tax Act lies only when a substantial question of law is involved.
Whether the High Court must formulate the substantial question of law at the time of admission of the appeal.
Whether the High Court can decide an appeal under Section 260A without adhering to the procedural requirements of the statute.
Whether the High Court may disturb the findings of fact of the Income Tax Appellate Tribunal while exercising powers under Section 260A.
What criteria determine a 'substantial question of law' under Section 260A.

Legislation cited

Code of Civil Procedure, 1908s. 100
Companies Act, 1956s. 583(4)(a)
Income Tax Act, 1961s. 260A(1), s. 260A(2), s. 260A(3), s. 260A(4), s. 260A(5), s. 260A(6), s. 260A(7)

Subjects

Section 260Aappeal to High Courtsubstantial question of lawprocedural complianceincome taxcapital gainsslump salehigh court jurisdictiontax litigation

Judgment

A M. JANARDHANA RAO
v.
JOINT COMMISSIONER OF INCOME TAX

JANUARY 28, 2005

B [RUMA PAL, ARIJIT PASA YAT AND C.K. THAKKER, JJ.)

Income Tax Act, 1961; Section 260-A :

Appeal under Section 260-A-Procedural requirements-Held : High
C Court not empowered to decide an appeal without following due procedure
prescribed therefor-Since High Court disposed of the appeal without
formulating and determining question of law at admission stage, matter remitted
to the High Court for deciding it afresh strictly following the procedural
requirements of Section 260-A.
D Question of law vis-a-vis substantial question of law-Distinction
1
between.

Right of appeal-Regulations of

The question which arose for determination in these appeals were
E as to whether High Court is empowered to dispose of an appeal filed under
Section 260-A of the Income Tax Act without formulating a question of
law at the stage of admission and disposing it of without determining as
to whether the question formulated was substantial question of law.
However, the basic dispute/issue came befor:! the High Court for
F determination was relating to Income tax liability on the amount received
by the assessees/partners out of the sale proceeds of assets of a dissolved
firm.

It was contended by the appellant-assessees that the arguments raised
by them relating to non-applicability of the principle of slump sale were
G not considered by the High Court; that before amendment of Section SOB
of the Income Tax Act by Finance Act, 1999 there was no scope for levying
any tax under the heading 'capital gain'; and that no question was
formulated by the High Court at the admission stage, however, the
questions were formulated by the High Court for the purpose of

H 874
M..l. RAOv. JOINTCOMMR. OF INCOME TAX 875

adjudicating the appeals. A

Disposing of the appeals, the Court

HELD : I.I. An appeal under Section 260A of the Income Tax Act
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 B
thereafter proceed in the matter. (880-A]

J 1.2. The High Court is not empowered to generally decide an appeal
under Section 260A of the Act without adhering to the procedure
prescribed thereunder. Further, the High Court must make every effort
to distinguish between a question of law and a substantial question of law. C
In exercise of powers under this Section, the findings of fact of the Tribunal
cannot be disturbed. (880-B]

Sir Chunilal V. Mehta & Sons Ltd. v. Century Spinning & Mfg. Co. Ltd,
AIR (1962) SC 1314, referred to. D
1.3. 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 of the Act must be strictly fulfilled
before an appeal can be maintained under the Section. Such appeal cannot E
be decided on merely equitable grounds. (880-C-DI

.2. In the instant case, 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 F
of the Act. Additionally, certain points which were urged have not been
dealt with by the High Court. Hence, the matter is remitted to the High
Court for re-determination of the matter afresh keeping in view the
prescriptions of Section 260-A of the Act. However, it is clarified that no
opinion is expressed on the merits of the case. (880-G-H; 881-AI
G
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4232 of2003.

From the Judgment and Order dated 19.12.2002 of the Karnataka High
Court in LT.A. No. 137 of 2000.
H
876 SUPREME COURT REPORTS [2005] I S.C.R.

A WITH

C.A. Nos. 4242, 4237, 4233-34, 4235-36, 4240-41, 4238-39/2003, 761-
64, 755-56/2005, 5322/2003, 757-760, 765-66 of 2005.

R.F. Nariman, S. Ganesh, Harish N. Salve, Joseph Vellapally, M.L.
B Venna, 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 for the appearing parties.

The Judgment of the Court was delivered by
c
ARIJIT PASAYAT, J. Leave granted in SLP (C) Nos. 13009-13012/
2003, 13021-13022/2003, 2763-2766/2004 and 13015-1301612003.

These appeals have their matrix in a common judgment rendered by a
Division Bench of the Karnataka High Court. By the impugned judgment
D 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.

Detailed reference to the factual aspects would be unnecessary as we
propose to dispose of the appeals taking note of submissions made by learned
E 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.
F 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.0.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
G terms of a scheme framed. Pursuant to the scheme, several members of the
A.0.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 finn were treated to have been sold to A.O.P.-3 with effect from
21.11. 1994.
H
M..I. RAOv . .IOINTCOMMR. OF INCOME TAX [PASAYAT .J.] 877
All these appeals relate to the assessment year 1995-96, for the A
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 B
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 C
Authorities were challenged by the assessees before the Income Tax Appellate
Tribunal, Bangalore Bench (in short 'ITA T'). 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.
D
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 SOB of the Act by Finance Act, 1999
there was no sco.pe for levying any tax under the heading 'capital gain' E
before 1.4.2000. The questions were formulated by the High Court for
adjudicating the appeals after the arguments were concluded for the l\urpose
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.
:.. F
In response, Mr. M.L.Verrna, 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.

Section 260A of the Act reads as follows : G
"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.
H
878 SUPREME COURT REPORTS 1200511 S.C.R.

A (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
B 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
C 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 fonnulated, and
the respondents shall, at the hearing of the appeal, be allowed to
D 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.
E
(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-
F
(a) has not been detennined 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 (I).
G (7) Save as otherwise provided in this Act, the provisions of the code
of Civil Procedure, 1908 (5of1908), relating to appeals to the High
'<
Court shall, as far as may be, apply in the case of appeals under this '
section"

This section was inserted by Finance (No.2) Act, I 998 (2 I of I998)
H
M..I. RAO v. JOINTCOMMR. OF INCOME TAX [PASAYAT . .I.] 879
w.e.f. I. I0.1998. A
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 Piocedure, 1908 (in short B
'the CPC') relating to appeals to the High Court shall, as far as may be ,
apply in the case of appeals provided under the Sectio,1, save as otherwise
provided in the Act.

Some of the provisions of Section 260A are in pari materia with various C
sub-sections of Section 100 CPC. The provisions are Section 260A( 1),
260(2)(c), 260A(3), 260A(4) of the Act corresponding to Section 100(1),
100(3), 100(4) and 100(5) of CPC.

Various essentials as culled out from the relevant provisions of the Act
are as follows:
D
•.I
Under Section 260A(2)(c) the appeal under Section 260A shall be (a)
in the fo~m 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 E
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 F
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
7
formulated and to deliver the judgment thereon containing grounds on which
such decision is founded. G
Sub-section (6) empowers the High Court to determine any such issue
which h~s not been determined by the Appellate Tribunal or has been wrongly
detennined by the Appellate Tribunal by reasons of a decision of such question
of law as is referred to in sub-section (I)
H
880 SUPREME COURT REPORTS !2005) I S.C.R.

A 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,
B 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.
C 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.
D
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 Chuni/al V. Mehta & Sons
Ltd. v. Century Spinning & Mfg. Co. Ltd., AIR (1962) SC 1314, this court
E 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
F 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.

On reading of impugned judgment of the High Court it is clear that no
G substantial question of the 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 'f
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.
H
M.J. RAOv. JOINTCOMMR.OFINCOME TAX [PASAYAT ,J.] 881
In the aforesaid background, the impugned judgement of the High Court A
is set aside. The matter is remitted to the High Court which shall deal with
the matter afresh keeping in view the presc"riptions of Section 260A of the
Act. We make it clear that we have not expressed any opinion on the merits
of the case.

For a period of three months the interim protection given by this Court B
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.

The appeals are disposed of accordingly with no order as to costs.
c
S.K.S. Appeals disposed of.