Tax Appeal to High Court-what constitutes Substantial Question of Law ?
The First Appellate Authority under the Income Tax Act, 1961 (the Act) is Commissioner of Income Tax (Appeals) [(CIT-A)]. The second appeal against the order passed by (FAA) lies to the Income Tax Appellate Tribunal (ITAT). Against every order passed by the ITAT, an appeal lies to the High Court. However, ITAT has been judicially held to be the final fact finding authority and even Courts can not go beyond it.
The Hon’ble Supreme Court in the context of a reference made u/s 256(2) answered by the Karnataka High Court [ABCAUS 890 (2016) (01) SC] stated as under:
“The legal position in this regard may be summed up by reiterating that it is the Tribunal which is the final fact finding authority and it is beyond the power of the High Court in the exercise of its reference jurisdiction to reconsider such findings on a reappraisal of the evidence and materials on record unless a specific question with regard to an issue of fact being opposed to the weight of the materials on record is raised…”
Right of appeal is not automatic. Right of appeal is conferred by the governing Statute. If the right of appeal conferred by the Statute is limited to cases where there is a substantial question of law, the High Court cannot sit in appeal over factual findings by re-weighing and re-analysing the evidence and materials on record.
Section 260A of the Income Tax Act contains the provisions with respect to appeal to High Court against the orders of ITAT. The sub section (1) categorically provides that 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.
The Supreme Court [ABCAUS 795 (2015) (08) SC] has held that in no circumstances the High Court can reverse the judgment of the trial court and the first appellate court without formulating the substantial question of law and complying with the mandatory requirements of section 100 CPC.
A two Judge Bench of the Supreme Court summarized the following conclusion in this regard:-
(i) On the day when the second appeal is listed for hearing on admission if the High Court is satisfied that no substantial question of law is involved, it shall dismiss the second appeal without even formulating the substantial question of law;
(ii) In cases where the High Court after hearing the appellate is satisfied that the substantial question of law is involved, it shall formulate that question and then the appeal shall be heard on those substantial question of law, after giving notice and opportunity of hearing to the respondent;
(iii) In no circumstances the High Court can reverse the judgment of the trial court and the first appellate court without formulating the substantial question of law and complying with the mandatory requirements of Section 100 CPC
What constitutes a substantial question of law has extensively been discussed and explained by the Supreme Court in various decisions.
It is now well settled that the principles for determination of existence of substantial question of law as laid down by the Supreme Court in the context of second appeals under the Civil Procedure Code would apply to appeals under Section 260 A of the Income-Tax Act.
The phrase “substantial question of law”, as occurring in the amended Section 100 CPC is not defined in the Code. However, the Hon’ble Supreme Court from time to time has deliberated on the principles and tests for deciding whether the questions involved in an appeal are substantial questions of law as under:
(i) The word substantial, as qualifying “question of law”, means—of having substance, essential, real, of sound worth, important or considerable. It is to be understood as something in contradistinction with—technical, of no substance or consequence, or academic merely.
(ii) As the legislature has chosen not to qualify the scope of “substantial question of law” by suffixing the words “of general importance” as has been done in many other provisions such as Section 109 of the Code or Article 133(1)(a) of the Constitution. The substantial question of law on which a second appeal shall be heard need not necessarily be a substantial question of law of general importance.
(iii) When a question of law is fairly arguable, where there is room for difference of opinion on it or where the Court thought it necessary to deal with that question at some length and discuss alternative views, then the question would be a substantial question of law. On the other hand if the question was practically covered by the decision of the highest court or if the general principles to be applied in determining the question are well settled and the only question was of applying those principles to the particular fact of the case it would not be a substantial question of law.
(iv) The proper test for determining whether a question of law raised in the case is substantial would be whether it is of general public importance or whether it 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 Supreme Court or by the Privy Council or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. 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.
(v) To be “substantial” a question of law must be debatable, not previously settled by law of the land or a binding precedent, and must have a material bearing on the decision of the case, if answered either way, insofar as the rights of the parties before it are concerned. To be a question of law “involving in the case” there must be first a foundation for it laid in the pleadings and the question should emerge from the sustainable findings of fact arrived at by court of facts and it must be necessary to decide that question of law for a just and proper decision of the case.
(vi) An entirely new point raised for the first time before the High Court is not a question involved in the case unless it goes to the root of the matter.
(vii) It will depend on the facts and circumstance of each case whether a question of law is a substantial one and involved in the case or not, the paramount overall consideration being the need for striking a judicious balance between the indispensable obligation to do justice at all stages and impelling necessity of avoiding prolongation in the life of any lis.
(viii) An inference of fact from the recitals or contents of a document is a question of fact. But the legal effect of the terms of a document is a question of law. Construction of a document involving the application of any principle of law, is also a question of law. Therefore, when there is misconstruction of a document or wrong application of a principle of law in construing a document, it gives rise to a question of law.
(ix) The High Court should be satisfied that the case involves a substantial question of law, and not a mere question of law. A question of law having a material bearing on the decision of the case (that is, a question, answer to which affects the rights of parties to the suit) will be a substantial question of law, if it is not covered by any specific provisions of law or settled legal principle emerging from binding precedents, and, involves a debatable legal issue.
(x) A substantial question of law will also arise in a contrary situation, where the legal position is clear, either on account of express provisions of law or binding precedents, but the court below has decided the matter, either ignoring or acting contrary to such legal principle. In the second type of cases, the substantial question of law arises not because the law is still debatable, but because the decision rendered on a material question, violates the settled position of law.
(xi) The general rule is that High Court will not interfere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the well-recognised exceptions are where (i) the courts below have ignored material evidence or acted on no evidence; (ii) the courts have drawn wrong inferences from proved facts by applying the law erroneously; or (iii) the courts have wrongly cast the burden of proof. When we refer to “decision based on no evidence”, it not only refers to cases where there is a total dearth of evidence, but also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding.”
Therefore, while drafting a writ ot Tax Appeal care should be taken that questions raised does meet the tests laid down by the Supreme Court for holding that the questions raised are substantial questions of law, else, the High Court would not entertain the appeal.