The Calcutta High Court has held that the Income Tax Appellate Tribunal (ITAT) cannot make a remand conditional upon payment of monetary costs in a manner that results in automatic confirmation of an otherwise defective appellate order.
The bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar has observed that once the Tribunal finds that an assessee was denied a meaningful opportunity of hearing in violation of natural justice, it cannot attach a coercive default clause that effectively shuts the doors of appellate adjudication.
The dispute arose from an ITAT order concerning Assessment Year 2018-19, under which the Tribunal had directed a fresh adjudication by the Commissioner of Income Tax (Appeals) while requiring payment of ₹1 lakh as costs within 60 days. The Tribunal had further directed that failure to pay the amount would automatically result in confirmation of the CIT(A)’s order, which had sustained an addition of ₹1.235 crore under Section 68 of the Income Tax Act.
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The case originated from the reassessment proceedings for AY 2018-19. The company had filed its income-tax return on October 31, 2018, declaring total income of ₹34,96,733. Subsequently, reassessment proceedings were initiated under Section 147 read with Sections 144 and 144B of the Income Tax Act.
The assessment proceedings were triggered by intelligence reports concerning alleged accommodation-entry activities involving certain Kolkata-based entities. The Assessing Authority focused on an unsecured loan of ₹1,23,50,000 received from Excellent Infrabuild Private Limited.
The Assessing Authority ultimately passed an ex-parte assessment order on November 30, 2023, treating the loan amount as unexplained under Section 68 of the Act. The resulting aggregate tax demand was ₹1,81,74,868.
The assessee challenged the assessment before the National Faceless Appeal Centre. However, the CIT(A) dismissed the appeal ex-parte on December 19, 2024. According to the High Court, the appellate order was cryptic and unreasoned and failed to comply with the statutory safeguards under Section 250(6), which requires an appellate authority to record the points for determination, its decision thereon and the reasons for the decision.
The assessee thereafter approached the ITAT, Kolkata. The Tribunal itself found that the CIT(A) had violated the principles of natural justice by passing an ex-parte order without providing an adequate opportunity of hearing.
On that basis, the Tribunal decided to set aside the CIT(A)’s order and remit the matter for fresh adjudication. However, the relief came with a condition: the assessee was required to deposit ₹1 lakh with Legal Aid Services, High Court, Calcutta, within 60 days.
More significantly, the ITAT directed that if the amount was not deposited within the prescribed period, the CIT(A)’s order would automatically stand confirmed.
The assessee, citing severe financial constraints and cash-flow difficulties, failed to deposit the amount within the stipulated period. As a consequence of the Tribunal’s direction, the Section 68 addition of ₹1.23 crore stood automatically confirmed without an adjudication of the underlying dispute on merits.
The principal issue before the High Court was whether the ITAT could impose a monetary condition on a remand and make non-payment of that amount a trigger for automatic confirmation of an order that the Tribunal itself had found to be procedurally defective.
The Court answered the issue against such a power.
It observed that the ITAT is a statutory tribunal deriving its authority from Section 254 of the Income Tax Act. Although Section 254(1) empowers the Tribunal to pass such orders as it thinks fit, that discretion has to operate within the boundaries of law, equity and reason.
According to the Court, the expression “as it thinks fit” cannot be interpreted as conferring an unrestrained power to erect financial barriers that defeat substantive statutory rights. Procedural powers, including the power to impose costs, cannot be stretched to the point of extinguishing or frustrating a statutory right of appeal.
The High Court emphasised that the right of appeal is a valuable statutory right. While tribunals may impose reasonable costs to regulate proceedings or address procedural defaults, such costs cannot be transformed into a condition precedent for the survival of an appeal.
The Court held that non-payment of costs cannot be used as a mechanism for automatically validating or confirming an otherwise invalid ex-parte assessment or appellate order.
It observed that when the ITAT itself had concluded that the assessee was denied natural justice before the CIT(A), the appropriate course was to restore the matter for fresh adjudication. The Tribunal could not simultaneously acknowledge the violation of natural justice and then create a mechanism under which the defective order would become final merely because the assessee could not meet a monetary condition.
The High Court further examined the nature of the CIT(A)’s order and found that it was vulnerable for failure to comply with Section 250(6) of the Income Tax Act.
Section 250(6) requires the first appellate authority to state the points for determination, the decision on those points and the reasons for the decision. The Court reiterated that an appellate authority exercising quasi-judicial powers must apply its mind and issue a reasoned, speaking order.
In the present case, the CIT(A)’s ex-parte order did not satisfy this statutory requirement. The High Court therefore held that the Tribunal could not permit such an order to acquire automatic finality merely because the assessee failed to pay the procedural cost imposed by the Tribunal.
The High Court also considered the substantive dispute concerning the ₹1.23 crore unsecured loan.
It noted that Section 68 requires an assessee, in the relevant circumstances, to establish the identity of the creditor, the creditor’s creditworthiness and the genuineness of the transaction.
The record, as noted by the Court, contained banking records and corporate documentation concerning the loan received from Excellent Infrabuild Private Limited. The Court further observed that the Revenue authorities had not undertaken independent inquiries sufficient to dislodge the documentary material and had instead relied upon generalized third-party reports.
The Court did not finally adjudicate the merits of the Section 68 addition. Instead, it held that the issue required fresh and unhindered factual consideration by the CIT(A), after providing the assessee an effective opportunity to present its evidence.
The High Court consequently answered the principal questions of law in favour of the assessee and against the Revenue.
While recognising that the Tribunal has power to impose costs for procedural defaults, the Court held that such costs cannot be made a condition precedent in a manner that leads to automatic dismissal or confirmation of an appeal.
The Court therefore reduced the cost imposed by the ITAT from ₹1 lakh to ₹25,000 and completely quashed the clause providing for automatic confirmation of the CIT(A)’s order upon failure to pay the cost.
The High Court partly allowed the appeal and modified the ITAT’s order. The assessee has been directed to deposit the reduced cost of ₹25,000 with Legal Aid Services, High Court, Calcutta, within four weeks of receiving the judgment and furnish proof of such payment before the CIT(A).
More importantly, the assessment proceedings have been restored unconditionally to the CIT(A), NFAC, for fresh de novo adjudication on merits.
The Court directed the assessee to appear on the first date of hearing and produce all relevant books, bank statements and other corroborative evidence concerning the unsecured loan transaction. The CIT(A), in turn, has been directed to consider the documentary evidence and pass a reasoned and speaking order in accordance with Section 250(6) within 12 weeks from receipt of the server copy of the judgment.
In a significant consequential direction, the High Court restrained coercive recovery of the demand arising from the ₹1,23,50,000 addition until the CIT(A) passes a fresh appellate order in accordance with law.
The Court thus restored the assessee’s statutory appellate remedy while ensuring that the Section 68 dispute is examined afresh on the basis of evidence and after providing a meaningful opportunity of hearing.
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