A. Corporate Taxes

1. Gujarat High Court1: What is meant by 'Substantial Question of Law' for purposes of filing appeal to High Court under section 260A?

In this case Hon. Gujarat High Court relied upon the judgement of Hon. Supreme Court in M. Janardhana Rao v. JCIT2 to rule what is meant by 'Substantial Question of Law' for purposes of filing appeal to High Court under section 260A of the Act. In case of M. Janardhana Rao v. JCIT (supra), while dealing with the scope of section 260A, the Hon. Supreme Court observed as under:

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 Chunilal V Mehta & Sons Ltd v. Century Spinning & Mfg. Co. Ltd3 the Hon. Supreme Court laid down the following tests to determine whether a substantial question of law is involved -

  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
  4. the issue is not free from difficulty, and
  5. it calls for a discussion of alternative view.

Next, the Hon. Gujarat High Court relied upon Vijay Kumar Talwar v. CIT4 where Hon. Supreme Court considered the issue of substantial question of law in context of section 260A of the Act and observed as under:

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 this Court or is not free from difficulty or calls for discussion of alternative views.

In Vijay Kumar Talwar v. CIT (supra) Hon. Supreme Court also observed that a finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread.

Our Comments:

Against orders of ITAT, the Revenue frequently files appeal to High Court under section 260A of the Act. The Taxpayers must check, on touch stone of the decisions rendered by the Hon. Supreme Court as mentioned hereinabove, whether any substantial question of law arises out of the order of ITAT.

2. Delhi High Court5: A Firm cannot invoke Micro, Small and Medium Enterprises Development Act (MSMED Act) for resolution of Special Audit Fee dispute with IT Dept.

Background

  • This case presents interesting legal issues relating to the interplay between the Income Tax Act, 1961 (hereinafter 'IT Act') and the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter 'MSMED Act') for deciding fee payable to CA Firms, for Special Audits directed under Section 142(2A) of the IT Act.
  • A CA Firm, being on the panel of the Income Tax Department (hereinafter 'IT Department'), was nominated as a Special Auditor by the IT Department in four cases for carrying out Special Audit in terms of Section 142(2A) of the IT Act.
  • After completing the said Special Audit assignments, the CA Firm raised four invoices in respect of the said audits. The grievance of the Special Auditor-CA Firm was that qua the invoices raised, full payment was not made by the IT Department.
  • Under such circumstances, the CA Firm invoked the provisions of the MSMED Act and approached the Micro & Small Enterprise Facilitation Council (hereinafter 'MSEFC'), because the CA Firm was also registered as a `Micro Enterprise' under the provisions of the MSMED Act.
  • The IT Department filed writ petitions before the Hon. Delhi High Court contending that the MSEFC, under the MSMED Act, lacks jurisdiction to deal with claims raised by Special Auditors under Section 142(2A) in respect of the fee payable for Special Audits.

Judgement of Hon. Delhi High Court

  1. The purpose of Special Audit is to help and assist the AO for the purpose of facilitating the assessment and for proper determination of the tax liability after arriving at the correct taxable income.
  2. After completion of the Special Audit, the Chief Commissioner or the Commissioner plays a very crucial role in the determination of remuneration of Special Auditor. Thus, the determination of the remuneration is a task, which is of a specialized nature, which only the Income Tax Department would be able to undertake; MSEFC does not possess domain expertise to undertake such task. 
  3. The IT Department cannot be termed as a ‘buyer' when it is nominating the accountant for conducting a Special Audit and neither can the CA Firm be termed as a ‘supplier'.
  4. The invocation of the provisions of the MSMED Act under such circumstances, in respect of Special Audit remuneration would, therefore, not be tenable and is completely misplaced.
  5. Thus, in the facts and circumstances as discussed above, the Income Tax Act would prevail over the MSMED Act.
  6. Because the MSMED Act would have no applicability, the impugned references by the MSEFC, of the claims raised by the CA Firm, to arbitration are not sustainable.
  7. The remedies of the CA Firm, if any, to challenge the orders passed by the IT Department in respect of determination of remuneration, are left open.

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Footnotes

1. Prabodhchandra Jayantilal Patel [TS-370-HC-2023(GUJ)]

2. (2005) 2 SCC 324

3. AIR (1962) SC 1314

4. (2011) 330 ITR 1

5. Micro and Small Enterprise Facilitation Council [TS-371-HC-2023(DEL)]

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