Case Note & Summary
The batch of ten appeals before the Supreme Court arose from orders passed by the High Court of Gujarat rejecting applications filed by the revenue under Section 256(2) of the Income-tax Act, 1961. The revenue, represented by the Commissioner of Income Tax, Gujarat at Ahmedabad, sought reference of certain questions of law to the High Court arising from orders of the Income Tax Appellate Tribunal. Special leave was granted in S.L.P. Nos. 15006-15008 of 1992. The assessees included Sakarlal Balabhai & Co. Ltd., Shri Nand Kishore Sakarlal Balabhai, Navnitlal Sakarlal (HUF), and others. The underlying tax dispute concerned computation of long-term capital gains on sale of bonus shares. In various appeals, the Tribunal directed the Income Tax Officer to take the average price of bonus shares for computation of capital gains without reducing the cost of original shares on receipt of bonus shares. The revenue formulated several questions of law: whether the Tribunal was right in valuing bonus shares at average cost for computing cost of acquisition; whether the cost of original shares should be reduced on averaging; whether the cost of original shares should be taken at cost price or substitute price as on 1.1.64; and similar questions relating to specific numbers of equity shares of Sarangpur Cotton Manufacturing Co. Ltd. sold. The High Court rejected the applications under Section 256(2) without adverting to the minimal facts and the findings of the Tribunal and failed to give any reasons for the rejection. The Supreme Court heard counsel and perused the Tribunal's orders. It observed that the High Court's orders were far from satisfactory and lacked reasoning. The Court held that on the basis of the findings entered by the Tribunal and the decisions adverted to by it, the questions of law posed in the various cases did arise out of the Tribunal's order. The Court noted that the Tribunal's orders discussed alternate views, which called for a reference. Accordingly, the Supreme Court set aside the High Court's orders and directed the Income Tax Appellate Tribunal, Ahmedabad to refer the specified questions of law to the High Court for decision, along with a statement of case and relevant documents. The Court expected the Tribunal to take appropriate steps expeditiously to enable the High Court to dispose of the matter finally. The appeals were allowed with no order as to costs.
Headnote
A) Income Tax - Reference to High Court - Section 256(2) Income-tax Act, 1961 - High Court must give reasons when rejecting reference application - The High Court rejected the revenue's applications under Section 256(2) without adverting to minimal facts and findings of the Income Tax Appellate Tribunal and without giving any reasons. The Supreme Court held that such unreasoned orders are unsatisfactory and liable to be set aside. Held that the High Court's orders rejecting the applications were set aside and the Tribunal was directed to refer the specified questions of law to the High Court (Paras 4-5). B) Income Tax - Reference Application - Questions of Law Arising from Tribunal Order - Section 256(2) Income-tax Act, 1961 - Questions formulated by revenue pertained to whether average cost of bonus shares should be used and whether cost of original shares should be reduced when computing capital gains. The Supreme Court held that these questions of law arose from the Income Tax Appellate Tribunal's orders, necessitating reference to the High Court. Held that the Tribunal must forward the questions along with statement of case and relevant documents (Paras 3-5).
Issue of Consideration
Whether the High Court erred in rejecting the revenue's applications under Section 256(2) of the Income-tax Act, 1961 without giving reasons; whether questions of law regarding computation of capital gains on bonus shares arose from the Income Tax Appellate Tribunal's orders.
Final Decision
The Supreme Court allowed the revenue's appeals, set aside the High Court orders rejecting the applications under Section 256(2) of the Income-tax Act, 1961, and directed the Income Tax Appellate Tribunal, Ahmedabad to refer the specified questions of law to the High Court along with statement of case and relevant documents. No order as to costs.
Law Points
- High Court order under Section 256(2) of Income-tax Act must be reasoned
- Questions of law arising from Tribunal order must be referred to High Court
- High Court cannot reject reference application without adverting to facts and findings
- Supreme Court can direct Tribunal to refer questions to High Court with statement of case
