Reference to Court under Income Tax Act: A Comprehensive Guide (Indian Law)

This article provides a detailed exploration of the provisions relating to “Reference to Court” under the Income Tax Act, 1961 (hereinafter referred to as "the Act"), as applicable in India. We will delve into the specific sections, conditions, procedures, and judicial interpretations relevant to this process. This aims to provide a comprehensive understanding for taxpayers, tax professionals, and anyone seeking clarity on this complex area of income tax law.

Introduction to Reference to Court

The mechanism of "Reference to Court" under the Income Tax Act provides a statutory avenue for the Income Tax Appellate Tribunal (ITAT) to seek the opinion of the High Court on questions of law arising out of its orders. This is a crucial safeguard to ensure that complex legal issues are appropriately adjudicated and that the law is applied consistently. Unlike an appeal, a reference is initiated by the ITAT itself when it feels uncertain about a substantial question of law.

Legal Basis: Section 256 of the Income Tax Act, 1961

The primary legal foundation for the "Reference to Court" lies in Section 256 of the Income Tax Act, 1961. This section outlines the circumstances under which a reference can be made, the procedure involved, and the powers of the High Court in dealing with such references.

Section 256 is divided into two main subsections:

• Section 256(1): This subsection deals with the situation where either the assessee or the Commissioner of Income Tax (CIT) applies to the ITAT to state a case and refer it to the High Court.
• Section 256(2): This subsection empowers the High Court to direct the ITAT to state a case and refer it to the High Court if the High Court is satisfied that the ITAT has wrongly refused to state a case.

Section 256(1): Application by Assessee or Commissioner

Conditions for Application:

According to Section 256(1), an application can be made to the ITAT for a reference to the High Court under the following conditions:

1. Question of Law: The application must raise a question of law arising out of the ITAT’s order. This question must be a substantial question of law. A mere question of fact, or a mixed question of fact and law where the factual aspect predominates, will not suffice.
2. Arising out of ITAT Order: The question of law must directly arise from the order passed by the ITAT. It cannot be a new question of law that was not considered by the ITAT.
3. Application within Time Limit: The application must be made within the prescribed time limit, which is generally 60 days from the date on which the order of the ITAT is served on the applicant. (Refer to Rule 48 of the Income Tax Rules, 1962).
4. Application in Prescribed Form: The application must be made in the prescribed form, setting out the relevant facts and the question of law sought to be referred. (Refer to Form No. 37 under the Income Tax Rules, 1962).

Procedure under Section 256(1):

1. Application to ITAT: The aggrieved party (either the assessee or the Commissioner) files an application to the ITAT within the stipulated time.
2. ITAT's Decision: The ITAT considers the application. If the ITAT is of the opinion that a question of law does arise out of its order, it will draw up a statement of the case. This statement will contain:
   • The facts of the case.
   • The relevant findings of the ITAT.
   • The question or questions of law that are being referred to the High Court.
3. Reference to High Court: The ITAT then refers the statement of the case, along with its opinion on the question(s) of law, to the High Court.
4. High Court's Decision: The High Court hears the case and gives its opinion on the question(s) of law referred to it. This opinion is binding on the ITAT.

Rejection of Application:

If the ITAT is of the opinion that no question of law arises out of its order, it can reject the application. In this case, the applicant has recourse under Section 256(2).

Section 256(2): Direction by High Court

Circumstances for Invoking Section 256(2):

Section 256(2) comes into play when the ITAT rejects an application made under Section 256(1), holding that no question of law arises from its order. The applicant, if aggrieved by this rejection, can then approach the High Court.

Procedure under Section 256(2):

1. Application to High Court: The applicant (either the assessee or the Commissioner) files an application to the High Court seeking a direction to the ITAT to state a case and refer it to the High Court.
2. High Court's Examination: The High Court examines the ITAT's order and the application made under Section 256(1). The High Court must be satisfied that the ITAT was wrong in holding that no question of law arose out of its order.
3. Direction to ITAT: If the High Court is so satisfied, it will direct the ITAT to state a case and refer it to the High Court. The High Court may specify the question(s) of law that should be included in the statement of the case.
4. ITAT's Compliance: The ITAT must comply with the High Court's direction and prepare a statement of the case, including the question(s) of law specified by the High Court. The ITAT then refers this statement to the High Court.
5. High Court's Decision: The High Court hears the case and gives its opinion on the question(s) of law referred to it. This opinion is binding on the ITAT.

Important Considerations under Section 256(2):

• The High Court's power under Section 256(2) is discretionary. Even if the High Court finds that a question of law does arise, it is not obligated to direct the ITAT to state a case.
• The High Court's power under Section 256(2) is limited to directing the ITAT to state a case and refer it to the High Court. The High Court cannot directly decide the question of law itself.

Key Concepts and Judicial Interpretations

Several key concepts and judicial interpretations are crucial to understanding the "Reference to Court" mechanism:

1. Substantial Question of Law: The question of law must be "substantial." This means that it must be a question that is debatable, not free from doubt, and one on which there could be a difference of opinion. It must be a question that affects the rights of the parties involved. Courts have held that a question is substantial if it affects the rights and liabilities of the parties or if it is of general public importance.
2. Question Arising Out of Order: The question of law must arise directly from the order of the ITAT. It cannot be a hypothetical question or a question that was not considered by the ITAT.
3. Time Limit: The prescribed time limits for making applications under Section 256(1) and Section 256(2) must be strictly adhered to. Delay can be condoned only under exceptional circumstances, and the applicant must provide sufficient cause for the delay.
4. Form of Application: The application must be made in the prescribed form and must contain all the necessary information. Any defects in the form can lead to the rejection of the application.
5. Power of High Court: The High Court's power is primarily advisory. It gives its opinion on the question of law referred to it. The ITAT is bound by this opinion and must dispose of the case accordingly. The High Court cannot interfere with the ITAT's findings of fact unless they are perverse or unsupported by evidence.

Relevant Case Laws (Illustrative):

• Sir Shadilal Sugar & General Mills Ltd. v. CIT (1987) 168 ITR 705 (SC): This case emphasizes that the question of law must be a substantial question of law and not a mere question of fact.
• CIT v. Scindia Steam Navigation Co. Ltd. (1961) 42 ITR 589 (SC): This case clarifies the scope of the High Court's power under Section 256(2).
• State of Madras v. G.J. Coelho (1964) 53 ITR 186 (SC): This case deals with the conditions under which the High Court can direct the ITAT to state a case.

Consequences of High Court's Decision

The High Court, after hearing the reference, pronounces its opinion on the question(s) of law referred to it. The ITAT is then bound to dispose of the case in conformity with the High Court's opinion. The High Court’s decision has the following implications:

1. Binding on ITAT: The ITAT is obligated to follow the opinion given by the High Court.
2. Finality at ITAT Level: The ITAT must pass a final order giving effect to the High Court’s opinion.
3. Further Appeal: Depending on the facts and circumstances of the case, an appeal may lie to the Supreme Court against the High Court's judgment. This appeal would typically be under Article 133 of the Constitution of India (Civil appeals relating to matters involving substantial questions of law of general importance).

Practical Considerations and Drafting Tips

When drafting an application for reference to the High Court, the following practical considerations are crucial:

1. Clearly Identify the Question of Law: The question of law must be framed clearly and concisely. It should be easily understood by the ITAT and the High Court.
2. Relate the Question to the ITAT's Order: The application should clearly explain how the question of law arises out of the ITAT's order.
3. Support with Case Law: The application should cite relevant case laws and legal principles to support the argument that the question is a substantial question of law.
4. Address Potential Objections: Anticipate potential objections that the ITAT or the Commissioner may raise and address them in the application.
5. Ensure Compliance with Formalities: Ensure that the application is made in the prescribed form and that all the necessary documents are attached. Pay close attention to the time limits.

Conclusion

The "Reference to Court" mechanism under Section 256 of the Income Tax Act, 1961, is a vital safeguard for ensuring the correct and consistent application of income tax law. While it provides a valuable avenue for resolving complex legal issues, understanding its nuances and procedures is crucial for both taxpayers and tax authorities. Careful consideration of the conditions, time limits, and judicial interpretations discussed above is essential for successfully navigating this process. The clear identification of a substantial question of law, proper documentation, and adherence to the prescribed procedures are key to obtaining a favorable outcome.