[Analysis] Substantial Question of Law under Section 260A – Income Tax Appeals

D.C. Agrawal – [2025] 177 taxmann.com 838 (Article)

1. Introduction

The Indian system of appellate tax adjudication is carefully tiered to balance taxpayer rights with judicial efficiency. The insertion of Section 260A in the Income-tax Act, 1961 by the Finance (No. 2) Act, 1998, marked a watershed by providing a direct statutory right of appeal to the High Court against orders of the Income Tax Appellate Tribunal (ITAT). Before this insertion, the High Courts could be approached only through a reference procedure under Sections 256–259, where questions of law were referred by the Tribunal. The legislative change was intended to expand taxpayer remedies while simultaneously restricting frivolous appeals by confining High Court jurisdiction to cases involving a “substantial question of law”.
The expression, though central to the appellate scheme, has not been defined in the Income-tax Act. Instead, its contours have been judicially developed over decades, borrowing heavily from Section 100 of the Code of Civil Procedure (CPC), which restricts second appeals in civil litigation to substantial questions of law. The object is to ensure that High Courts remain forums for clarifying legal principles, rather than forums for re-appreciation of evidence and factual disputes.
In practice, the meaning and scope of “substantial question of law” have been the subject of substantial litigation. Several judgments of the Supreme Court and High Courts have settled principles that demarcate:

i. when an issue amounts to a pure question of fact,
ii. when it is a mixed question of fact and law, and
iii. when it rises to the level of a substantial question of law.

Understanding these principles is vital for practitioners, as admission of a Section 260A appeal hinges entirely on how well the question of law is framed in the memorandum of appeal.

2. Constitutional and Statutory Framework:

The appellate scheme in tax matters reflects the constitutional division of powers between the High Courts and the Supreme Court.

2.1 Constitutional Jurisdiction:

i. Article 132–134 of the Constitution provide for appeals to the Supreme Court in specified matters. Article 133 permits appeal on a “substantial question of law of general importance” if the High Court certifies that it needs to be decided by the Supreme Court.

ii. Article 136 confers wide discretionary jurisdiction on the Supreme Court to grant special leave to appeal. This jurisdiction is residuary in character, meant to correct grave injustice or manifest errors of law, and often invoked in tax cases.

Thus, at the constitutional level, the idea of “substantial question of law” as a filter already existed, and Section 260A borrowed heavily from this framework.

2.2 Section 260A of the Income-tax Act:

Section 260A provides that an appeal shall lie to the High Court from every order of the ITAT if the High Court is satisfied that the case involves a substantial question of law. Procedural features include:

i. The appeal must clearly state the substantial question of law involved.
ii. The High Court, if satisfied, shall formulate that question.
iii. The appeal shall be heard only on such formulated question(s).
iv. Under the proviso to Section 260A(4), the Court may, for recorded reasons, hear the appeal on any other substantial question of law not formulated earlier.
v. Sub-section (7) makes the provisions of the CPC relating to appeals applicable, “as far as may be,” to appeals under Section 260A.

2.3 Comparison with Section 100 CPC:

Section 260A is analogous to Section 100 CPC, which governs second appeals in civil cases. Section 100 was amended in 1976 to confine second appeals only to substantial questions of law, following recommendations of the Law Commission to curb endless factual litigation. The same policy underpins Section 260A: High Courts are not meant to act as fact-finding bodies in tax matters.

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