ITAT Cannot Automatically Confirm Adverse Order For Non-Payment Of Costs: Calcutta High Court

The Calcutta High Court on 7 August held that the Income Tax Appellate Tribunal (ITAT) cannot make payment of costs a condition for continuation of an appeal or direct that non-payment would automatically revive or confirm an adverse appellate order.

A Division Bench of Justices Rajarshi Bharadwaj and Uday Kumar clarified that while the ITAT can impose costs for procedural lapses, such costs cannot be made a condition precedent to a litigant's statutory right to have an appeal adjudicated, particularly where the Tribunal itself has found a violation of natural justice. They observed:

“...the merits of the addition under Section 68 require fresh, unhindered adjudication by the First Appellate Authority. The cost of ₹1,00,000/- is reduced to ₹25,000/-, and the automatic default confirmation clause is wholly quashed”

Ajitnath Suppliers Private Limited filed its income tax return for Assessment Year 2018-19, declaring total income of Rs. 34,96,733. The return was initially processed under Section 143(1).

The Income Tax Department subsequently initiated reassessment proceedings under Sections 147, 144 and 144B after receiving intelligence reports alleging that certain Kolkata-based entities were being used for providing accommodation entries. During reassessment, the Assessing Officer questioned an unsecured loan of Rs. 1,23,50,000 received by the company from Excellent Infrabuild Private Limited. The Assessing Officer completed the assessment ex parte and added the amount under Section 68, resulting in an aggregate tax demand of Rs. 1,81,74,868.

The company challenged the assessment before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre. However, the CIT(A) dismissed the appeal ex parte.

It then approached the ITAT, Kolkata. The Tribunal found that the CIT(A) had not provided the company an adequate opportunity of hearing and remanded the matter for fresh adjudication.

While remanding the matter, however, the ITAT directed the company to deposit Rs. 1 lakh as costs with the Legal Aid Services, High Court, Calcutta, within 60 days. It further directed that failure to deposit the amount within the stipulated period would result in the CIT(A)'s order confirming the Rs. 1.23 crore addition automatically standing confirmed.

The company could not deposit the amount within the prescribed period, citing acute financial difficulties and cash flow constraints. It consequently challenged the condition before the High Court under Section 260A of the Income Tax Act, which provides for appeals to the High Court on substantial questions of law arising from ITAT orders.

The High Court also condoned a delay of 154 days in filing the appeal, finding that the company had sufficiently explained the delay. It took into account the time spent on corporate formalities, board approvals, the Court's winter vacation and legal consultations and held that the delay was not deliberate.

On the central issue, it held that the ITAT had committed a fundamental error by attaching a coercive consequence to its own finding that the company had been denied an adequate opportunity of hearing.

The Bench observed that once the Tribunal found a violation of natural justice, it ought to have restored the matter for fresh adjudication instead of making the company's right to such adjudication dependent on payment of costs.

The judges further held that the ITAT's power under Section 254(1) to pass orders in an appeal cannot be exercised in a manner that defeats a substantive statutory right of appeal. While the Tribunal may impose costs for procedural delays or defaults, such costs cannot operate as a condition resulting in automatic dismissal of an appeal or confirmation of an adverse order.

They also noted that the company had placed banking records and corporate documents on record concerning the loan transaction. It observed that the merits of the Section 68 addition required factual examination by the CIT(A) after giving the company a full opportunity of hearing.

Therefore, the Bench modified the ITAT's order dated 23 June 2025 in ITA No. 334/Kol/2025, reducing the costs from Rs. 1 lakh to Rs. 25,000 and quashing the direction providing for automatic confirmation of the CIT(A)'s order upon non-payment. It stated:

"The impugned order dated 23rd June, 2025 passed by the Income Tax Appellate Tribunal, 'A' Bench, Kolkata, in ITA No. 334/Kol/2025 is modified to the limited extent that the cost of ₹1,00,000/- is reduced to ₹25,000/-, and the penal direction regarding the "automatic confirmation" of the CIT(A)'s order upon default is quashed and set aside."

It further restored the assessment proceedings to the CIT(A) for fresh and unhindered adjudication on merits. It directed the company to deposit Rs. 25,000 within four weeks and produce proof of payment before the CIT(A), which was directed to pass a reasoned order within 12 weeks.

Accordingly, the High Court set aside the ITAT's 'Automatic Confirmation' Clause. It directed that until the fresh appellate order is passed, the Revenue not to take coercive recovery steps in respect of the demand arising from the Rs. 1.23 crore addition.

For Appellant: Amit Agarwal and Tabbish Wasi, Advocates 

For Respondent: Prithu Dudhoria, Advocate