The procedural machinery of law must remain a “handmaid to justice rather than its mistress”, the Calcutta High Court said while stopping a Rs 1.23 crore addition to a company’s taxable income from being automatically upheld after the firm failed to pay Rs 1 lakh in costs imposed by the Income Tax Appellate Tribunal (ITAT).
The court said a litigant should not lose the right to challenge a tax order just because it could not make a procedural payment, especially when the tribunal had already found that the company was not given a proper opportunity to be heard, but made the relief conditional on payment of Rs 1 lakh.
A bench of Justices Rajarshi Bharadwaj and Uday Kumar were on August 7 hearing an appeal filed by Ajitnath Suppliers Private Limited against the Principal Commissioner of Income Tax-1, Kolkata and others. The appeal challenged the ITAT’s June 23, 2025 order concerning the 2018-19 assessment year.
“It is a foundational tenet of our constitutional democracy and judicial architecture that access to justice is a substantive right, and the procedural machinery of the law must forever remain a handmaid to justice rather than its mistress… When that remedial restoration is shackled by an arbitrary monetary pre-condition, coupled with a penal guillotine of ‘automatic confirmation’ upon default, the judicial process is subverted into an instrument of oppression,” said the court.
The dispute arose from an unsecured loan of Rs 1.23 crore received by Ajitnath Suppliers from Excellent Infrabuild Private Limited. The assessing officer added the amount under Section 68 (unexplained cash credit/income) of the Income Tax Act, resulting in a total tax demand of Rs 1.81 crore.
The company’s appeal against this was later dismissed ex parte (without hearing its side) by the Commissioner of Income Tax (Appeals) or CIT(A) at the National Faceless Assessment Centre. The ITAT found that the dismissal violated natural justice but made a fresh hearing conditional on payment of Rs 1 lakh.
How Rs 1.23 crore addition arose
Ajitnath Suppliers filed its income tax return on October 31, 2018, declaring total income of Rs 34,96,733 for the assessment year 2018-19. The National Faceless Assessment Centre then launched reassessment proceedings, focusing on an unsecured loan of Rs 1.23 crore (Rs 1,23,50,000) received from Excellent Infrabuild Private Limited.
The assessment was completed ex parte on November 30, 2023, with the loan amount added under Section 68 (unexplained cash credit/income). A total tax demand of Rs 1.81 crore (Rs 1,81,74,868) was then raised.
The company challenged this assessment before the CIT(A) by filing an appeal on January 12, 2024. The CIT(A), however, dismissed the appeal on December 19, 2024. The high court later held that the order did not comply with Section 250(6), which requires an appellate authority to state the points for determination, the decision on those points and the reasons for the decision.
Ajitnath Suppliers then approached the ITAT’s ‘A’ Bench in Kolkata. In its June 23, 2025 order, the appellate tribunal found that the CIT(A) had passed an ex parte order, denying the assessee proper hearing. It, therefore, set aside the order and sent the matter back for a fresh decision.
However, the tribunal directed the assessee to pay Rs 1 lakh as cost to Legal Aid Services, Calcutta High Court, within 60 days and stated that failure to deposit the amount within the period would automatically confirm the CIT(A)’s order.
The company failed to deposit the amount within the said period. The high court noted that it cited acute financial situation and cash-flow issues. This meant that the ITAT’s conditional direction thus resulted in the Rs 1.23 crore addition being automatically confirmed.
‘Costs can’t determine survival of plea’
The high court held that the ITAT had committed a fundamental jurisdictional error by converting its remedial order into a conditional one.
The bench noted that Section 254(1) empowers the ITAT to pass appropriate orders, while Rule 32 of the Income-tax (Appellate Tribunal) Rules gives it procedural powers to regulate proceedings and impose costs. But such powers cannot be stretched to defeat substantive legal rights.
The court said a right of appeal is a valuable legal right and that procedural provisions must advance justice, not defeat it.
“Costs can never be transformed into a pre-condition for the very survival of an appeal,” the bench said. It added that non-payment could not automatically confirm an ex parte assessment order that was already found to have violated natural justice.
The court held that once the ITAT had found a violation of the right to be heard, the matter should have been unconditionally sent back to the first appellate authority for a fresh hearing.
The court also held that the CIT(A)’s order was flawed because it failed to comply with Section 250(6) (order must be passed with detailed reasoning). It noted that an appellate authority exercising quasi-judicial powers must pass a speaking order reflecting application of mind.
HC leaves Rs 1.23 crore dispute open
The court also examined the issue concerning the addition of Section 68 (unexplained income) but did not finally decide whether the Rs 1.23 crore loan was genuine or whether the addition was legally sustainable.
The court noted that Section 68 places an initial burden on an assessee to establish the identity of the lender, the lender’s creditworthiness and the genuineness of the transaction. It recorded that the appellant had submitted banking records and corporate details concerning the loan. However, the court held that the merits required fresh factual examination by the CIT(A).
Rs 1 lakh cost reduced to Rs 25,000
The high court partly allowed the appeal and modified the ITAT’s June 23, 2025 order. It reduced the cost from Rs 1 lakh to Rs 25,000 and cancelled the direction that the CIT(A)’s order would be automatically confirmed if the amount was not paid.
The company has been directed to deposit Rs 25,000 with Legal Aid Services, Calcutta High Court, within four weeks of receiving a copy of the judgment, and produce proof of the deposit before the CIT(A). The assessment proceedings have been restored unconditionally to the CIT(A) for a fresh decision on merits.
Ajitnath Suppliers must appear before the CIT(A) on the first date fixed for hearing and place on record its books, bank statements and other corroborative evidence concerning the unsecured loan. The CIT(A) has been directed to consider the material and pass a reasoned, speaking order under Section 250(6) within 12 weeks of receiving the copy of the high court judgment.
Until that fresh appellate order is passed, the high court has directed that no coercive steps be taken to recover the demand arising from the Rs 1.23 crore addition.
