Substantial question of law must be formulated first in Section 260A appeals before hearing on merits

In an appeal under Section 260A of the Income-tax Act, the High Court must first determine whether a substantial question of law arises, formulate that question, and then hear the parties only on that basis. Hearing the appeal on merits without prior formulation, and framing the question only while preparing judgment, is inconsistent with the statutory scheme and procedurally invalid. The Supreme Court set aside the impugned judgment and remanded the matter for reconsideration in accordance with law.

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Issues: Whether the High Court complied with the mandatory procedure under Section 260A of the Income-tax Act, 1961 by first formulating a substantial question of law and then hearing the appeal only on that question.

Analysis: An appeal under Section 260A lies only on a substantial question of law. The High Court must first satisfy itself that such a question arises, formulate it, and then hear the respondent on that formulated question. The hearing on merits without prior formulation of a substantial question of law, followed by formulation during preparation of the judgment, was contrary to the statutory scheme. The procedure under Section 260A is akin to the discipline governing second appeals, where admission and formulation of the substantial question of law are prerequisites to merits hearing.

Conclusion: The High Court did not follow the mandatory procedure under Section 260A; the impugned judgment was set aside and the matter was remanded for reconsideration in accordance with law.

Ratio Decidendi: In an appeal under Section 260A of the Income-tax Act, 1961, the High Court must first determine and formulate the substantial question of law before hearing the appeal on merits; disposal without following that sequence is procedurally invalid.

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