The Calcutta High Court has clarified an important principle concerning the powers of the Income Tax Appellate Tribunal (ITAT). The Court held that the Tribunal cannot make payment of litigation costs a condition for a taxpayer to exercise the statutory right to have an appeal decided on merits. It also cannot provide that failure to pay such costs will automatically revive or confirm an adverse appellate order.
The judgment was delivered on 7 August 2026 by a Division Bench comprising Justice Rajarshi Bharadwaj and Justice Uday Kumar in Ajitnath Suppliers Private Limited v. The Principal Commissioner of Income Tax-I, Kolkata & Ors., ITAT No. 120 of 2026.
Background of the Case
The dispute arose from the assessment proceedings of Ajitnath Suppliers Private Limited for Assessment Year 2018-19. The company had originally filed its income tax return declaring a total income of approximately ₹34.97 lakh, which was initially processed under Section 143(1) of the Income Tax Act.
Subsequently, the Income Tax Department initiated reassessment proceedings after receiving information alleging that certain Kolkata-based entities were involved in providing accommodation entries.
During reassessment proceedings, the Assessing Officer examined an unsecured loan of ₹1.23 crore received by the company from Excellent Infrabuild Private Limited. The assessment was ultimately completed ex parte, and the entire loan amount was treated as unexplained cash credit under Section 68 of the Income Tax Act.
This resulted in a substantial tax demand of approximately ₹1.82 crore.
Appeal Before CIT(A) Dismissed Ex Parte
Aggrieved by the assessment order, the company approached the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (CIT(A), NFAC).
However, the first appeal was also dismissed ex parte. According to the company, it had not been provided an adequate opportunity to present its case and explain the disputed loan transaction.
The company therefore approached the ITAT, Kolkata.
The Tribunal accepted the grievance regarding the denial of an effective opportunity of hearing. It consequently remanded the matter to the CIT(A) for fresh adjudication.
However, the ITAT imposed a condition while granting the relief. It directed the company to deposit ₹1 lakh as costs with the Legal Aid Services, High Court, Calcutta, within 60 days.
More significantly, the Tribunal directed that if the amount was not deposited within the stipulated period, the adverse order of the CIT(A), including the addition of ₹1.23 crore under Section 68, would automatically stand confirmed.
The company was unable to deposit the amount within the prescribed period, citing financial difficulties and cash-flow constraints.
Calcutta High Court Examines ITAT’s Power
The company challenged the ITAT’s direction before the Calcutta High Court under Section 260A of the Income Tax Act.
The High Court also considered the company’s delay of 154 days in filing the appeal and condoned the delay after being satisfied with the explanation. The Court took into consideration factors including corporate formalities, board approvals, the winter vacation and the time required for obtaining legal advice.
On the substantive issue, the High Court found that the ITAT had erred in attaching such a serious consequence to non-payment of costs.
The Court emphasised that once the Tribunal had itself concluded that the taxpayer was denied a proper opportunity of hearing, the appropriate course was to restore the matter for fresh adjudication. The right to such an adjudication could not be made conditional upon payment of costs.
Costs Cannot Defeat the Right of Appeal
The High Court recognised that the ITAT possesses powers under Section 254(1) to pass appropriate orders while deciding appeals. However, such powers cannot be exercised in a manner that effectively defeats a substantive statutory right available to a litigant.
According to the Court, costs may be imposed to address procedural defaults, delays or other lapses. However, non-payment of such costs cannot automatically result in dismissal of the appeal or confirmation of an adverse assessment order.
The Court also noted that the company had placed banking records and corporate documents relating to the disputed loan transaction on record. The question of whether the amount was properly explained under Section 68 required examination of facts and evidence by the CIT(A).
Therefore, the merits of the addition could not be conclusively determined through a coercive default mechanism.
High Court Reduces Costs and Removes Automatic Confirmation
The Calcutta High Court modified the ITAT’s order dated 23 June 2025, passed in ITA No. 334/Kol/2025.
The Court reduced the costs imposed on the company from ₹1 lakh to ₹25,000. More importantly, it completely quashed the direction that non-payment of the costs would automatically result in confirmation of the CIT(A)’s order.
The matter was restored to the CIT(A) for fresh and unhindered adjudication on merits. The company was directed to deposit ₹25,000 within four weeks and submit proof of payment before the CIT(A).
The appellate authority was directed to pass a reasoned order within 12 weeks.
The Court further protected the taxpayer from immediate recovery action by directing the Revenue not to take coercive recovery measures concerning the demand arising from the ₹1.23 crore addition until the fresh appellate decision was passed.
Key Takeaway for Taxpayers
The judgment reinforces an important principle of tax litigation: procedural costs cannot be converted into a mechanism for extinguishing a taxpayer’s substantive right to appellate adjudication.
Where a Tribunal finds that an assessee was denied a proper opportunity of hearing, the focus should be on ensuring a fair reconsideration of the dispute. While reasonable costs may be imposed, failure to pay them cannot automatically revive an adverse order or deprive the taxpayer of an opportunity to contest the assessment on merits.
The ruling is therefore significant for taxpayers and tax professionals dealing with ITAT proceedings, Section 68 additions, principles of natural justice, appellate remedies and recovery of disputed tax demands.
Case Details
Case Title: Ajitnath Suppliers Private Limited v. The Principal Commissioner of Income Tax-I, Kolkata & Ors.
Case No.: ITAT 120 of 2026
ITAT Order: 23 June 2025, ITA No. 334/Kol/2025
Court: Calcutta High Court
Judgment Date: 7 August 2026
Bench: Justice Rajarshi Bharadwaj and Justice Uday Kumar
For the Appellant: Amit Agarwal and Tabbish Wasi, Advocates
For the Respondent: Prithu Dudhoria, Advocate
Key Provisions: Sections 68, 254(1) and 260A of the Income Tax Act