Supreme Court rules on validity of Section 254(2A) of Income Tax Act in stay order cases (06 April 2021)

Date of the Judgment: 06 April 2021
Citation: 2021 INSC 185
Judges: Justice Rohinton Fali Nariman, Justice B.R. Gavai, and Justice Hrishikesh Roy.

Can an Income Tax Appellate Tribunal (ITAT) automatically vacate a stay order if an appeal isn’t decided within 365 days, even if the delay isn’t the assessee’s fault? The Supreme Court of India recently addressed this critical question concerning the validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961. The Court’s decision clarifies the powers of the ITAT regarding stay orders in tax appeals, impacting both taxpayers and the revenue department.

This judgment, delivered by a three-judge bench comprising Justice Rohinton Fali Nariman, Justice B.R. Gavai, and Justice Hrishikesh Roy, settles a conflict arising from differing interpretations of the third proviso to Section 254(2A) by various High Courts. The core issue revolves around whether the automatic vacation of stay orders after 365 days, regardless of the reasons for delay, is constitutionally valid.

Case Background

The case of Deputy Commissioner of Income Tax & Anr. v. M/s Pepsi Foods Ltd. (now Pepsico India Holdings Pvt. Ltd.) is representative of the facts in all the appeals before the Supreme Court. The respondent, an Indian company incorporated on 24 February 1989, is involved in manufacturing and selling concentrates, fruit juices, and processing rice, as well as trading goods for export. It is a group company of Pepsico Inc., a multinational corporation based in the United States.

The company merged with Pepsico India Holdings Pvt. Ltd. on 1 April 2010. For the assessment year 2008-2009, the assessee filed a return on 30 September 2008, declaring a total income of INR 92,54,89,822. A final assessment order was passed on 19 October 2012, which was unfavorable to the assessee. Aggrieved, the assessee appealed to the Income Tax Appellate Tribunal (ITAT) on 29 April 2013.

On 31 May 2013, the ITAT granted a stay on the assessment order for six months. This stay was extended until 8 January 2014 and subsequently until 28 May 2014. As the 365-day limit under Section 254(2A) of the Income Tax Act was to expire on 30 May 2014, the assessee, anticipating coercive action from the Revenue, filed a writ petition in the Delhi High Court on 21 May 2014. The assessee challenged the constitutional validity of the third proviso to Section 254(2A), which did not allow for an extension of a stay order beyond 365 days, even if the assessee was not responsible for the delay in hearing the appeal.

The Delhi High Court, in its judgment dated 19 May 2015, struck down the part of the third proviso to Section 254(2A) that prohibited the extension of a stay order beyond 365 days when the assessee was not at fault. This judgment, along with similar judgments from other High Courts, was challenged by the revenue in the present appeals before the Supreme Court.

Timeline:

Course of Proceedings

The assessee, M/s Pepsi Foods Ltd., initially received an adverse assessment order from the assessing officer. Aggrieved by this order, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT initially granted a stay of the assessment order, which was extended multiple times.

However, the assessee, anticipating that the stay would be automatically vacated after 365 days as per Section 254(2A) of the Income Tax Act, even if the delay in the appeal was not attributable to them, filed a writ petition before the Delhi High Court. The Delhi High Court ruled in favor of the assessee, striking down the part of the third proviso to Section 254(2A) that did not permit the extension of a stay order beyond 365 days if the assessee was not responsible for the delay.

The revenue then filed appeals before the Supreme Court against the Delhi High Court’s decision and similar judgments from other High Courts.

Legal Framework

The core legal provision at the heart of this case is Section 254(2A) of the Income Tax Act, 1961, which deals with the powers of the Income Tax Appellate Tribunal (ITAT) to pass orders, including stay orders, in appeals. The section has been amended several times, each amendment altering the conditions under which stay orders could be granted and extended.

Initially, Section 254(2A) did not have any time limits for stay orders. However, the Finance Act, 2001 introduced two provisos, limiting the stay to 180 days, after which it would automatically be vacated. This was amended by the Finance Act, 2007, which allowed for an extension of the stay up to 365 days if the delay in disposing of the appeal was not attributable to the assessee.

The Finance Act, 2008, further amended the provision by adding the third proviso, which stated that the stay order would stand vacated after 365 days, even if the delay was not attributable to the assessee. This third proviso became the subject of the constitutional challenge in this case.

The Supreme Court also considered the constitutional implications of these provisions, particularly Article 14 of the Constitution of India, which guarantees equality before the law and prohibits discriminatory treatment. The Court examined whether the third proviso, in its operation, violated the principles of equality and non-arbitrariness.

The relevant provisions of the Income Tax Act, 1961 are:

• Section 254(2A): “In every appeal, the Appellate Tribunal, where it is possible, may hear and decide such appeal within a period of four years from the end of the financial year in which such appeal is filed under sub-section (1) or sub-section (2) of section 253:”
• First Proviso to Section 254(2A): “Provided that the Appellate Tribunal may, after considering the merits of the application made by the assessee, pass an order of stay in any proceedings relating to an appeal filed under sub-section (1) of section 253, for a period not exceeding one hundred and eighty days from the date of such order and the Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order:”
• Second Proviso to Section 254(2A): “Provided further that where such appeal is not so disposed of within the said period of stay as specified in the order of stay, the Appellate Tribunal may, on an application made in this behalf by the assessee and on being satisfied that the delay in disposing of the appeal is not attributable to the assessee, extend the period of stay, or pass an order of stay for a further period or periods as it thinks fit; so, however, that the aggregate of the period originally allowed and the period or periods so extended or allowed shall not, in any case, exceed three hundred and sixty-five days and the Appellate Tribunal shall dispose of the appeal within the period or periods of stay so extended or allowed:”
• Third Proviso to Section 254(2A): “Provided also that if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee.”

Arguments

The arguments presented before the Supreme Court can be broadly categorized into those made by the revenue and those made by the assessees.

Arguments by the Revenue:

• The revenue, represented by the learned ASG, argued that there is no inherent right to a stay order in an appellate proceeding. A stay is a discretionary remedy granted by the appellate court, and the legislature can regulate or even take away this right.
• The revenue contended that once the discretion to grant a stay has been exercised, it does not imply that automatic extensions should be granted. The revenue argued that the legislature has the power to impose a time limit on stay orders.
• The revenue argued that Article 14 of the Constitution should not be applied mechanically to tax legislation, emphasizing that the state has greater freedom in tax matters. As long as the state has a valid policy and does not single out any individual, no discrimination can be claimed.
• The revenue argued that equitable considerations and arguments based on hardship are irrelevant in tax statutes, which must be interpreted literally.

Arguments by the Assessees:

• The assessees, represented by various Senior Advocates and Advocates, argued that once a stay order is granted based on a strong prima facie case, it should not be automatically vacated without considering whether the assessee is responsible for the delay in the appellate proceedings.
• The assessees contended that the right to appeal includes the right to obtain a stay, which cannot be vacated without any fault on the part of the appellant. They argued that the third proviso to Section 254(2A) is arbitrary and discriminatory because it treats assessees who are not at fault the same as those who are.
• The assessees argued that the state cannot use a “policy” as a shield if the statutory provision is itself arbitrary or discriminatory. They cited judgments to show that discriminatory taxation has been struck down under Article 14.
• The assessees argued that while equitable considerations might not be relevant in interpreting a tax statute, they are important when challenging the constitutional validity of a provision.

The innovativeness of the arguments lay in the assessees’ strong reliance on the constitutional principles of equality and non-discrimination, challenging the automatic vacation of stay orders as being arbitrary and violative of Article 14.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether the third proviso to Section 254(2A) of the Income Tax Act, 1961, which mandates the automatic vacation of a stay order after 365 days, even if the delay in disposing of the appeal is not attributable to the assessee, is constitutionally valid?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered a range of authorities to arrive at its decision. These authorities are categorized based on the legal points they address:

Cases and Books Cited:

Legal Provisions Considered:

• Section 254(2A) of the Income Tax Act, 1961: Deals with the powers of the Appellate Tribunal to pass orders, including stay orders.
• Article 14 of the Constitution of India: Guarantees equality before the law and prohibits discriminatory treatment.

Judgment

The Supreme Court analyzed the submissions made by both the revenue and the assessees, as well as the various authorities cited, to arrive at its decision.

The Court also analyzed how it viewed the authorities:

• Income Tax Officer v. M.K. Mohammed Kunhi [CITATION]: The Court relied on this case to establish that the power to grant stay is incidental to the appellate jurisdiction of the Tribunal.
• Narang Overseas Pvt. Ltd. v. ITAT [CITATION]: The Court agreed with the Bombay High Court’s interpretation that the power to grant stay is inherent and not defeated by the provisos to the sub-section.
• Commissioner of Customs & Central Excise v. Kumar Cotton Mills [CITATION]: The Court used this case to support the view that the power to grant stay is inherent and not defeated by the provisos to the sub-section.
• Mardia Chemicals Ltd. v. Union of India [CITATION]: The Court referred to this case to highlight that conditions for the exercise of the right of appeal should not be so onerous as to render the right illusory.
• Shayara Bano v. Union of India [CITATION]: The Court used this case to highlight that legislation can be challenged if it is manifestly arbitrary.
• Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta [CITATION]: The Court used this case to show that the word “mandatorily” could be struck down from a provision.

The Supreme Court ultimately held that the third proviso to Section 254(2A) of the Income Tax Act, as amended by the Finance Act, 2008, was both arbitrary and discriminatory and, therefore, liable to be struck down as offending Article 14 of the Constitution of India. The Court struck down the words “even if the delay in disposing of the appeal is not attributable to the assessee” from the third proviso.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Discrimination: The Court found that the third proviso treated unequals equally by not differentiating between assessees who were responsible for delaying the proceedings and those who were not. This was a clear violation of Article 14 of the Constitution.
• Arbitrariness: The Court held that the automatic vacation of a stay after 365 days, regardless of the cause of delay, was manifestly arbitrary. This was because it could result in the vacation of a stay even when the assessee was not at fault or when the delay was due to the revenue or the Tribunal.
• Right to Appeal: The Court emphasized that the right to appeal, though statutory, should not be rendered illusory by unreasonable conditions. The third proviso, in itsoperation, had the potential to make the right of appeal ineffective.
• Fairness and Equity: While acknowledging that equitable considerations are not relevant in interpreting a tax statute, the Court held that they are relevant when challenging the constitutional validity of a provision. The Court found the third proviso to be unfair and inequitable in its operation.

Here’s a sentiment analysis of the Court’s reasoning:

The Court’s decision was driven by a strong sense of fairness and a commitment to upholding constitutional principles.

The ratio of fact to law considerations in the judgment is as follows:

This indicates that while the Court considered the specific facts of the case, its decision was primarily based on legal and constitutional principles.

Ratio Decidendi

The ratio decidendi of the Supreme Court’s judgment is that the third proviso to Section 254(2A) of the Income Tax Act, 1961, insofar as it mandates the automatic vacation of a stay order after 365 days, even if the delay in disposing of the appeal is not attributable to the assessee, is unconstitutional. This is because it violates Article 14 of the Constitution of India by treating unequals equally and is manifestly arbitrary.

The Court held that the power to grant a stay is incidental to the appellate jurisdiction of the Tribunal and that the right to appeal should not be rendered illusory by unreasonable conditions. The Court emphasized that while the legislature can impose time limits, these limits must not be arbitrary or discriminatory.

The Court’s decision establishes that a statutory provision cannot mandate the automatic vacation of a stay order without considering the reasons for the delay, especially when the assessee is not at fault. This ratio is binding on all courts and tribunals in India.

Obiter Dicta

While the main ratio decidendi of the case is focused on the unconstitutionality of the third proviso to Section 254(2A), the Supreme Court also made several obiter dicta, which are non-essential remarks that provide additional guidance. These include:

• Need for Expeditious Disposal of Appeals: The Court emphasized the need for the Income Tax Appellate Tribunal (ITAT) to dispose of appeals expeditiously. While the Court struck down the automatic vacation of stay orders, it recognized the importance of timely resolution of tax appeals.
• Importance of Considering Fault: The Court reiterated that when considering the extension or vacation of stay orders, the ITAT should consider whether the delay is attributable to the assessee. If the delay is not due to the assessee’s fault, the stay order should not be vacated.
• Role of the ITAT: The Court emphasized that the ITAT should exercise its powers in a fair and equitable manner, ensuring that the rights of the assessees are protected.
• Interpretation of Tax Laws: The Court reiterated that while interpreting tax laws, the literal rule of interpretation should be followed, but that constitutional principles of equality and non-discrimination must be upheld.

These obiter dicta provide valuable guidance to the ITAT and other courts in dealing with stay orders and tax appeals.

Impact of the Judgment

The Supreme Court’s judgment has significant implications for tax appeals, stay orders, and the functioning of the Income Tax Appellate Tribunal (ITAT). The key impacts are:

• Validity of Stay Orders: The judgment ensures that stay orders granted by the ITAT will not be automatically vacated after 365 days if the delay in disposing of the appeal is not attributable to the assessee. This provides relief to taxpayers who were facing coercive recovery actions despite not being responsible for the delay.
• Fairness and Non-Discrimination: The ruling upholds the principles of fairness and non-discrimination by ensuring that assessees are not penalized for delays that are not their fault. This aligns with the constitutional guarantee of equality before the law.
• Functioning of the ITAT: The judgment requires the ITAT to consider the reasons for delay when dealing with stay orders. This means that the ITAT must now exercise its powers more judiciously and must not automatically vacate stay orders without considering the fault of the assessee.
• Reduction in Litigation: The judgment is likely to reduce litigation related to stay orders, as the automatic vacation clause has been struck down. This will save time and resources for both taxpayers and the revenue department.
• Impact on Taxpayers: Taxpayers who have been granted stay orders will be protected from coercive recovery action if the delay in disposing of their appeal is not their fault. This provides much-needed relief and ensures that taxpayers are not unfairly penalized.
• Impact on Revenue Department: The revenue department must now ensure that appeals are disposed of in a timely manner. The judgment also means that the revenue department cannot rely on the automatic vacation of stay orders to enforce recovery actions against assessees who are not at fault.
• Precedent: The judgment sets a significant precedent for all cases involving stay orders and the interpretation of similar provisions in other tax laws.

In summary, the judgment ensures a more equitable and fair system for handling tax appeals and stay orders, protecting the rights of taxpayers while also promoting the efficient functioning of the ITAT.

Flowchart of the Process