Article analyses recent Supreme Court Judgment in the case of DCIT Vs Pepsi Foods Ltd. in which while deciding the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961 it was held by SC that Any order of stay shall stand vacated after the expiry of the period or periods mentioned in the Section only if the delay in disposing of the appeal is attributable to the assessee.

Legal Provisions in question

Section 254(2A) 01-06-2001 01-06-2007 01-10-2008 01-04-2020
Ist Proviso ITAT to dispose off appeal with in 180 days from the date of stay order Period of Stay Order not to exceed 180 days   No stay without Pre Deposit of 20% of demand
2nd Proviso After 180 days stay order stands vacated Further extension of stay allowed subject to aggregate extension of 365 days, if delay not attributable to assesse No extension without pre deposit of 20% of demand
3rd Proviso NIL Stay to stand vacated after 180 days/365 days Stay to stand vacated after 180 days/365 days even if delay is not attributable to assesse  

1. Supreme Court in M.K. Muhammed Kunhi had laid down that “….in our opinion the Appellate Tribunal must be held to have the power to grant stay as incidental or ancillary to its appellate jurisdiction………….”

2. Bombay High Court in Narag Overseas 295 ITR 22 quoting Commissioner of Customs & Central Excise v. Kumar Cotton Mills [2005] 13 SCC 296 laid down on 3rd proviso (before amendment w.e.f. 01-10-2018) that  the proviso as it stood could really have not have stood the test of non-arbitrariness as it would result in an appeal being defeated even if the assessee was not at fault, as in the meantime the revenue could proceed against the assets of the assessee.

3. Amended 3rd Proviso was considered by Division Bench of the Delhi High Court in Commissioner of Income-tax v. Maruti Suzuki India Ltd. 362 ITR 21 where constitutionality of 3rd proviso was not challenged. Court held that

a) tribunal does not have power to grant stay beyond 365 days.

b) If lapse is on part of revenue, tribunal could conclude hearing and decide.

c) Alternately revenue can plead that it shall not take coercive action and at request of revenue, tribunal could adjourn.

d) Alternately assesse could approach High Court. 3rd proviso does not bind high Court.

4. Gujrat High Court in Vodafone Essar Gujrat Ltd. 376 ITR 23, differed with Delhi High Court in Maruti Suzuki and held that 3rd proviso does not limit the powers of tribunal to grant stay beyond 365 days. High Court advised tribunal to maintain register of appeals in which stay has been granted fully and/or partially and the appeals in which no stay has been granted.

5. Delhi High Court in Pepsi Foods Ltd. v.ACIT [2015] 376 ITR 87 dealt with constitutionality of 3rd proviso to section 254(2A), held “……………The intention of the legislature, which has been made explicit by insertion of the words – ‘even if the delay in disposing of the appeal is not attributable to the assessee’- renders the right of appeal granted to the assessee by the statute to be illusory for no fault on the part of the assessee…………..”

 6. Observations of Supreme Court in Pepsi Foods Ltd. 

a) The petitioners are correct in their submission that unequals have been treated equally. Assessees who, after having obtained stay orders and by their conduct delay the appeal proceedings, have been treated in the same manner in which assessees, who have not, in any way, delayed the proceedings in the appeal. The two classes of assessees are distinct and cannot be clubbed together. This clubbing together has led to hostile discrimination against the assessees to whom the delay is not attributable. It is for this reason that we find that the insertion of the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’- by virtue of the Finance Act, 2008, violates the non-discrimination clause of Article 14 of the Constitution of India.

b) Ordinarily, the Appellate Tribunal, where possible, is to hear and decide appeals within a period of four years from the end of the financial year in which such appeal is filed. It is only when a stay of the impugned order before the Appellate Tribunal is granted, that the appeal is required to be disposed of within 365 days. So far as the disposal of an appeal by the Appellate Tribunal is concerned, this is a directory provision. However, so far as vacation of stay on expiry of the said period is concerned, this condition becomes mandatory so far as the assessee is concerned.

c) The object sought to be achieved by the third proviso to Section 254(2A) of the Income-tax Act is without doubt the speedy disposal of appeals before the Appellate Tribunal in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary, as has been felicitously held inNagpur Improvement Trust  Vithal Rao [1973] 3 SCR 39 as under:

It is now well-settled that the State can make a reasonable classification for the purpose of legislation. It is equally well-settled that the classification in order to be reasonable must satisfy two tests: (i) the classification must be founded on intelligible differentia and (ii) the differentia must have a rational relation with the object sought to be achieved by the legislation in question. In this connection it must be borne in mind that the object itself should be lawful. The object itself cannot be discriminatory, for otherwise, for instance, if the object is to discriminate against one section of the minority the discrimination cannot be justified on the ground that there is a reasonable classification because it has rational relation to the object sought to be achieved.”

d) Instances of provisions held discriminatory and arbitrary under article 14

Suraj Mall Mohta and Co. v. A.V. Visvanatha Sastri [1955] 1 SCR 448 Court struck down Section 5(4) of the Taxation on Income (Investigation Commission) Act, 1947 on the ground that the procedure prescribed was substantially more prejudicial and more drastic to the assessee than the procedure contained in the Indian Income-tax Act, 1922
Kunnathat Thatehunni Moopil Nair v. State of Kerala [1961] 3 SCR 77 Uniform tax called “basic tax” levied under the provisions of the Travancore Cochin Land Tax Act, 1955 was held to be discriminatory as it treated unequals equally. Under the Act in question we shall take a hypothetical case of a number of persons owning and possessing the same area of land. One makes nothing out of the land, because it is arid desert. The second one does not make any income, but could raise some crop after a disproportionately large investment of labour and capital. A third one, in due course of husbandry, is making the land yield just enough to pay for the incidental expenses and labour charges besides land tax or revenue. The fourth is making large profits, because the land is very fertile and capable of yielding good crops. Under the Act, it is manifest that the fourth category, in our illustration, would easily be able to bear the burden of the tax. The third one may be able to bear the tax. The first and the second one will have to pay from their own pockets, if they could afford the tax. If they cannot afford the tax, the property is liable to be sold, in due process of law, for realisation of the public demand. It is clear, therefore, that inequality is writ large on the Act and is inherent in the very provisions of the taxing section. It is also clear that there is no attempt at classification in the provisions of the Act. Hence, no more need be said as to what could have been the basis for a valid classification. It is one of those cases where the lack of classification creates inequality.
Union of India v. A. Sanyasi Rao [1996] 3 SCC 465 Court struck down Section 44-AC of the Income-tax Act as being discriminatory when only particular trades were singled out for discriminatory treatment, reliefs under sections 28 to 43-C of the Income Tax Act being denied only to such trades. This was done as the denial of such relief had no nexus to the object sought to be achieved by the legislation and resulted in unfairness, arbitrariness and denial of equality of treatment
Shayara Bano v. Union of India [2017] 9 SCC 1 It was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14

Revenue put forth Bhopal Sugar Industries Ltd. [1964] 6 SCR 846. In this case, the judgment of Supreme Court held that if the statute discloses a permissible policy of taxation, the Courts will uphold it. However Court in present case held that , the expression “permissible” policy of taxation would refer to a policy that is constitutionally permissible. If the policy is itself arbitrary and discriminatory, such policy will have to be struck down [Para 22]

Language of 3rd Proviso to S.254(2A) modified by Supreme Court

The third proviso to Section 254(2A) of the Income-tax Act will now be read without the word “even” and the words “is not” after the words “delay in disposing of the appeal {para 25]

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 assesse

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