Introduction
The three-judge bench of Supreme Court of India in the case of Deputy Commissioner of Income Tax v. M/S Pepsi Foods Ltd struck down the third proviso of Section 254(2A) of Income Tax Act (Act) as unconstitutional and violative of Article 14 of the Constitution of India on account of being arbitrary and discriminatory in nature. The proviso provided that the stay order granted by the Income Tax Appellate Tribunal (ITAT) on the recovery or assessment of income tax from the assessee would automatically stand vacated which was ordered while the proceedings were going on in ITAT to protect the assessee from any authoritative action of the Income Tax Department while the case is sub-judice before it. The proceedings could be delayed for maximum number of 365 days, and if it there is delayed beyond that, then the stay order would be suspended even if the assessee is not responsible for the delay in proceedings.
Examining the Legal Framework
The hierarchy of the tax litigation in India is that the disputes at the first level are addressed by the Income Tax Commissioner (Appeals), then by the Income Tax Appellate Tribunal and then by the High Court and the Supreme Court if the question is related to the interpretation of a legal or constitutional provision under the Income Tax Act.
The power of ITAT to grant stay order has been subject to numerous litigations in the past. This power was not granted to the ITAT in the Act as introduced in 1961. It was only in the case of Income Tax Officer v Mohammed Kunhi that the Apex Court noted that Income Tax Authorities have wide and express powers under Section 220(6) of the Act to grant a stay on the demand of the income tax when the case is sub-judice before the Commissioner of Income Tax (Appeals). The Apex Court also held that ITAT must have powers under Section 254(1) of the Act to grant a stay order on collection or assessment of the Income Tax if the matter is sub-judice before the ITAT.
Following this judgment, amendments were made in the Act by various Finance Acts namely in the years 1998, 2001 and 2007. The Finance Act of 1998 did not confer any express power to the ITAT to grant stay on the assessment and collection of Income Tax if the matter is not disposed of by the ITAT, but it provided for the levy of fees on the application of stay. Later in the Finance Act of 2001, two provisos were introduced to Section 254(2A) of the Act which made it compulsory for the ITAT to dispose of the appeal within 180 days of filing, failure of which would result in vacation on the grant of stay on the income tax assessment. Further the Finance Bill 2007 was introduced which entered three provisos to Section 254(2A). The first proviso empowered the ITAT, to grant stay on assessment for 180 days with liability to dispose the proceedings within the set time frame. Second proviso further extended the duration of stay order if it deemed fit but in no case could it extend it more than 365 days.
The third proviso stated that the stay order shall be vacated automatically after the expiry of 365 days and there is no solution given in case the appeal is not disposed of even if it was not the fault of assessee.
Factual Matrix
The factual matrix in the M/s Pepsi Food Ltd. case pertained to filing income tax return in 2008 and receiving an assessment order adverse to the assessee in 2012. The assessee company filed an appeal challenging the order in the same year. A stay order was granted; however, no further actions were taken up till 2014. Feared by facing a coercive action by the Revenue Department after the end of 365 days as mentioned under Section 254(2A) of the Act, the assessee company filed a writ petition challenging the constitutional validity of the section before the Delhi High Court in May 2014. A year later in May 2015, Delhi High Court partly annulled the third proviso to Section 254(2A) which did not permit extension of the stay order. The judgement was challenged in the Hon’ble Supreme Court that upheld the Delhi High Court judgement.
The article examines the grounds on which the said provision was challenged and the impact it will offer in the future.
Article 14 vis a vis Taxation
The judgement was challenged on the grounds of constitutional validity under Article 14 of the Constitution. The two dimensions of Article 14 in its application to legislation and for rendering legislation valid are –(i) intelligible differentia, (ii) reasonable nexus, i.e., such differentia must have a relation with the object sought to be achieved. Legislation will be termed invalid if it contravenes Article 14. The third proviso of section 254(2A) allowed automatic vacation order which was opposed to principles of equality. It can be argued that tax statute should be defined literally and not mechanically as greater freedom is given qua non tax legislation. The same was held by the Hon’ble Supreme Court stipulating that equity or taxation hardship should not be considered while determining tax liability.
We need to consider that if the taxing statute is applied uniformly on the same class of property, persons, etc. then it contravenes Article 14 meaning thereby that law-abiding assessee prompt in proceedings were treated in the same manner as assesses who obtained stay orders to delay the appeal proceedings. The two classes were different in conduct and cannot be treated similarly. The Bombay High Court in Narang Overseas Private Limited v. Income Tax Appellate took into consideration the incongruous interpretation of the third proviso to Section 254(2A) and mentioned that if a different approach was adopted, the Tribunal would have been granted with the power to extend the stay beyond the period of 365 days, provided the delay was not attributable to the assessee.
In the past, Section 44-AC of the Act was struck down as arbitrary when only particular trades enjoyed advantages of exemptions. The clubbing together of two classes is itself violative of law as unequals cannot be treated as equals under any circumstance. It has been duly acknowledged by the courts that ‘no man should suffer because of the fault of the court or delay in procedure’ and even the taxing statute should fulfill the reasonableness.
Therefore, striking down the discriminatory taxation proviso to section 254(2A) which led to the denial of equity, arbitrariness is beneficial to the assessee who had no responsibility in delaying proceedings.
Impact of the judgment on Tax Litigation and Tax-Payers in India
The global giant, Pepsi Co. stood to its slogan‘change the game’ and truly changed the income tax provision. These issues were of vital importance as many innocent assesses were affected and later were compelled by the revenue department. The welcoming amendment specified that taxation laws need not be equitable, however, after obtaining the stay order, the provisions need to be unbiased. The removal of capricious proviso will affect the assessee and revenue department equally, who under the garb of this provision availed benefit. One of the main reasons for inserting this proviso was the speedy disposal of appeals in the Appellate Tribunal. However, in some cases, the appeal was automatically vacated as Tribunal was over burdened with cases and could not take up the matter in time. Consequent to this judgement, it is hoped that tribunals will hear the appeals expeditiously and the revenue department will not resort to delaying tactics. This judgement will not only prevent the honest assesse from arbitrary actions of tax authorities but will also keep a check on abuse of power through judicial medium by the tax authorities.
(Article is Jointly Authored by Simran Sabharwal and Varun Singh)
Author Bio
