In a decision that will grant relief to the appellant in this case (Pepsi Foods Ltd.) an many other taxpayers in India, the Supreme Court has recently held that the automatic vacation of a stay order, by an Income Tax Appellate Tribunal Order, that has exceeded 365 days is unconstitutional. In holding so, the Supreme Court has partially struck down a part of Section 265 (2A) of the Income Tax Act,1961 and upholds that the stay order cannot be vacated unless the delays are caused by the Assessees.
In a decision that will grant relief to the appellant in this case (Pepsi Foods Ltd.) and many other taxpayers in India, the Supreme Court recently held that the automatic vacation of a stay order, by an Income Tax Appellate Tribunal Order (‘ITAT’), that has exceeded 365 days is unconstitutional. In holding so, the Supreme Court has partially struck down a part of Section 265 (2A) of the Income Tax Act,1961 (‘ITA’), and upholds that the stay order cannot be vacated unless the delays are caused by the Assessees.
This Supreme Court holding is an important decision as it has reinforced that tax laws that are discriminatory or arbitrary can be struck down as being violative of Article 14 of the Constitution.
Following are the brief facts of the case:
The Assessees argued that the right to appeal includes the right to obtain a stay, and this right should not be violated by vacating such orders when the delays for hearing the dispute have not been caused by them.
The Assessees relied on the argument that Section 254 (2A) of the ITA was violative of Article 14 of the Constitution as vacating an order of stay due to the expiry of 365 days was arbitrary, and that the State should not be allowed to shelter under a policy or provision that is arbitrary or discriminatory. Hence, they contended that the taxing statute in question was discriminatory and relied on previous judgments to show that such discriminatory taxing statutes should be struck down under Article 14 of the Indian Constitution on the basis of arbitrariness.
Section 254 of the ITA laid down the powers of the ITATs with regard to passing appellate orders. Within this by way of an amendment via The Finance Act, 2017, the appellate tribunal was allowed to hear and decide such appeals within a time period of four years from the financial year when the appeal was filed.
However, Section 254(2A) was also subject to the following three provisos:
Hence, the addition of provisos meant that in any event if the appeal was not decided within the extended period of stay of maximum up to three hundred and sixty-five days, then the order of stay would be automatically vacated. This order of stay would be vacated regardless of whether the delay in deciding the matter had been caused by the appellants or not. The effect caused by this third proviso was the section in contention under this and a few other similar cases. The Assessees all argued that a provision allowing the stay to be automatically vacated beyond three hundred and sixty-five days when the Assessees were not the reason for the delay, would be prima face arbitrary and discriminatory. They also further argued that the same law cannot be applied between two unequal classes, in the sense that an unequal classification was being made between the assessees in the second proviso and the Assessees in the third proviso.
The Assessees in the second proviso are not granted an extension on the order of stay if the delays in hearing the appeals are caused due to disruptions from the Assessees, but the stay is still vacated in the third proviso even if the delays are not caused by the Assesses. Hence, they argued that this third proviso had to be struck down under Article 14 of the Constitution since unequal classes under the law cannot be treated equally.
The Supreme Court held that the third proviso to Section 254(2A) of the ITA was both arbitrary and discriminatory and had to be struck down as unconstitutional. Unequal classes are being treated equally under the third proviso, as no differentiation is being made between the assessees who might be responsible for causing delays in the hearings and the assessees who do not. The legislative intent is clear from the second proviso, as the extension is not provided in the event that the delay is attributable to the Appellants.
The disposal of an appeal is a directory provision as the appeal has to be disposed of within 365 days only when the appeal has been granted. But when it comes to the automatic vacation of the stay order, this becomes a mandatory provision. The Court holds that the object of Section 254(2A) is the speedy disposal of cases, but the object cannot come at the cost of being discriminatory to the appellants.
Furthermore, the Court held that as precedents have held, if a tax law was imposed with the object of differentiating between people that are similarly circumstanced, it would be liable to be struck down.
The Court finally held that the third proviso to Section 254(2A) of the ITA will only be read without the words ‘even’ and ‘is not’ after ‘delay in disposal of an appeal’. Orders of stay by ITAT will only stand vacated if the expiry of the period mentioned therein is due to a delay that is attributable to the appellants or assessees in disposing of the appeal.
The clarity brought in by the Pepsi Foods case will no doubt bring relief to taxpayers, as delays in the proceedings cannot be used as a tactic by the assessing officers to receive an automatic vacation order. Assessees should however be careful that the delay in the proceedings is not caused due to their actions or actions attributable to them.
While this judgment may have brought some clarity for taxpayers, Section 254(2A) has also been further amended by the Finance Act, 2020 which could cause further litigation. The 2020 amendment introduced two more provisos to Section 254(2A). These were:
This amendment underlines the legislative intent that the stay granted by ITAT should not extend beyond a year. While the judgment in Pepsi Foods is not contrary to this provision, it is possible that this could lead to disputes for taxpayers. At the moment, proviso 3 to Section 254(2A) of the ITA has been struck down and so the stay order by ITATs that have extended beyond a year will not be automatically vacated, as long as the delays are not attributable to the taxpayers.