- Introduction
In the current hierarchy of tax litigation, the disputes are addressed at the first level by a tax officer, the appeal against which is determined by another tax officer, albeit a senior one. The second appeal lies before a quasi-judicial tribunal, against whose orders further appeals lie only on substantial question of law before the High Court and the Supreme Court. Viewed from this perspective the Tribunal occupies an important space in the tax litigation sphere for multiple reasons. Foremost of these is the fact that the Tribunal is the first intrinsically independent forum which examines the correctness of the views and positions taken by the tax officers. Second, the Tribunal is the last fact-finding authority and its factual determinations are binding even on the High Court and Supreme Court unless they are perverse. Third, while the instructions of the tax administration are binding on the tax officers, their rigours are inapplicable to the Tribunal, thereby the Tribunal is free to take an independent view de hors the tax administration’s understanding of the law.
For these reasons, the positioning and empowerment of the Tax Tribunal becomes extremely crucial. A case to the point is the vexed question relating to the power of the Income Tax Appellate Tribunal (ITAT) to grant stay against recovery of demands confirmed by the tax officers. This article examines a recent decision of the Supreme Court, in Pepsi Foods[1], which addresses the change in the legislative scheme diminishing the empowerment of the ITAT to grant stay. On a larger perspective, this decision favours an approach whereby the taxpayers have effective remedies against the enforcement powers of the tax officers and thereby underscores the need for ensuring an empowered tax tribunal which can effectively maintain supervisory jurisdiction over the functioning of the tax authorities.
- Genesis of ITAT’s empowerment to grant
It is noteworthy that in the original statutory scheme there was no specific power conferred upon the ITAT enabling it to stay the demands against taxpayers. It was the Supreme Court’s decision in Mohd. Kunhi[2] which had read, by way of judicial construction, such powers being available with the ITAT. In that decision that declared ITAT as having the power to grant stay, in view of the statutory scheme which “impliedly grants the power of doing all such acts, or employing such means, as are essentially necessary to its execution and that the statutory power carries with it the duty in proper cases to make such orders for staying proceedings as will prevent the appeal if successful from being rendered nugatory.” The Supreme Court in Mohd. Kunhi had also laid out the parameters to be observed by ITAT while considering requests for grant of stay.[3]
- Legislative changes to the ITAT’s power to grant stay and the views of High Courts
The aforesaid scheme continued for many decades until the legislature intervened, twice, in the 2000s, first by the Finance Act, 2001 and thereafter by the Finance Act, 2007. On both occasions Section 254 of the Income Tax Act, 1961 stood amended. These changes are set out below:
Provision inserted by Finance Act, 2001
“(2-A) 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:
Provided that where an order of stay is made in any proceedings relating to an appeal filed under sub-section (1) of Section 253, the Appellate Tribunal shall dispose of the appeal within a period of one hundred and eighty days from the date of such order:
Provided further that if such appeal is not so disposed of within the period specified in the first proviso, the stay order shall stand vacated after the expiry of the said period.”
Provision substituted by the Finance Act, 2007
(2-A) 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:
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:
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:
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, the order of stay shall stand vacated after the expiry of such period or periods.”
From the aforesaid it is evident that the power of the ITAT to grant stay was severely circumscribed and multiple limitations were imposed by the legislature insofar as proceedings relating to stay of demand were concerned.
The Bombay High Court in its decision in Narang Overseas[4] acknowledged that the amended provisions “exclude the power of the Tribunal to grant interim relief after the period provided in the proviso” and went ahead to interject their untrammelled application inter alia for the following reason:
“The second proviso as it earlier stood, in a case when in an appeal interim relief was granted, if the appeal was not disposed of within 180 days provided that the stay shall stand vacated. 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. The proviso as introduced by the Finance Act, 2007 was to an extent to avoid the mischief of it being rendered unconstitutional. Once an appeal is provided, it cannot be rendered nugatory in cases were the assessee was not at fault.
Can it then be said that the intention of Parliament by restricting the period of stay or interim relief up to 360 days had the effect of excluding by necessary intendment the power of the Tribunal to continue the interim relief. Would not reading the power not to continue the power to continue interim relief in cases not attributable to the acts of the assessee result in holding that such a provision would be unreasonable. Could Parliament have intended to confer the remedy of an appeal by denying the incidental power of the Tribunal to do justice. In our opinion for reasons already discussed it would not be possible to so read it.
It would not be possible on the one hand to hold that there is a vested right of an appeal and on the other hand to hold that there is no power to continue the grant of interim relief for no fault of the assessee by divesting the incidental power of the Tribunal to continue the interim relief. Such a reading would result in such an exercise being rendered unreasonable and violative of Article 14 of the Constitution. Courts must, therefore, construe and/or give a construction consistent with the constitutional mandate and principle to avoid a provision being rendered unconstitutional.”
Unperturbed by this construct given to the incumbent provisions, another amendment was carried out to Section 254 by the Finance Act, 2008 to the effect that “if such appeal is not so disposed of within the period … 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.”
Unsurprisingly, therefore, fresh challenges were instituted before the High Courts. The Delhi High Court in Maruti[5] held that in view of the amendment, the extension of stay, if needed, could be granted by the High Court. This view was not agreed with by the Gujarat High Court in Vodafone Essar[6]. Thereafter the Delhi High Court considered challenge to constitutional validity of the provision which led to its decision (which was impugned before the Supreme Court) striking down the amendment.[7] The High Court concluded that the amendment was unconstitutional inter alia observing as under:
“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. The stay, which was available to him prior to the 365 days having passed, is snatched away simply because the Tribunal has, for whatever reason, not attributable to the assessee, been unable to dispose of the appeal. Take the case of delay being caused in the disposal of the appeal on the part of the Revenue. Even in that case, the stay would stand vacated on the expiry of 365 days. …
Furthermore, 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. … On the contrary, the clubbing together of ‘well behaved’ assesses and those who cause delay in the appeal proceedings is itself violative of Article 14 of the Constitution and has no nexus or connection with the object sought to be achieved.”
It was in the aforesaid background that the Supreme Court examined the issues relating to power of ITAT to grant stay which led to its decision in Pepsi Foods[8].
- Decision of the Supreme Court
At the outset, the Supreme Court made it clear that tax laws were not beyond the scope of examination mandated by Article 14 of the Constitution of India and even these laws could be challenged on “grounds relatable to discrimination as well as grounds relatable to manifest arbitrariness”.[9]
Agreeing with the Delhi High Court, the Supreme Court concluded that “the third proviso to Section 254(2-A) of the Income Tax Act, introduced by the Finance Act, 2008, would be both arbitrary and discriminatory and, therefore, liable to be struck down as offending Article 14 of the Constitution of India” for the following reasons:
(a) The High Court is right in stating that “unequals are treated equally in that no differentiation is made by the third proviso between the assessees who are responsible for delaying the proceedings and assessees who are not so responsible”. No doubt the “object sought to be achieved by the third proviso to Section 254(2-A) 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”.[10]
(b) The amendment is also arbitrary as it may result into awarding the defaulting party, because “vacation of stay in favour of the Revenue would ensue even if the Revenue is itself responsible for the delay in hearing the appeal. In this sense, the said proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned.”[11]
(c) The submission put forth on behalf of the tax administration is incorrect insofar as it is contended that “when Article 14 of the Constitution of India is applied to tax legislation, greater freedom in the joints must be allowed by the court in adjudging the constitutional validity of the same” because “unequals have been treated equally so far as assessees who are responsible for delaying appellate proceedings and those who are not so responsible,” which is not a “constitutionally permissible” policy. In any case,[12] even a taxing law is vulnerable to Article 14 challenge “if it seeks to impose upon the same class of property, persons, etc., something which leads to obvious inequality”.
By way of a resultant declaration and as a measure of guidance for interpretation, the Supreme Court declared that “the third proviso to Section 254(2-A) 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’. 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”.
- Changes brought about by Finance Act, 2020: Yet another battleground?
The affirmation of the decision of the Delhi High Court by the Supreme Court is a gracious balm to the taxpayers who were suffering from the harsh consequences of the stay being automatically vacated by operation of law despite there being no default at their end. The battle, however, does not stop here owing to the events which have transpired after the decision of the High Court. During the pendency of the appeal before the Supreme Court, Section 254 of the Income Tax Act was amended, yet again, with effect from 1-4-2020 by the Finance Act, 2020 to the following effect;
“99. In Section 254 of the Income Tax Act, in sub-section (2-A),—
(a) in the first proviso, after the words “from the date of such order”, the words “subject to the condition that the assessee deposits not less than twenty per cent of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act, or furnishes security of equal amount in respect thereof” shall be inserted;
(b) for the second proviso, the following proviso shall be substituted, namely:
Provided further that no extension of stay shall be granted by the Appellate Tribunal, where such appeal is not so disposed of within the said period of stay as specified in the order of stay, unless the assessee makes an application and has complied with the condition referred to in the first proviso and the Appellate Tribunal is satisfied that the delay in disposing of the appeal is not attributable to the assessee, so however, that the aggregate of the period of stay originally allowed and the period of stay so extended shall not 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.”
These amendments effectuated two changes[13] i.e. (a) adding a condition that the ITAT could grant stay only “subject to the condition” that the taxpayer concerned deposited 20% of the amount being demanded; and (b) reaffirming the earlier intent of the stay not being extended beyond one year.
These recent amendments clearly reveal the legislative aversion to ITAT’s unconditional powers to grant stay and, given the declaration in Pepsi Foods[14], stand at variance with the judicial declaration of the legal position. These are, therefore, ripe for challenge and further judicial contest appears imminent.
- Conclusion
The fact that the tide is against the taxpayer in any battle against the tax administration is undeniable. In fact a five-Judge Bench of the Supreme Court in Vatika[15] has categorically emphasised upon the need to ensure “fairness” while administering tax laws against the citizens. The denial of interim protection, albeit partially after one year, to the taxpayer despite a prima facie case and after satisfying an independent quasi-judicial forum, therefore, does not stand the test of reasonableness, as the Supreme Court has rightly concluded. It is one thing to say that the legislature desires for timely determination of appeals by the ITAT but completely differently thing to state that the taxpayers should suffer for delays in such determination even though they may not be at fault for the delay. Hopefully the decision in Pepsi Foods[16] will inspire a legislative revisit and such contests will be a thing of the past.
†Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.
[1] CIT v. Pepsi Foods Ltd., 2021 SCC OnLine SC 283.
[2] ITO v. M.K. Mohammad Kunhi, AIR 1969 SC 430 : (1969) 2 SCR 65.
[3]On this count, the Supreme Court observed, “[a] certain apprehension may legitimately arise in the minds of the authorities administering the Act that if the Appellate Tribunals proceed to stay recovery of taxes or penalties payable by or imposed on the assessees as a matter of course the revenue will be put to great loss because of the inordinate delay in the disposal of appeals by the Appellate Tribunals. It is needless to point out that the power of stay by the Tribunal is not likely to be exercised in a routine way or as a matter of course in view of the special nature of taxation and revenue laws. It will only be when a strong prima facie case is made out that the Tribunal will consider whether to stay the recovery proceedings and on what conditions and the stay will be granted in most deserving and appropriate cases where the Tribunal is satisfied that the entire purpose of the appeal will be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal.”
[4] Narang Overseas (P) Ltd. v. Income Tax Appellate Tribunal, 2007 SCC OnLine Bom 671 : (2007) 295 ITR 22 inter alia following the decision of the Supreme Court in CCE v. Kumar Cotton Mills (P) Ltd., (2005) 13 SCC 296 in context of similar powers of Customs, Excise and Service Tax Appellate Tribunal.
[5] CIT v. Maruti Suzuki (India) Ltd., 2014 SCC OnLine Del 798 : (2014) 362 ITR 215.
[6]CIT v. Vodafone Essar Gujarat Ltd., 2015 SCC OnLine Guj 6235 : (2015) 376 ITR 23.
[7] Pepsi Foods (P) Ltd. v. CIT, 2015 SCC OnLine Del 9543 : (2015) 376 ITR 87.
[9] Making reference to Suraj Mall Mohta & Co. v. A.V. Visvanatha Sastri, AIR 1954 SC 545 : (1955) 1 SCR 448; Kunnathat Thatehunni Moopil Nair v. State of Kerala, AIR 1961 SC 552 : (1961) 3 SCR 77; Union of India v. A. Sanyasi Rao, (1996) 3 SCC 465.
[10] Relying upon Nagpur Improvement Trust v. Vithal Rao, (1973) 1 SCC 500 : (1973) 3 SCR 39.
[11] Referring to Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 wherein “the word ‘mandatorily’ in the 2nd proviso inserted through an amendment made to Section 12(3) of the Insolvency and Bankruptcy Code, 2016 was struck down”.
[12] Following N. Venugopala Ravi Varma Rajah v. Union of India, (1969) 1 SCC 681.
[13] See generally, Government of India, Memorandum explaining the Provisions in the Finance Bill, 2021, available at <HERE>, p. 22.
[15] CIT v. Vatika Township (P) Ltd., (2015) 1 SCC 1.