Introduction
In the current bureaucratic setup of taxation systems in India, the right to appeal is an important right. The right of appeal against the Orders by the Income Tax authorities under the Income Tax Act, 1961 (‘Act’) has been expressly conferred on the taxpayers. In disposing of these appeals, the appellate authorities have inherent power to grant stay against the tax demands raised by Income Tax officers.
The power to grant stay by the Income Tax Appellate Tribunal (‘Tribunal’) has been subject to numerous litigations. In many cases, before the introduction of specific provisions in Section 254 of the Act concerning grant of stay by the Tribunal, the Courts have held that the Tribunal has inherent power to grant a stay against the recovery of income tax demand. Recently, the Supreme Court in DCIT v. Pepsi Foods Ltd.[1] examined the power of the Tribunal to grant stay, as well as certain amendments which provided for automatic vacation of stay granted by the Tribunal. This article analyses the legislative history in the matter of grant of stay by the Tribunal with the help of notable judicial precedents.
Legislative history and judicial precedents
The Act, as introduced in 1961, did not explicitly conferred any power with the Tribunal to grant stay against the recovery of income tax demand. The genesis of power to grant stay by the Tribunal flows from the judgement of the Apex Court in ITO v. M.K. Mohammed Kunhi[2], wherein, the Court noted that the income tax authorities do have express powers under Section 220(6) of the Act to grant stay against the income tax demand when the matter is sub-judice before the Commissioner of Income Tax (Appeals). However, the said power cannot be exercised if the challenge to assessment is pending before the Tribunal. Considering the wide amplitude of powers granted to Tribunal under Section 254(1) of the Act, to pass such orders as it thinks fit, the Court held that the Tribunal must be held to have the power to grant stay as incidental or ancillary to its appellate jurisdiction. The exercise of such power is subject to condition that a strong prima facie case is made out, to grant stay.
This landmark decision paved the way for legislative amendments, which were introduced more than three decades later.
For the first time, the Finance (No. 2) Act, 1998, inserted sub-section (7) to Section 253 of the Act, providing for levy of fees on the application for stay of demand. Though this amendment did not expressly confer any power to grant stay onto the Tribunal, yet it somewhere recognised the inherent power of the Tribunal in granting stay.
The principal amendments relating to grant of stay by the Tribunal, were introduced vide Finance Act, 2001 w.e.f. 1 June 2001, which introduced two provisos to Section 254(2A) of the Act. These provisos added an obligation upon the Tribunal to dispose of an appeal within 180 days of the grant of stay, failing which, the stay order shall stand vacated at the end of the period. The Memorandum to the Finance Bill, 2001 states that in many cases, such stays granted by the Tribunal on recovery of demand till the disposal of appeal, makes the demand irrecoverable for several months or even years. Thus, the amendment was brought about to shore up revenue collection which was stuck due to these stay orders.
Thereafter, the Finance Act, 2007 substituted the provisos inserted by the Finance Act, 2001 and inserted three provisos to Section 254(2A). Under the ‘First proviso’, the Tribunal could grant stay for 180 days coupled with liability to dispose of the appeal in such time period. However, if the appeal could not be disposed of within 180 days for reasons not attributable to the assessee, then the ‘Second proviso’ provided that the Tribunal may extend the period of stay for further period, as it thinks fit, but the aggregate period of stay (original 180 days + further period of stay) shall not, in any case, exceed 365 days. The Tribunal was again made duty-bound to dispose of appeal during the existence of stay period. Again, if the appeal could not be disposed of within this extended period, the ‘Third proviso’ provided that the order of stay shall stand vacated after the expiry of such period. This proviso was silent as to whether the non-disposal of appeal is due to reasons attributable to the assessee or not.
Thus, by putting an embargo on the power of Tribunal in granting stay for limited number of days, the legislature put in jeopardy those assessee’s who were not at fault in non-disposal of appeal by the Tribunal within the existence of stay period. Further, a question also arose that owing to the 2nd proviso where the stay could not be extended beyond 365 days, could the interpretation of the 3rd proviso curtail the Tribunal’s inherent power to grant stay beyond 365 days. This question assumed more significance when the delay in disposing of the appeal was not attributable to the assessee.
The above noted question came up for consideration before the Bombay High Court, in Narang Overseas Pvt. Ltd. v. ITAT[3]. The Court observed that the mischief sought to be curtailed by the Legislature was the long delay in disposing of proceedings where interim relief had been obtained by the assessee. The Court thus held that it would not be possible to hold that even though there is a vested right of appeal, there is no power to continue the grant of interim relief granted to the assessee for no fault of his, and thereby divesting the incidental power of the Tribunal to continue the interim relief. The Court held that such a reading would result in such an exercise being rendered unreasonable and violative of Article 14 of the Constitution.
Thus, the Court effectively bifurcated the situation in two parts:
- Where the delay in disposal of appeal was not due to any fault of the assessee, the stay granted would not be vacated even after the expiry of 365 days;
- Where the delay in disposal of appeal could be attributed to the actions of the assessee, the stay would automatically vacate on the expiry of 365 days.
To overcome the above judgement, the Finance Act, 2008 replaced the then existing 3rd Proviso, to now provide that the stay would be vacated at the expiry of 365 days even if the delay in disposing of the appeal was not attributable to the assessee. This amendment then led to a plethora of litigation.
When the above amendment, came up for consideration before the High Court of Delhi, in CIT v. Maruti Suzuki (India) Ltd.[4], the Court, without examining the constitutionality of the provisions, held that the Tribunal has no power to extend stay beyond 365 days. But, the assessee can approach the High Court by way of writ petition under Article 226 of the Constitution of India wherein the High Court has power to grant stay and issue directions to the Tribunal, as may be required. In a subsequent decision, the High Court of Gujarat in DCIT v. Vodafone Essar Gujarat Ltd.[5] disagreed with the above view and held that the Tribunal can extend stay granted earlier beyond period of 365 days from date of grant of initial stay, on being subjectively satisfied that delay in disposing of appeal within a period of 365 days was not attributable to assessee, and that assessee was not at fault. It recommended that the registrar of the Tribunal maintain separate registers for stay granted matters and give them priority in disposal.
For the first time, the constitutional validity of these provisions was challenged before the High Court of Delhi in Pepsi Foods Ltd. v. ACIT[6]. The Court upheld the challenge and struck down the amendments made the Finance Act, 2008 as being violative of Article 14 of the Constitution of India. Aggrieved by this order, the Revenue filed an appeal in the Supreme Court.
Supreme Court on the constitutional validity of the amendment
Firstly, as to whether provisions of tax statues can be challenged under Article 14 of the Constitution of India, the Supreme Court held that challenges to tax statutes under Article 14 can be on grounds relatable to discrimination as well as grounds relatable to manifest arbitrariness, either on procedural or substantive grounds. The Court referred to a recent Constitution Bench Decision in the case of Shayara Bano v. Union of India[7] wherein the Court set out the test of manifest arbitrariness. The Court had held:
“Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary.”
On both the parameters, the SC found the amendments brought in by Finance Act, 2008 to be both arbitrary and discriminatory and, therefore, liable to be struck down as offending Article 14.
The SC further held that vide the amendment, un-equals were treated equally in that no differentiation was made by the third proviso between the assessees who were responsible for delaying the proceedings and assessees who were not so responsible. It observed that object sought to be achieved by the third proviso to Section 254(2A) of the Act is speedy disposal of appeals before the Tribunal in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary[8].
Further, the SC held that the provision is capricious, irrational and disproportionate so far as the assessee is concerned since it unfairly penalizes the assessee even where the appeal could not be taken up for fault of the Tribunal or even if the revenue was itself responsible for the delay in hearing the appeal. This would give rise to a situation wherein the revenue itself adopts delaying tactics and thereafter would be unjustly rewarded by automatic vacation of stay.
The Revenue 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, relying on certain decisions[9] of the SC itself. However, relying upon paragraphs within those very judgements, the SC held that a taxing statute may contravene Article 14 of the Constitution of India if it seeks to impose upon the same class of property, persons, etc., something which leads to obvious inequality.
The SC thus upheld the impugned order of the Delhi High Court and struck down the word ‘even’ and the words ‘is not’ after the words ‘delay in disposing of the appeal’ in the third proviso to Section 254(2A) as arbitrary and discriminatory, violative of Article 14 of the Constitution.
Further challenges
While the decision of the SC is a panacea for many assessee’s, the challenges do not end with this decision. The Finance Act, 2020 has again made certain amendments to Section 254 of the Act and introduced more conditions and limitation to the power of the Tribunal in grant of stay of recovery of demand. The amendments introduced a new condition that the Tribunal could only grant stay of recovery subject to the condition that the assessee deposits twenty percent of the amount demanded by the Revenue. Further, it has amended the second proviso to incorporate the aforementioned condition, while retaining the period for which the stay may be granted.
These amendments reveal the intent of the legislature to curb the Tribunal’s unconditional power to grant stay and with this decision of the SC, stand at variance with the judicial declaration of the legal position.
Further, the Department has lately been relying upon the decision of the Supreme Court in Asian Resurfacing of Road Agency Pvt. Ltd. v. CBI[10] to hold that any stay order granted by the High Court or Tribunal will automatically stand vacated if it is not extended by a speaking order of that Court. Relying upon this decision, notices have been sent to multiple assessees for recovery of demand and resumption of proceedings which were stayed by the High Courts.
The High Court of Bombay in Oracle Financial Services Ltd. v. DCIT[11] has however held that the decision of the SC in the Asian Resurfacing case cannot be applied in the context of tax matters, since the decision clearly mandates that stay granted in civil/criminal proceedings would be vacated, and not stay granted in quasi-judicial matters. Even with this decision of the Bombay HC, the impact of the decisions of the SC in Asian Resurfacing case read with the decision in Pepsi Foods is likely to lead to further challenges and another judicial contest appears imminent.
Conclusion
As the Legislature keeps interfering with the power of Tribunal to grant stay, it appears that the Tribunal can no longer exercise its independence in granting complete stay even where the assessee is able to satisfy the three ingredients for seeking a stay, being a prima facie case, balance of convenience and financial / genuine hardship. Even in cases where the issue in appeal is covered in favour of the assessee, the Tribunal would have no option, but to direct the assessee to pay 20%, thereby causing unnecessary financial hardship on the assessees. The only recourse in those cases would be to approach the High Court under Article 226 of the Constitution of India.
[The author is an Associate, Direct Tax Team, Lakshmikumaran & Sridharan Attorneys, Mumbai]
[1] [2021] 126 taxmann.com 69 (SC)
[2] [1969] 2 SCR 65 (SC)
[3] [2007] 295 ITR 22 (Bom.)
[4] [2014] 362 ITR 215 (Del)
[5] [2015] 376 ITR 23 (Guj)
[6] [2015] 376 ITR 87 (Del), the impugned judgement
[7] [2017] 9 SCC 1 (SC)
[8] Nagpur Improvement Trust v. Vithal Rao [1973] 3 SCR 39
[9] State of M.P. v. Bhopal Sugar Industries Ltd. [1964] 6 SCR 846, N. Venugopala Ravi Varma Rajah v. Union of India [1969] 1 SCC 681
[10] Criminal Appeal No. 1375-76/2013 (SC)
[11] W.P. No. 542/2019
