Can’t treat unequals equally; No automatic vacation of stay under Section 254(2A) Proviso 3 of the Income Tax Act, 1961 if the assessee is not responsible for the delay: Supreme Court

Supreme Court: Dealing with an important question as to the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961, the 3-judge bench of RF Nariman*, BR Gavai and Hrishikesh Roy, JJ has held 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.

Section 254 (2A) of the Income Tax Act states that “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”

However, the third proviso provides 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 assessee.”

By a judgment dated 19.05.2015, the Delhi High Court struck down that part of the third proviso to Section 254(2A) of the Income Tax Act which did not permit the extension of a stay order beyond 365 days even if the assessee was not responsible for delay in hearing the appeal. The Revenue, hence, challenged the said judgment and several other judgments from various High Courts holding the same.

The Delhi High Court, in it’s judgment, held that

“Unequals have been treated equally so far as assessees who are responsible for delaying appellate proceedings and those who are not so responsible, resulting in a violation of Article 14 of the Constitution of India.”

Agreeing to the said reasoning, the Supreme Court added,

“This is a little peculiar in that the legislature itself has made the aforesaid differentiation in the second proviso to Section 254(2A) of the Income Tax Act, making it clear that a stay order may be extended upto a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee.”

It was further explained that 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.

“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…”

The Court, hence, concluded:

  • Since the object of the third proviso to Section 254(2A) of the Income Tax Act is the automatic vacation of a stay that has been granted on the completion of 365 days, whether or not the assessee is responsible for the delay caused in hearing the appeal, such object being itself discriminatory, was held liable to be struck down as violating Article 14 of the Constitution of India.
  • Also, the said proviso would result in the automatic vacation of a stay upon the expiry of 365 days even if the Appellate Tribunal could not take up the appeal in time for no fault of the assessee.
  • Further, 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.

Hence, partially upholding the validity of the third proviso to Section 254(2A) of the Income Tax Act, the Court held that the same will now be read without the word “even” and the words “is not” after the words “delay in disposing of the appeal”. Therefore, 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.

[Deputy Commissioner of Income Tax v. Pepsi Foods Ltd., 2021 SCC OnLine SC 283, decided on  06.04.2021]


*Judgment by Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Revenue: ASG Bikarma Banerjee

For Assessees: Senior Advocate Ajay Vohra and Advocates Himanshu S. Sinha, Deepak Chopra and  Sachit Jolly

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