Powers of the Tribunal to stay demand proceedings beyond 365 days

“….it has been observed that many assessees file appeals to the Tribunal only to obtain stay of demand and avoid payment of justified taxes. In order to discourage this practice, and ensure speedier collection of outstanding tax, the Act has amended Section 254…”

However, the language used by the legislature to introduce the proviso to section 254(2A) was subject to various interpretations by the judicial forums in the following decisions:

• Subhadra (B) vs. ITO (2005)(272 ITR 100)(Hyd.)(AT);
• Centre for Women’s Development Studies vs. DDIT (257 ITR 60)(Del)(AT);
• Anuradha Timber Estates vs. DCIT (282 ITR 59)(Hyd) (AT), etc

While the language of the proviso to section 254(2A) achieved its object, it created hardships for those assessees who had genuine reasons for stay of demand. They were subjected to unjustified and unreasonable recovery proceedings.

The said insertion of proviso to section 254(2A), however, did not limit the powers of the Tribunal to pass fresh orders of stay on expiry of 180 days. In order to address the said anomaly, the Legislature substituted the aforesaid proviso vide Finance Act, 2007 with the following three new provisos to section 254(2A):

• First Proviso—After considering the merits of application of stay arising in the appeal, the Tribunal shall pass orders of stay and dispose the appeal within a period of 180 days;

• Second Proviso—If the appeal is not disposed of within a period of 180 days, then the Tribunal may extend the period of stay or pass an order of stay for further period or periods as it thinks fit, provided the Tribunal is satisfied that delay in disposing of the appeal is not attributable to the assessee, pursuant to the application so moved before the Tribunal by the assessee on expiry of aforesaid 180 days of stay; and

• Third Proviso—The period of stay originally allowed and/or extended as above shall not exceed 365 days and the Tribunal shall dispose of the appeal within the said original and/or extended period, which if not disposed would vacate stay of demand on expiry of the said period.

However, the Bombay High Court in the case of Narang Overseas (P) Ltd vs. ITAT and Ors (295 ITR 22), relying upon the decision of the apex court in the case of CCE vs. Kumar Cotton Mills (P) Ltd. (180 ELT 434) [judgment delivered while considering similar provisions on powers of Tribunal to stay demand under the Indirect Tax Laws] held that the third proviso to section 254(2A) so inserted vide the Finance Act, 2007 cannot be construed as limitation on the powers of the Tribunal to grant interim relief even if the delay in disposal of appeal is not attributable to acts of the assessee.

Pursuant to the aforesaid observations, the third proviso to section 254(2A) was again amended vide the Finance Act, 2008 to address the said interpretation, by specifically clarifying that the order of stay by the Tribunal shall stand vacated after 365 days from the date of initial stay, even if the delay in disposing the appeal is not attributable to the assessee.

The impugned proviso of section 254(2A) as amended vide the Finance Act, 2008 has since then been subject to different interpretations by judicial forums on the powers of Tribunal to stay demand beyond a period of 365 days from the date of initial stay. One finds that the issue of whether the Tribunal has powers to stay demand beyond 365 days can be divided into three parts:

1. Determination of powers of the Tribunal under the Act;
2. Constitutional validity of third proviso to section 254(2A) of the Act; and
3. Whether third proviso to section 254(2A) is mandatory or directory

1. Determination of powers of the Tribunal under the Act:

At the outset, reliance is placed on the decision of the apex court in the case of ITO vs. M.K.Mohammed Kunhi (71 ITR 815), wherein the court made the following specific observations w.r.t. powers of the Tribunal under the Act:

“….The right of appeal is a substantive right and questions of fact or law are at large and are open to review by the Tribunal. …The powers which have been conferred by section 254 on the Tribunal with widest possible amplitude must carry with them by necessary implication all powers and duties incidental and necessary to make the exercise of those powers fully effective… It is well known that the Tribunal is not [a] Court but it exercises judicial powers. The Tribunal’s powers in dealing with appeals are of the widest amplitude and have in some cases been held similar to and identical with the powers of an appellate Court under the CPC…”

The above decision holds that while the Tribunal is not a Court, it has judicial independence and in certain cases even has powers similar and identical to an appellate Court as provided in the Civil Procedure Code. The question which then arises is can the legislature impose conditions and/or limit the said powers of the Tribunal to provide stay on demand proceedings?

On study of relevant decisions which are set out later, the following characteristics of the right of appeal emerge:

• The right of appeal is not a natural or inherent right and cannot be assumed unless expressly given by the statute;

• Right of appeal is neither an absolute right nor an ingredient of natural justice;

• The appeal is a creation of a statute and therefore subject to the conditions imposed by the statute;

However, the aforesaid plenary powers of the legislature to impose conditions in regard to the right to appeal are subject to certain limitations, which are as under:

• The conditions imposed and/or specified have to be in relation to the assessee as something which is required to be complied with by the assessee. But where the assessee has no control or say, then the said provisions cannot be sustained;

• An appeal is the right of entering a superior court and invoking its aid and interpretation to redress the error of the court below; anything which pares down this very right, carving the kernel out, it violates the provision creating the right;

• Appeal is a remedial right and if remedy is reduced to a husk of procedural excess, and

• The law does not compel a man to do that which he cannot possibly perform (lex non cogit ad impossibilia) and an Act of the Court shall prejudice no man (actus curiae neminem gravabit).

The aforesaid relevant legal propositions were observed in the following decisions while opining on the powers of the legislature to impose subjective conditions of prepayment of deposit of disputed tax and/ or penalty and/or its waiver thereof for entertaining the appeals before the Tribunal under the respective statutory acts, which are as under:

• Vijay Prakash D. Mehta and Jawahar D. Mehta vs. Collector of Customs, Bombay (AIR 1988 SC 2010);
• Seth Nand Lal & Anr. vs. State of Haryana & Ors. (AIR 1980 SC 2097);
• Emerald International Ltd. vs. State of Punjab and Ors. (122 STC 382)(P&H)(FB);
• Anant Mills Co. Ltd vs. State of Gujarat & Ors. (AIR 1975 SC 1234);
• Sita Ram and Others vs. State of UP (AIR 1979 SC 745);
• Raj Kumar Dey and Others vs. Tarpada Dey and Others (1987)(4 SCC 398);
•    PML Industries Ltd vs. Commissioner of Central Excise (2013)(30 STR 113) (P&H); etc.

So, while the legislature has plenary powers to impose conditions on the Tribunal in regard to the right of appeal, it is equally true that conditions so imposed cannot be so unreasonable or onerous that they violate the exercise of said right of appeal itself. On application of aforesaid principles to the issue under consideration:

•    Firstly, the assessee’s right for grant of stay is subjected to functioning of the Tribunal to pass final orders on appeal within the period of stay, over which the assessee has no control;

•    The assessee shall not have right for grant of stay beyond a prescribed period, if the Tribunal cannot pass final orders within period of stay, for no fault of the assessee;

•    The cause and effect relationship are prejudicial to the assessee; and

•    The assessee will not be granted stay of demand beyond the prescribed period, even though on merits he deserves and has a genuine case of stay.

Therefore, one may conclude that the conditions imposed by the legislature vide the provisos to section 254(2A) seriously affect right of appeal of the Tribunal which includes right to stay demand beyond the prescribed period.

2.    Constitutional validity of the third proviso to section 254(2A) of the Act

The constitutional validity of the third proviso to section 254(2A) of the Act was under challenge in the case of Jethmal Faujimal Soni vs. ITAT & Ors. (333 ITR 96)(Bom); however, it was not adjudicated upon on account of request by the department to instead give directions for expeditiously disposing the appeal, which was accepted by the court.

However, in the case of Narang Overseas (supra), the court, while considering the powers of the Tribunal to grant stay of demand, made the following relevant observations w.r.t. constitutional validity of the provisos to section 254(2A) of the Act, which is as under:

“…..The mischief if and at all was the long delay in disposing of proceedings where interim relief had been obtained by the assessee. The second proviso as it earlier stood could really have not 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 regarded nugatory in cases where the assessee was not at fault.”

[Emphasis supplied]

So, the High Court in very clear terms held that any arbitrary conditions imposed to defeat the right of appeal for no fault of the assessee would regard it as unconstitutional.

Recently, CBEC issued Circular No. 967/01/2013 dated 1st January 2013, with similar conditions as present under consideration. The said Circular provides for initiating recovery proceedings against the assessee if no stay was provided by the relevant appellate authority within the prescribed period of filing an appeal. The said conditions in the Circular on being challenged before various courts, was decided in favour of the assessee by either reading down the said onerous conditions of the Circular; or setting aside the said provisions of the Circular with specific observations that no recovery proceedings shall be initiated in cases where there is no fault of the assessee; or providing interim stay of demand:

•    Larsen & Toubro Ltd. vs. Union of India and Others (2013)(29 STR 449)(Bom.);

•    Manglam Cement Ltd. vs. Superintendent, Central Excise and Ors. (86 DTR 215)(Raj);

•    Gujarat State Fertilizers Co. Ltd. vs. UOI through Secretary and Others (86 DTR 176)(Guj.);

•    PML Industries Ltd. vs. CEC (supra); and

•    Ultratech Cement Ltd. vs. Union of India and Others (W.P. No. 736 of 2013) dated 9th January, 2013

In light of the above discussions, it is possible that the third proviso to section 254(2A) may fail to pass the test of constitutional validity and the courts may decide to read down the provisions to mean that the Tribunal has powers to order stay of demand even beyond 365 days from the date of initial stay, provided there is no fault of the assessee in the disposal of appeal.

3.    Whether the third proviso to section 254(2A) is mandatory or directory:

Alternatively, without going into the constitutional validity of the impugned provisos, one may urge that the said provision is directory in nature. It is a well-settled position that if a provision is mandatory then an act done in breach thereof will be invalid, but if it is directory then the act will be valid although the non-compliance may give rise to some other conse-quences. Even a complete non-compliance of a directory provisions has been held in many cases as not affecting the validity of act done in breach thereof.

On perusal of the relevant decisions on the subject, the following tests, (which are by no means exhaustive) have been applied by the courts to determine as to whether a provision is mandatory or directory:

•    Generally, the intent of the legislature is of paramount importance and not the language of the provision in which the intent is clothed;

•    The meaning and intention of the legislature are to be ascertained by considering its nature, its design, and the consequences which would follow from construing it one way or the other;

•    The phraseology of the provisions is not by itself a determinative factor. The use of the word “shall” or “may” respectively, would ordinarily indicate imperative (mandatory) or directory character, but not always;

•    Whether non-compliance with the provision would render the entire proceedings invalid or not;

•    When consequences of nullification on failure to comply in a particular manner is provided by the statute itself, then such statutory requirement must be interpreted as mandatory;

•    If the object of the enactment will be defeated by holding the provision directory, it will be construed as mandatory, whereas if by holding it mandatory serious inconvenience will be caused to innocent persons without furthering the object of enactment, the same will be construed as directory;
 

•    The provision enacted is generally regarded as mandatory, if the language of the provision is clothed in a negative form. Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statute imperative;

•    When the provisions of statute relate to performance of a public duty and the case is such that to hold null and void acts done in neglect of this duty would cause serious inconvenience or injustice to persons who have no control over those entrusted with the duty and at the same time would not promote the main object of the legislature, it has been the practice of the courts to hold such provisions to be directory;

•    When a public authority is required to do a certain thing, within a specified period, the same is ordinarily directory; however, it is equally provided that when consequences for inaction on part of the statutory authority within the specified time is expressly provided, it must be held imperative; and

•    When mandatory and directory requirements are lumped together in a provision, then in such a case, if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non-compliance of directory requirements;

The relevant decisions which were considered in order to list down the aforesaid legal propositions are as under:

•    M/s. Delhi Airtech Services Pvt Ltd. and Anr vs. State of UP and Anr. (2011)(9 SCC 354);
•    May George vs. Special Tahsildar & Ors. (2010)(13 SCC 98);
•    Bhavnagar University vs. Palitana Sugar Mills Pvt Ltd. (2003)(2 SCC 111);
•    Balwant Singh vs. Anand Kumar Sharma (2003)(3 SCC 433); etc.

On the touchstone of the aforesaid principles, if the provisions of section 254(2A) are to be determined as to whether they are a mandatory or directory provision, one may infer as under:

•    Legislative history suggests that the main intention of the provision was to discourage practice of those assessees who used to defer the payment of justified taxes for months or years under the garb of stay of demand till disposal of appeal by the Tribunal and to ensure speedier collection of said taxes;

•    A Tribunal being a public functionary takes a decision on the final appeal and interim application for stay of demand and it is not within the powers and control of the assessee. The provisions of section 245(2A) relate to performance of public duty. So, on failure of the Tribunal to dispose of the appeal within the period of stay would cause serious general inconvenience or injustice to assessees who have no control over those entrusted with the duty;

•    The third proviso to section 254(2A) has caused serious inconvenience to the public (assesses), since the provisions provide for automatic vacation of stay of demand and thereby initiation of recovery proceedings, for even those who have genuine case and/or at no fault for delay in disposal of appeals; and

•    Section 254(2A) alongwith provisos thereof are not clothed in a negative form, barring use of negative words w.r.t. expiry of period for disposing of orders.

In light of the above, it may be urged that section 254(2A) read with provisos, are lumped together with both mandatory and directory conditions. The mandatory condition being the Tribunal has to decide on merits the assessee’s application for stay of demand, thereby reflecting substantial compliance with the provisions. The condition of disposing stay granted appeal within a prescribed period as being a directory condition.

Therefore, in view of the above, one can conclude that the Tribunal has powers to pass order for stay on merits even on expiry of prescribed period, provided the delay in disposal of appeal in not on account of the assessee.

For the sake of completeness, it would be necessary to mention that in the case of CIT vs. Ecom Gill Trading Pvt Ltd. (2012)(74 DTR 241)(Kar), the Court considering the provisions of section 254(2A), has held that the Tribunal has no powers to grant stay of demand for a period exceeding 365 days from the date of initial stay. The High Court has based its conclusions on the following important findings:

•    The Tribunal which is the creature of the statute should abide by the statutory provisions in letter and spirit and the introduction of third proviso to the Finance Act, 2008 makes it abundantly clear that the purpose is to ensure that order of stay of demand has no effect after the period of 365 days from the date of initial stay; and

•    None of the decisions of the Bombay High Court viz., Narang Overseas (supra), CIT vs. Ronuk Industries (333 ITR 99), have any significance or an impact on the amendment brought about by the third proviso to section 254(2A) vide the Finance Act, 2008.

These findings of the High Court to hold otherwise have either been addressed in detail in the aforesaid paragraphs and/or can be distinguished. In addition to the above, the following are the decisions of various other judicial forums, wherein it has been held that the Tribunal has powers to stay demand beyond 365 days from the date of initial stay under section 254(2A):

•    CIT vs. Ronuk Industries (supra);

•    Tata Communications Ltd vs. ACIT (130 ITD 19) (Mum)(SB);

•    Vodafone West Ltd. vs. ACIT (S.A. No. 86,87/ Ahd/2012 arising out of ITA No. 386 and 387/ Ahd/ 2011) dated 11th January 2013; and

•    Qualcomm Incorporated vs. ADIT (S.A. No. 177 to 183/Del/2012 arising from ITA No. 3696 to 3702/
Del/2012) dated 28th September 2012

The aforesaid decisions are not discussed in detail, as they have either followed the decisions discussed in detail above and/or no new observations are made therein.

Based on the aforesaid averments, one may argue that Tribunals have powers to stay demand proceedings even beyond 365 days; however, it shall be equally necessary to remind oneself of the observations of the apex court in the case of ITO vs. M.K.Mohammed Kunhi (supra), which read as under:

“A certain apprehension may legitimately arise in the minds of the authorities administering the Act that, if the Tribunal proceeds to stay recovery of taxes or penalties payable by or imposed on the assesses 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 Tribunal. It is needless to point 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.”