6 DCIT vs. Pepsi Foods Ltd. (2021) 433 ITR 295 (SC)
Stay – Stay of recovery of demand pending disposal of appeal by the Income Tax Appellate Tribunal – The third proviso to section 254(2A) of the Income-tax Act, introduced by the Finance Act, 2008, is both arbitrary and discriminatory and therefore liable to be struck down as offending Article 14 of the Constitution of India – Consequently, the third proviso to section 254(2A) 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
The respondent-assessee, an Indian company incorporated on 24th February, 1989, was engaged in the business of manufacture and sale of concentrates, fruit juices, processing of rice and trading of goods for exports. The assessee was a group company of the multinational Pepsico Inc., a company incorporated and registered in the USA. It merged with Pepsico India Holdings Pvt. Ltd. w.e.f. 1st April, 2010 in terms of a scheme of arrangement duly approved by the Punjab and Haryana High Court. On 30th September, 2008, a return of income was filed for the assessment year 2008-2009 declaring a total income of Rs. 92,54,89,822. A final assessment order was passed on 19th October, 2012 which was adverse to the assessee.
Aggrieved by this order, the assessee filed an appeal before the Income Tax Appellate Tribunal on 29th April, 2013. On 31st May, 2013 a stay of the operation of the order of the A.O. was granted by the Tribunal for a period of six months. This stay was extended till 8th January, 2014 and continued being extended until 28th May, 2014. Since the period of 365 days as provided in section 254(2A) was to end on 30th May, 2014 beyond which no further extension could be granted, the assessee, apprehending coercive action from Revenue, filed a writ petition before the Delhi High Court on 21st May, 2014 challenging the constitutional validity of the third proviso to section 254(2A). By a judgment dated 19th May, 2015, the Delhi High Court struck down that part of the third proviso to section 254(2A) 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 Supreme Court noted that the genesis of the stay provision contained in section 254 was in the celebrated judgment of this Court in Income Tax Officer vs. M.K. Mohammed Kunhi (1969) 2 SCR 65. In this judgment, section 254, as originally enacted, came up for consideration before this Court. After setting out section 254(1), the Supreme Court referred to Sutherland, Statutory Construction (3rd Edn., Articles 5401 and 5402) and then held that the power which has been conferred by the said section on the Appellate Tribunal with the widest possible amplitude must carry with it, by necessary implication, all powers incidental and necessary to make the exercise of such power fully effective. The Supreme Court recognised that orders of stay prevent the appeal, if ultimately successful, from being rendered nugatory or futile, and are granted only in deserving and appropriate cases.
The Supreme Court further noted that this judgment was followed for many decades, the Appellate Tribunal granting stay without being constrained by any time limit.
However, by Finance Act, 2001 (w.e.f. 1st June, 2001), two provisos were introduced to section 254(2A) to provide that where, in an appeal filed by the assessee, the Appellate Tribunal passes an order granting stay, the Tribunal shall hear and decide such appeal within 180 days from the date of passing such order granting stay, failing which the stay granted shall be vacated after the expiry of the aforesaid period.
Realising that a hard and fast provision which was directory so far as the disposal of appeal was concerned, but mandatory so far as vacation of the stay order was concerned, would lead to great hardship, the Legislature stepped in again and amended section 254(2A) vide Finance Act, 2007 (w.e.f. 1st June, 2007), to further provide that where such an appeal is not disposed of within the aforesaid period of stay, the Appellate Tribunal may extend the period of stay or pass an order of stay for a further period or periods as it thinks fit where the delay in disposing the appeal is not attributable to the assessee; however, the aggregate period of the stay originally allowed and the period or periods subsequently extended in any case shall not exceed 365 days.
The Supreme Court noted that the aforementioned provision (as amended by the Finance Act, 2007) became the subject matter of challenge before the Bombay High Court in Narang Overseas Pvt. Ltd. vs. ITAT (2007) 295 ITR 22. The Bombay High Court, after referring to the judgment in Mohammed Kunhi (Supra), held that Parliament clearly intended that such appeals should be disposed of at the earliest. However, the object was not to defeat the vested right of appeal in an assessee, whose appeal could not be disposed of not on account of any omission or failure on his part, but either the failure of the Tribunal or the acts of Revenue resulting in non-disposal of the appeal within the extended period as provided. The High Court then referred to the judgment of this Court in Commissioner of Customs & Central Excise vs. Kumar Cotton Mills (2005) 13 SCC 296, which dealt with a similar provision contained in the Central Excise Act, 1944, namely, section 35C(2A), and then held that the third proviso has to be read as a limitation on the power of the Tribunal to continue interim relief in a case where the hearing of the appeal has been delayed for acts attributable to the assessee.
Further, the Court pointed out that close on the heels of this judgment, section 254(2A) was again amended, this time by the Finance Act, 2008 (w.e.f. 1st October, 2008), to provide that the aggregate period originally allowed and the period or periods so extended or allowed shall not, in any case, exceed 365 days even if the delay in disposing of the appeal is not attributable to the assessee.
The Supreme Court also noted that the amended provision came to be considered by a Division Bench of the Delhi High Court in Commissioner of Income Tax vs. M/s Maruti Suzuki (India) Ltd. (2014) 362 ITR 215. The constitutional validity of the said provision had not been challenged, as a result of which the Delhi High Court interpreted the third proviso to section 254(2A) as follows:
(i) In view of the third proviso to section 254(2A) of the Act substituted by the Finance Act, 2008 with effect from 1st October, 2008, the Tribunal cannot extend stay beyond the period of 365 days from the date of the first order of stay.
(ii) In case default and delay is due to a lapse on the part of the Revenue, the Tribunal is at liberty to conclude hearing and decide the appeal, if there is likelihood that the third proviso to section 254(2A) would come into operation.
(iii) The third proviso to section 254(2A) does not bar or prohibit the Revenue or Departmental representative from making a statement that they would not take coercive steps to recover the impugned demand and, on such statement being made, it will be open to the Tribunal to adjourn the matter at the request of the Revenue.
(iv) An assessee can file a writ petition in the High Court pleading and asking for stay and the High Court has power and jurisdiction to grant stay and issue directions to the Tribunal as may be required. Section 254(2A) does not prohibit / bar the High Court from issuing appropriate directions, including granting stay of recovery.
The Supreme Court further noted that close upon the heels of the judgment in Maruti Suzuki (Supra), the Gujarat High Court in DCIT vs. Vodafone Essar Gujarat Ltd. (2015) 376 ITR 23, while disagreeing with the view taken in Maruti Suzuki (Supra), interpreted the third proviso to section 254(2A) and held that the extension of stay beyond the total period of 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction of the learned Appellate Tribunal and on an application made by the assessee-appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant-assessee.
Coming to the impugned judgment in M/s Pepsi Foods Ltd. vs. ACIT (2015) 376 ITR 87, the Supreme Court noted that it dealt with the challenge to the constitutional validity of the third proviso to section 254(2A) as amended by the Finance Act, 2008. The Delhi High Court, after setting out the Bombay High Court judgment in Narang Overseas (Supra), and then referring to the previous judgment of the Delhi High Court in Maruti Suzuki (Supra), held that the 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. Therefore, 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.
The object that appeals should be heard expeditiously and that assessees should not misuse the stay orders granted in their favour by adopting delaying tactics is not at all achieved by the provision as it stands. On the contrary, the clubbing together of ‘well-behaved’ assessees 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. The said expression introduced by the Finance Act, 2008 is, therefore, struck down as being violative of Article 14 of the Constitution of India. This would revert us to the position of law as interpreted by the Bombay High Court in Narang Overseas (Supra). Consequently, it was held that where the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to grant extension of stay beyond 365 days in deserving cases.
The Supreme Court, after referring to a plethora of judgments, held that there can be no doubt that the third proviso to section 254(2A), 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. First and foremost, as has correctly been held in the impugned judgment, 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 those who are not so responsible. This is a little peculiar in that the Legislature itself has made the aforesaid differentiation in the second proviso to section 254(2A), making it clear that a stay order may be extended up to a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee. 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 as far as the assessee is concerned. The object sought to be achieved by the third proviso to section 254(2A) is without doubt the speedy disposal of appeals in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary. Since the object of the third proviso 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, is liable to be struck down as violating Article 14 of the Constitution of India. Besides, 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.
The Supreme Court concluded that the law laid down by the impugned judgment of the Delhi High Court in M/s Pepsi Foods Ltd. (Supra) was correct. As a consequence, the judgments of the various High Courts which followed the aforesaid declaration of law are also correct. Consequently, the third proviso to section 254(2A) 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.
