The Supreme Court upheld the Delhi High Court’s verdict of partially striking down a provision of the Income Tax law which did not permit extension of a stay on tax assessment beyond 365 days even if the assessee is not responsible for delay in hearing of appeals before a tribunal by terming it as “arbitrary and discriminatory”.
The appeals raised an important question as to the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961.
The Respondent-assessee, M/s Pepsi Foods Ltd. is an Indian company and is engaged in the business of manufacture and sale of concentrates, fruit juices, processing of rice and trading of goods for exports. The assessee is a group company of the multi-national Pepsico Inc., a company incorporated and registered in the United States of America. The assessee-company merged with Pepsico India Holdings Pvt. Ltd., in terms of a scheme of arrangement duly approved by the Punjab and Haryana High Court. A return of income was filed for the assessment year 2008-2009 declaring a total income of INR92,54,89,822. A final assessment order was passed which was adverse to the assessee.
Aggrieved by the aforesaid order, the assessee filed an appeal before the ITAT wherein a stay of the operation of the order of the assessing officer was granted by the Tribunal for a period of six months. This stay was extended. Since the period of 365 days as provided in Section 254(2A) of the Income Tax Act was to end on May 30, 2014 beyond which no further extension could be granted, the assessee, apprehending coercive action from the Revenue, filed a writ petition before the Delhi High Court challenging the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act.
By a judgment dated May 19, 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. It is this judgment and several other judgments from various High Courts that have been challenged by the revenue in these appeals.
The three-judge bench including Justice RF Nariman, Justice BR Gavai, and Justice Hrishikesh Roy noted that the proviso treats unequal equally where no differentiation is made between the assessee who is responsible for the delay and the ones who are not responsible for the delay.
“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 up to a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee,” the top court observed.
The apex court stated that the objective of the third proviso to Section 254 (2A) sought to be achieved which aims at speedy disposal of appeals before the Appellate Tribunal in cases where a stay has been granted in favour of the assessee.
“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, in the sense pointed out above, is 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,” the court observed.
The Court said that 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 25 proviso is also manifestly arbitrary being a provision that is capricious, irrational, and disproportionate so far as the assessee is concerned.
The Apex Court said, “We have already seen how unequal 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. Also, the expression “permissible” policy of taxation would refer to a policy that is constitutionally permissible. If the policy is itself arbitrary and discriminatory, such policy will have to be struck down.”
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