DCIT vs. Pepsi Foods: Vacation of Stay Order

In a decision that will grant relief to the appellant in this case (Pepsi Foods Ltd.) an many other taxpayers in India, the Supreme Court has recently held that the automatic vacation of a stay order, by an Income Tax Appellate Tribunal Order, that has exceeded 365 days is unconstitutional. In holding so, the Supreme Court has partially struck down a part of Section 265 (2A) of the Income Tax Act,1961 and upholds that the stay order cannot be vacated unless the delays are caused by the Assessees.

Wed Jun 29 2022 | Recent Judgments | Comments (0)

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In a decision that will grant relief to the appellant, in this case (Pepsi Foods Ltd.) many other taxpayers in India, the Supreme Court recently held that the automatic vacation of a stay order, by an Income Tax Appellate Tribunal Order (ITAT) , that has exceeded 365 days is unconstitutional. In holding so, the Supreme Court has partially struck down a part of Section 265 (2A) of the Income Tax Act,1961 (IT Act) , and upholds that the stay order cannot be vacated unless the delays are caused by the Assesses.

This Supreme Court holding is an important decision as it has reinforced that tax laws that are discriminatory or arbitrary can be struck down as being violative of Article 14 of the Constitution.

Facts & Issues of the Case

Following are the brief facts of the case:

  • PepsiCo, the Assessed in question, is a multinational entity engaged in manufacturing and selling fruit juices, concentrates, and trading other foods substances. After being aggrieved by an order of assessment by the tax officials in the AY for 2008-2009, they had filed an appeal before the ITAT.
  • In 2013, the tax tribunal allowed a stay on the order. While the stay was first granted in May of 2013, this was extended till May of 2014.
  • Under Section 254(2A) of the ITA, a stay granted by an ITAT cannot exceed 365 days. Hence, the Assessee contested the validity of this section at the Delhi High Court alleging that it was unconstitutional.
  • The Delhi High Court struck down the part of Section 254(2A) wherein the order of stay would be automatically vacated after 365 days even if the delay in hearing the appeals was not caused by the Assessee.
  • This judgment and other similar High Court judgments have now been challenged at the Supreme Court.

The Assesses argued that the right to appeal includes the right to obtain a stay, and this right should not be violated by vacating such orders when the delays for hearing the dispute have not been caused by them.

The Assesses relied on the argument that Section 254 (2A) of the ITA was violative of Article 14 of the Constitution as vacating an order of stay due to the expiry of 365 days was arbitrary, and that the State should not be allowed to shelter under a policy or provision that is arbitrary or discriminatory. Hence, they contended that the taxing statute in question was discriminatory and relied on previous judgments to show that such discriminatory taxing statutes should be struck down under Article 14 of the Indian Constitution on the basis of arbitrariness.

ITAT’s Power to Grant Stay

Section 254 of the ITA laid down the powers of the ITATs with regard to passing appellate orders. By  way of an amendment via The Finance Act, 2017, the appellate tribunal was allowed to hear and decide such appeals within a time period of four years from the financial year when the appeal was filed.

However, Section 254(2A) was also subject to the following three provisos:

  • Proviso 1: That the tribunal could pass an order of stay in any proceeding related to the appeal for a period of up to one hundred eighty days (180) and the tribunal should dispose of the appeal within that period of stay.
  • Proviso 2: If the appeal is not disposed within this period of stay then the tribunal may extend the period of stay if the delay in disposing such appeal is not attributable to the Assessed. However, the aggregate period of stay should not extend beyond three hundred and sixty-five days.
  • Proviso 3: If the appeal is not disposed within the maximum period of three hundred and sixty-five days, then the order will stand vacated beyond this period.

Hence, the addition of provisos meant that in any event if the appeal was not decided within the extended period of stay of maximum up to three hundred and sixty-five days, then the order of stay would be automatically vacated. This order of stay would be vacated regardless of whether the delay in deciding the matter had been caused by the appellants or not. The effect caused by this third proviso was the section in contention under this and a few other similar cases. The Assesses all argued that a provision allowing the stay to be automatically vacated beyond three hundred and sixty-five days when the Assesses were not the reason for the delay, would be prima face arbitrary and discriminatory. They also further argued that the same law cannot be applied between two unequal classes, in the sense that an unequal classification was being made between the assesses in the second proviso and the Assesses in the third proviso.

The Assesses in the second proviso are not granted an extension on the order of stay if the delays in hearing the appeals are caused due to disruptions from the Assesses, but the stay is still vacated in the third proviso even if the delays are not caused by the Assesses. Hence, they argued that this third proviso had to be struck down under Article 14 of the Constitution since unequal classes under the law cannot be treated equally.

Holding by the Court

The Supreme Court held that the third proviso to Section 254(2A) of the ITA was both arbitrary and discriminatory and had to be struck down as unconstitutional. Unequal classes are being treated equally under the third proviso, as no differentiation is being made between the assesses who might be responsible for causing delays in the hearings and the assesses who do not. The legislative intent is clear from the second proviso, as the extension is not provided in the event that the delay is attributable to the Appellants.

The disposal of an appeal is a directory provision as the appeal has to be disposed of within 365 days only when the appeal has been granted. But when it comes to the automatic vacation of the stay order, this becomes a mandatory provision. The Court holds that the object of Section 254(2A) is the speedy disposal of cases, but the object cannot come at the cost of being discriminatory to the appellants.

Furthermore, the Court held that as precedents have held, if a tax law was imposed with the object of differentiating between people that are similarly circumstanced, it would be liable to be struck down.

The Court finally held that the third proviso to Section 254(2A) of the ITA will only be read without the words even and ‘is not after delay in disposal of an appeal’ . Orders of stay by ITAT will only stand vacated if the expiry of the period mentioned therein is due to a delay that is attributable to the appellants or assesses in disposing of the appeal.

Effect of the Judgement

The clarity brought in by the Pepsi Foods case will no doubt bring relief to taxpayers, as delays in the proceedings cannot be used as a tactic by the assessing officers to receive an automatic vacation order. Assesses should, however, be careful that the delay in the proceedings is not caused due to their actions or actions attributable to them.

While this judgment may have brought some clarity for taxpayers, Section 254(2A) has also been further amended by the Finance Act, 2020, which could cause further litigation. The 2020 amendment introduced two more provisos to Section 254(2A). These were:

  • That the ITAT would grant an order of stay on the condition that the Assesse or taxpayer has paid 20% of the disputed amount.
  • That the stay will not be extended beyond a year.

This amendment underlines the legislative intent that the stay granted by ITAT should not extend  a year. While the judgment in Pepsi Foods is not contrary to this provision, it is possible that this could lead to disputes for taxpayers. At the moment, proviso 3 to Section 254(2A) of the ITA has been struck down and so the stay order by ITATs that have extended beyond a year will not be automatically vacated, as long as the delays are not attributable to the taxpayers.

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