Court strikes down amendment limiting stay orders in tax appeals, reinforcing taxpayers’ rights.

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Case Name:

Pepsi Foods Pvt. Ltd. Vs Assistant Commissioner of Income Tax & Anr (High Court of Delhi)

W.P.(C) 1334/2015 & CM 2337/2015

Date: 19th May 2015

Key Takeaways:

• The court reaffirmed that the right to appeal must be meaningful and not illusory.
• The amendment introduced by the Finance Act, 2008, which limited stay orders, was struck down for violating Article 14 of the Constitution.
• Taxpayers are entitled to have their appeals heard without arbitrary restrictions on stay orders.

Issue

Can the Income Tax Appellate Tribunal extend stay orders beyond 365 days if the delay in hearing the appeal is not attributable to the taxpayer?

Facts:

• The case involved multiple writ petitions challenging the constitutional validity of the third proviso to Section 254(2A) (of Income Tax Act, 1961), 1961.
• The amendment in question was introduced by the Finance Act, 2008, which stated that stay orders would automatically vacate after 365 days, regardless of the reasons for the delay.
• The petitioners argued that this provision rendered their right to appeal ineffective, especially when delays were not their fault.

Arguments

• Petitioners’ Arguments: They contended that the amendment violated Article 14 of the Constitution by treating taxpayers unequally. They argued that the Tribunal should have the power to extend stay orders beyond 365 days if the delay was not due to the taxpayer’s actions.
• Respondent’s Arguments: The revenue argued that the amendment clarified legislative intent and was not discriminatory. They maintained that the Tribunal’s powers were not affected and that the provision aimed to expedite the appeal process.

Key Legal Precedents

• The court referenced Narang Overseas Private Limited v. Income Tax Appellate Tribunal: 295 ITR 22 (Bombay), which had previously interpreted similar provisions in a way that allowed for extensions of stay orders if the delay was not attributable to the taxpayer.
• The court also cited Maruti Suzuki (India) Limited, where the implications of the third proviso were discussed, emphasizing the need for a fair interpretation of the law to avoid arbitrary results.

Judgement

The court ruled in favor of the petitioners, striking down the amendment introduced by the Finance Act, 2008, as unconstitutional. The court held that the provision violated Article 14 by treating taxpayers unequally and rendering their right to appeal illusory. The Tribunal was reaffirmed to have the power to extend stay orders beyond 365 days in cases where the delay was not the taxpayer’s fault.

FAQs

Q1: What does this ruling mean for taxpayers?

A1: Taxpayers can now have their stay orders extended beyond 365 days if the delay in their appeal is not due to their actions, ensuring their right to appeal is protected.

Q2: How does this affect the Income Tax Appellate Tribunal’s powers?

A2: The Tribunal retains the authority to grant extensions on stay orders, allowing for a more equitable process in tax appeals.

Q3: What was the main legal principle established in this case?

A3: The ruling reinforced that legislative provisions must not violate the principle of equality and must ensure that the right to appeal is meaningful and not arbitrary.

Q4: Can the government appeal this decision?

A4: The government may seek to challenge the ruling, but the court’s decision is based on constitutional principles, which are typically upheld unless there is a compelling reason to overturn them.

1. These writ petitions are taken up together because they raise a common issue and, that is, the challenge to the constitutional validity of the third proviso to Section 254(2A) (of Income Tax Act, 1961), 1961 (hereinafter referred to as ‘the said Act’). An alternative prayer has also been made to read down the provisions of the said proviso to Section 254(2A) of the said Act to mean that the power of the Income Tax Appellate Tribunal to grantinterim relief is co-terminus with the main power of disposal of the appeal, as stipulated in Section 254(1) of the said Act. In each of these petitions, initially stay was granted by the Income Tax Appellate Tribunal. But, the period of 365 days from the grant of initial stay has elapsed and in view of the provisions of Section 254(2A) (of Income Tax Act, 1961), as it stands now, the Tribunal cannot grant any further extension of the stay even though the appeals filed by the petitioners before the Tribunal are pending. The delay in the disposal of the appeals is also not on account of any conduct attributable to the petitioners.

2. The Constitutional validity of the third proviso to Section 254(2A) (of Income Tax Act, 1961)

and, particularly, to the amendment introduced therein by virtue of the

Finance Act, 2008, with effect from 01.08.2008, which added the words –

‘even if the delay in disposing of the appeal is not attributable to the

assessee’– is in question before us. The case of the petitioners is that prior to the said amendment, in a decision of the Bombay High Court in the case of Narang Overseas Private Limited v. Income Tax Appellate Tribunal: 295 ITR 22 (Bombay), the third proviso to Section 254(2A) (of Income Tax Act, 1961) had been read down

in such a manner that even if the period of 365 days from the initial grant of stay had expired, the Tribunal could extend the stay granted, provided the delay was not attributable to the assessee. The amendment brought about by the Finance Act, 2008 sought to nullify this reading of the third proviso to Section 254(2A) of the said Act by introducing the words – ‘even if the

delay in disposing of the appeal is not attributable to the assessee’. It was urged on the part of the petitioners that the right of appeal is not inherent, but once it has been granted, it has to be construed as one which effectively redresses the grievances. It was further contended that the right to obtain a stay of demand/ penalty was integral and cardinal to an effective right of appeal. It was also contended that the introduction of the above mentioned words by virtue of the amendment of 2008 has made the right of appeal illusory and the amendment is, therefore, clearly arbitrary and contrary to the provisions of the Article 14 of the Constitution of India. It was also contended that the said amendment introduces a classification which has no nexus with the object sought to be achieved. In the first place, it clubs assessees belonging to two different categories as one class. It was contended that the assessees, who are not responsible for any delay in the hearing of the appeal, have been clubbed together with those assessees to whom the delay was attributable. Therefore, the persons belonging to different groups/ classes have been clubbed together in one category and this has caused hostile discrimination against those assessees who are law abiding and did not cause any delay in the hearing of their respective appeals. This, in itself, was violative of Article 14 of the Constitution of India and, therefore, the amendment introduced by virtue of the Finance Act, 2008 was liable to be struck down, as being invalid.

3. The learned counsel for the petitioners referred to several decisions in

support of their contentions. They were:-

(i) ITO v. M. K. Mohammed Kunhi: 71 ITR 815 (SC);

(ii) Wire Netting Store, Delhi & Another v. Regional Provident Fund

Commissioner & Others: (1984) 1 ILR 76 (Delhi) (DB);

(iii) Mardia Chemicals Limited & Others v. Union of India and

Another: (2004) 4 SCC 311;

(iv) Narang Overseas Private Limited v. Income Tax Appellate

Tribunal: (2007) 295 ITR 22 (Bombay) (DB) ;

(v) PML Industries Limited v. CCE & Another: 2013 (30) STR 113

(Punjab and Haryana High Court) (DB);

(vi) CIT v. Maruti Suzuki (India) Limited: (2014) 362 ITR 215

(Delhi) (DB); and

(vii) Dr Subramanian Swamy v. Director, CBI: (2014) 8 SCC 682(SC)

4. On the other hand, the learned counsel for the revenue submitted that

there was nothing wrong with the amendment brought about in 2008

inasmuch as all it did was to clarify the legislative intent and make it explicit.

What was already provided under the said Act in the third proviso to Section

254(2A) has merely been clarified. It was contended that there has been no

class treatment given by the legislature and that the said provision is not

discriminatory. The intention behind the amendment was to clarify that the

period of stay cannot be extended beyond 365 days under any circumstances.

A reference was also made to this Court’s decision in Maruti Suzuki (India)

Limited (supra). Reliance was also placed on a decision of the Bombay

High Court in the case of Jethmal Faujimal Soni v. Income Tax Appellate

Tribunal: (2011) 333 ITR 96 and V. M. Salgaocar and Brothers v. Board

of Trustees of Port of Mormugao and Another: (2005) 4 SCC 613.

5. At this point, it would be relevant to set out the provisions of Section

254 (2A), including its provisos, which reads as under:-

“254. Orders of Appellate Tribunal.

(2A) 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) or sub-

section (2A) of section 253 (of Income Tax Act, 1961):

Provided that the Appellate Tribunal may, after considering the

merits of the application made by the assessee, pass an order of

stay in any proceedings relating to an appeal filed under sub-

section (1) of section 253 (of Income Tax Act, 1961), for a period not exceeding one

hundred and eighty days from the date of such order and the

Appellate Tribunal shall dispose of the appeal within the said

period of stay specified in that order:

Provided further that where such appeal is not so disposed of

within the said period of stay as specified in the order of stay,

the Appellate Tribunal may, on an application made in this

behalf by the assessee and on being satisfied that the delay in

disposing of the appeal is not attributable to the assessee,

extend the period of stay, or pass an order of stay for a further

period or periods as it thinks fit; so, however, that the aggregate

of the period originally allowed and the period or periods so

extended or allowed shall not, in any case, exceed three

hundred and sixty-five days and the Appellate Tribunal shall

dispose of the appeal within the period or periods of stay so

extended or allowed:

Provided also 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.

(underlining added)

6. Section 254(2A) (of Income Tax Act, 1961) stipulates that the Appellate Tribunal, where it is

possible, may hear and decide the appeal within a period of four years from

the end of the financial year in which such appeal is filed under Section

253(1), (2) or (2A). Initially, there was no proviso to Section 254(2A) (of Income Tax Act, 1961). The

provisos were added, for the first time, by virtue of the Finance Act, 2001.

At that point of time, the provisos inserted by the Finance Act, 2001 read as under:-

“Provided that where an order of stay is made in any

proceedings relating to an appeal filed under sub-section (1) of

section 253 (of Income Tax Act, 1961), the Appellate Tribunal shall dispose of the appeal

within a period of one hundred and eighty days from the date of

such order:

Provided further that if such appeal is not so disposed of

within the period specified in the first proviso, the stay order

shall stand vacated after the expiry of the said period.”

7. It is clear from the above that with effect from 01.06.2001, it was

stipulated that where an order of stay had been granted, the Appellate

Tribunal was required to dispose of the appeal within a period of 180 days

from the date of said order. It was further provided that if appeal was not

disposed of within the specified period of 180 days, the stay order would

stand vacated after the expiry of the said period. As pointed out by the

learned counsel for the revenue, the Courts, while interpreting the said

provisos, as they stood with effect from 01.06.2001, did not limit the powers of the Tribunal to pass fresh orders of stay on expiration of the period of 180 days. Consequently, by virtue of the Finance Act of 2007, with effect from 01.06.2007, the three provisos, as they stand today, except the last portion of the third proviso, which reads as – ‘even if the delay in disposing of the appeal is not attributable to the assessee’–, were substituted for the provisos which had earlier been inserted by the Finance Act of 2001. Thereafter, by virtue of the Finance Act, 2008, the third proviso was substituted by the existing proviso with effect from 01.10.2008, the difference being that the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– was now added by virtue of the amendment of 2008.

8. Prior to the amendment of 2008, the provisos clearly stipulated that, in

the first instance, a stay order could be passed for a period, not exceeding

180 days from the date of said order, and that the Tribunal was required to

dispose of the appeal within that period. The second proviso stipulated that

in case the appeal was not so disposed of within the period initially stipulated by the Tribunal, the Tribunal could, on an application made on this behalf by the assessee and on being satisfied that the delay in disposing of the appeal was not attributable to the assessee, extend the period of stay for a period or periods, provided that the aggregate of the period originally allowed and the period or periods so extended, would not, in any case, exceed 365 days. The Tribunal was also required to dispose of the appeal within the period or periods of stay so extended or allowed. The third proviso stipulated that if the appeal had not been disposed of within the period of 365 days, the order of stay would stand vacated after the expiry of such period. This provision came up for consideration before the Bombay High Court in Narang Overseas (supra). The exact question which was considered by the Bombay High Court was whether the third proviso to Section 254(2A) of the said Act had the effect of denuding the Tribunal of its incidental power to grant interim relief. A Division Bench of the Bombay High Court, after considering various provisions and decisions, observed as under:-

“20. It would not be possible on the one hand to hold that

there is a vested right of appeal and on the other hand to hold

that there is no power to continue the grant of interim relief

for no fault of the assessee by divesting the incidental power

of the Tribunal to continue the interim relief. Such a reading

would result in such an exercise being rendered unreasonable

and vilative of Article 14 of the Constitution. Courts must,

therefore, construe and / or give a construction consistent with

the constitutional mandate and principle to avoid a provision

being rendered unconstitutional.”

“23. We are of the respectful view that the law as enunciated

in Kumar Cotton Mills (P) Ltd. (supra) should also apply to

the construction of the third proviso as introduced in Section

254(2A) by the Finance Act, 2007. The power to grant stay or

interim relief being inherent or incidental is not defeated by

the provisos to the sub-section. 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. It cannot

mean that a construction be given that the power to grant

interim relief is denuded even if the acts attributable are not of

the assessee but of the revenue or of the Tribunal itself. The

power of the Tribunal, therefore, to continue interim relief is

not overridden by the language of the third proviso to Section

254(2A). This would be in consonance with the view taken in

Kumar Cotton Mills (P) Ltd. (supra). There would be power

in the Tribunal to extend the period of stay on good cause

being shown and on the Tribunal being satisfied that the

matter could not be heard and disposed of for reasons not

attributable to the assessee.”

9. From the above extract, it is evident that the Bombay High Court was of the view that if it were to be held that the Tribunal, while it had the power to pass an order in an appeal, did not have the power to continue the grant of interim relief for no fault of the assessee, the result would be rendered unreasonable or violative of Article 14 of the Constitution. In other words, the Bombay High Court took the view that the Tribunal had the power to extend the stay beyond the period of 365 days, provided the delay in disposal of the appeal was not attributable to the assessee. The Bombay High Court also took the view that if the third proviso to Section 254(2A) (of Income Tax Act, 1961) were not interpreted in such manner and it was to be held that the Tribunal had no power to extend the period of stay beyond a period of 365 days even though the delay was not attributable to the assessee then, the provision would run afoul of Article 14 of the Constitution and would have to be struck down as such. While observing this, the Bombay High Court was mindful that the Courts are required to construe and/ or to give a construction to a provision which was consistent with the constitutional mandate so as to avoid a provision being rendered unconstitutional. It is in this light that the Bombay High Court read down and interpreted the third proviso (prior to the amendment of 2008) to not take away the power of the Tribunal to extend

the period of stay beyond 365 days, provided, of course, that the delay in

disposing of the appeal was not attributable to the assessee.

10. The Notes on Clauses pertaining to the Finance Bill, 2008, to the

extent relevant, read as under:-

“Clause 46 seeks to amend section 254 (of Income Tax Act, 1961),

relating to orders of the Appellate Tribunal.

Sub-section (2A) of the said section provides that the

Income-tax Appellate Tribunal, where it is possible, may hear

and decide an 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 (of Income Tax Act, 1961).

The first proviso to this sub-section provides that the

said Appellate Tribunal may, on merit, pass an order of stay in

any proceedings relating to an appeal. However, such period

of stay cannot exceed 180 days from the date of such order and

the said Appellate Tribunal shall dispose of the appeal within

the specified period of stay.

The second proviso to this sub-section provides that

where the appeal has not been disposed of within the said

specified period and the delay in disposing of the appeal is not

attributable to the assessee, the Appellate Tribunal can further

extend the period of stay originally allowed. However, the

aggregate of period originally allowed and the period so

extended should not exceed 365 days. The Appellate Tribunal

is required to dispose of the appeal within the extended period.

The third proviso to this sub-section provides that if such

appeal is not decided within the period allowed originally or

the period or periods so extended or allowed, the order of stay

shall stand vacated after the expiry of such period or periods.

The intention behind these provisions have been very

clear that the Appellate Tribunal cannot grant stay either under

the original order or under any subsequent order, beyond the

period of 365 days in aggregate.

To make this intention clear, it is proposed to amend

section 254 (of Income Tax Act, 1961) and further provide that the

aggregate of the period originally allowed and the period or

periods so extended or allowed shall not, in any case, exceed

three hundred and sixty five days, even if the delay in

disposing of the appeal is not attributable to the assessee.

This amendment will take effect from 1st October,

2008.”

From the above, it is evident that the object behind the introduction of the

words – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– was to make it clear that the aggregate of the period originally allowed and the period or periods so extended or allowed was not to, in any case, exceed 365 days, even if the delay in disposing of the appeal was not attributable to the assessee.

11. It is evident that the amendment introduced by virtue of the Finance

Act, 2008 had nullified the effect of the decision of the Bombay High court

in Narang Overseas (supra). The said provision, after its amendment by

virtue of the Finance Act, 2008, came up for consideration before this Court

in Maruti Suzuki (India) Limited (supra). The following observations made

by a Division Bench of this Court in that case are relevant:-

“26. In view of the aforesaid discussion, we have reached the

following conclusion:-

(i) In view of the third proviso to Section 254(2A) (of Income Tax Act, 1961)

substituted by Finance Act, 2008 with effect from 1st October,

2008, tribunal cannot extend stay beyond the period of 365 days

from the date of first order of stay.

(ii) In case default and delay is due to 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) (of Income Tax Act, 1961) would come into operation.

(iii) Third proviso to Section 254(2A) (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) does not prohibit/bar the

High Court from issuing appropriate directions, including

granting stay of recovery.

27. We have not examined the constitutional validity of the

provisos to Section 254(2A) (of Income Tax Act, 1961) and the issue is left

open.”

(underlining added)

12. From the above extract, it is evident that the Division Bench was not

called upon and did not examine the constitutional validity of the provisos to Section 254(2A) of the said Act and left the issue open. It is only on a plain reading of the provisos, as they existed, that the Division Bench came to the conclusion that the Tribunal had no power to extend stay beyond a period of 365 days from the date of the first order of stay but that an assessee could file a writ petition in the High Court asking for stay even beyond the said period of 365 days and the High Court had the power and jurisdiction to grant stay and issue directions to the Tribunal and that Section 254(2A) (of Income Tax Act, 1961) did not prohibit / bar the High Court from issuing appropriate directions, including grant of stay of recovery. A similar view was taken by the Bombay High Court in Jethmal Faujimal Soni (supra). But that decision was also rendered on a plain meaning of the provisos, as they stood. There was no challenge to the constitutional validity of the third proviso to Section 254(2A) of the said Act after the amendment introduced by the Finance Act, 2008. No decision of any High Court has been brought to our notice by the learned counsel for the parties, wherein the constitutional validity of the third proviso to Section 254(2A) of the said Act has been examined.

13. At this point, we may also refer to certain other observations of the

Division Bench in Maruti Suzuki (India) Limited (supra). The Court had

examined various data with regard to the filing of appeals, pendency of

appeals and stay orders granted by the Tribunal etc.. Paragraphs 21, 22 and

23 are of material importance and they are reproduced herein below:-

“21. Information/data in this regard was received vide letter dated

30th January, 2014 written by Assistant Registrar, Tribunal. The

relevant portion of the said letter reads as under:-

“a) Number of appeals filed before the Tribunal by the

assessee and the revenue is as under:-

Year Assessee Revenue Total

2011 3359 3013 6372

2012 3593 3462 7055

2013 3975 3102 7077

Total 10927 9577 20504

b) No data is available with regard to average time taken

for disposal of the appeal before the Tribunal.

c) (i) The year-wise details of the stay orders passed by

the Tribunal are as under:-

Year Number of stay orders

2011 173

2012 278

2013 321

(ii) The complete details in respect of each and every appeal

where stay order was passed is annexed as Annexure-1, 2 & 3.

d) The year-wise details of the cases/appeals which

remained pending beyond 365 days of the stay order are as

under:-

Year Number of appeals disposed-off after 365

days or pending for more than 365 days

2011 90 Appeals

2012 131 Appeals

2013 36 Appeals

e) The year-wise details of the number of appeals

disposed of within 365 days from the date of grant of stay

are as under:-

Year Number of appeals disposed-off within 365

days or pending within 365 days

2011 83 Appeals

2012 147 Appeals

2013 285 Appeals”

22. The aforesaid data does not mention the quantum of

demand, which was subject matter of stay, but the position is

certainly not bleak and unpalatable. Most of the appeals in which

stay had/has been granted, were/are being disposed of within 365

days. Number of appeals, which were not disposed of within 365

days of grant of stay, have come down sharply in the year 2013.

Grant of stay by the tribunal is not a matter of right, but is decided

by a speaking order, recording prima facie view on merits. In case

there is an error or the tribunal has erred in granting stay, Revenue

is not without remedy and can approach the High Court in

accordance with law.

23. We do not have figures or data on whether the demands

raised, which was subject matter of stay, was sustained/upheld or

were deleted by the tribunal. Merits and justification of additions

is examined by the appellate forums and demands raised have

relevance when they are sustained by the tribunal/High Court and

the Supreme Court.”

14. From the above data, it is evident that the number of stay orders

granted by the Tribunal in the years 2011, 2012 and 2013 do not even

amount to 10% of the appeals filed by assessees before the Tribunal.

Furthermore, even a fewer number of appeals, in which stay orders have

been passed, remain pending beyond the period of 365 days. It is in this

light that the Division Bench observed that most of the appeals in which stay had/has been granted were/are being disposed of within 365 days. The

Division Bench also observed that the grant of stay by the Tribunal was not a matter of right but was decided by a speaking order, recording the prima

facie view on merits. Furthermore, in case there was an error, the revenue

was not without remedy and could approach the High Court in accordance

with law. From the above figures, it is evident that there is a very small

percentage of appeals before the Tribunal which remain pending beyond the

period of 365 days in which stay orders were granted.

15. We may also refer to paragraph 17 of the decision in Maruti Suzuki

(India) Limited (supra) which was relied upon by the revenue. The said

paragraph reads as under:-

“17. In these circumstances, we have examined whether we

can read down the third proviso, by applying principles of

equity, justice and fair play and also the principle that the court

should interpret a provision in a manner that it does not lead to

arbitrary results or make it violative of Article 14 or would

render it unconstitutional. However, it is clear to us that the

legislative mandate has to be respected and the courts do not

legislate but interpret the statute as a legislative edict. The third

proviso after amendment, undoubtedly bars and prohibits the

tribunal from extending interim stay order beyond 365 days. It

stipulates deemed vacation and imposes no fault consequences

in strict terms. The language is clear and therefore has to be

respected. However, the provision does not bar or prohibit an

assessee from approaching the High Court by way of writ

petition for continuation, extension or grant of stay. Fairly, the

standing counsel for Revenue accepts and admits that in spite of

Section 254(2A) (of Income Tax Act, 1961), the High Court has power to grant and extend

stay where the appeal is pending before the tribunal. The

constitutional power and right is available and has not and

cannot be curtailed. The powers of the High Court under

Articles 226 and 227 form a part and parcel of the basic

structure of the Constitution and cannot be over written and

nullified as held by the Constitutional Bench in L. Chandra

Kumar versus Union of India, (1997) 3 SCC 261. Thus, the

High Court in appropriate matters can grant or extend stay even

when the tribunal has not been able to dispose of an appeal

within 365 days from the date of grant of initial stay. This

perhaps appears to be and apparently is the intention of the

Parliament. High Court while granting or rejecting the writ

petition will examine the factual matrix, record reasons as to

who is to be blamed and is responsible for the default and can

also issue appropriate directions or orders for expeditious and

early disposal of the appeal. The provision will propel and

ensure that the tribunal will try and dispose of and decide

appeals within 365 days of the grant of stay order. The Bombay

High Court in Jethmal Faujimal Soni vs. Income Tax

Appellate Tribunal [2011] 333 ITR 96, had occasion to deal

with a similar situation and entertained the writ petition. In the

said case constitutional validity of the third proviso inserted in

Section 254(2A) (of Income Tax Act, 1961) by Finance Act, 2008, w.e.f. 1st

October, 2008 was challenged It was observed that the proviso

enacted a stringent provision as a result of which even if the

delay in disposing of the appeal was/is not attributable to the

assessee, the stay stands vacated after 365 days. Thus, the

tribunal was/is under binding duty and obligation to dispose of

the appeal within the said time, particularly when the fault was

not on the part of the assessee. In the said case, directions were

issued for expeditious disposal of the appeal and it was also

directed that the Revenue shall not take coercive steps for

enforcing demand subject matter of the appeal.”

(underlining added)

16. At this juncture itself, we may reiterate that the decision of the

Division Bench in Maruti Suzuki (India) Limited (supra) was based on an

interpretation of the third proviso to Section 254(2A) (of Income Tax Act, 1961) as it stands. The

constitutional validity of the same had not been examined. It only spelt out

the legislative intent and that was more than clear that no stay could be

granted by the Tribunal beyond the period of 365 days under any

circumstances. The question that we have to examine is whether this

intention of the legislature is not hit by Article 14 of the Constitution of

India. We may also point out that the fact that judicial review was available to an assessee under Article 226 of the Constitution, would not, in any way, add to or subtract from the issue of constitutional validity of the third proviso to Section 254(2A) (of Income Tax Act, 1961).

17. It would now be relevant to examine the decision of the Supreme

Court in Mohammed Kunhi (supra). The question before the Supreme

Court was whether the Income Tax Appellate Tribunal had power under the

relevant provisions of the said Act to stay the recovery of the realization of the penalty imposed by the departmental authorities on an assessee during

the pendency of an appeal before it. In that case, the Tribunal had declined

to order any stay holding that it had no power to grant such a prayer. We

must be mindful of the fact that at that point of time Section 254(2A) (of Income Tax Act, 1961) was not there in the said Act. The said provision was introduced with effect from 01.06.1999 by the Finance Act, 1999. In the absence of any specific

provision, permitting the Tribunal to grant stay, the question arose as to

whether the Tribunal had the power to stay the proceedings as also the

collection of penalties pending the appeal. The High Court of Kerala held

that the Tribunal had such power and that the power was incidental and

ancillary to its appellate jurisdiction. The Supreme Court observed that the

powers, which had been conferred by Section 254 (of Income Tax Act, 1961) on the Appellate Tribunal,

were of the widest possible amplitude and, therefore, must carry with them,

by necessary implication, all powers and duties incidental and necessary to

make the exercise of those fully effective. Finally, the Supreme Court

concluded by holding:-

“13. Section 255(5) (of Income Tax Act, 1961) does empower the Appellate

Tribunal to regulate its own procedure, but it is very doubtful if

the power of stay can be spelt out from that provision. In our

opinion the Appellate Tribunal must be held to have the power

to grant stay as incidental or ancillary to its appellate

jurisdiction. This is particularly so when Section 220(6) (of Income Tax Act, 1961) deals

expressly with a situation when an appeal is pending before the

Appellate Assistant Commissioner, but the Act is silent in that

behalf when an appeal is pending before the Appellate Tribunal.

It could well be said that when Section 254 (of Income Tax Act, 1961) confers appellate

jurisdiction, it impliedly grants the power of doing all such acts,

or employing such means, as are essentially necessary to its

execution and that the statutory power carries with it the duty in

proper cases to make such orders for staying proceedings as

will prevent the appeal if successful from being rendered

nugatory.

14. A certain apprehension may legitimately arise in the

minds of the authorities administering the Act that if the

Appellate Tribunals proceed to stay recovery of taxes or

penalties payable by or imposed on the Assessees 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 Appellate

Tribunals. It is needless to point out 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.”

(underlining added)

18. From this decision, it is evident that the power to grant a stay is

incidental or ancillary to the appellate jurisdiction of the Tribunal. It is also clear that the power of stay exercised 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 and it is only when a strong prima facie case is made out that the Tribunal would consider whether to stay the recovery proceedings and on what conditions. The stay is also granted in deserving and appropriate cases where the Tribunal is satisfied that the entire purpose of the appeal would be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal.

These words of the Supreme Court were indeed prophetic, as can be

discerned from the data which has been referred to by a Division Bench of

this Court in Maruti Suzuki (India) Limited (supra), which shows that in

less than 10% of the appeals filed by assessees, the Tribunal has granted stay orders and in a very few of such cases, the appeals are pending beyond the period of 365 days stipulated under the provisions, as they now stand.

19. A reference has been made to Mardia Chemicals Limited (supra).

The passages referred to were paragraphs 55, 61 and 80, which read as

under:

“55. We may then turn to the arguments raised on behalf of

the petitioners that the remedy before the Debts Recovery

Tribunal under Section 17 (of Income Tax Act, 1961) is illusory, burdened with

onerous and oppressive condition of deposit of 75% of the

amount of the demand notice before an appeal can be

entertained by the Tribunal. We feel that it would be difficult to

brush aside the challenge made to the condition of such a

deposit. Sub-section (2) of Section 17 (of Income Tax Act, 1961) itself says that no appeal

shall be entertainable unless the borrower has deposited the

aforesaid sum of amount claimed. Much stress has been given

in reply to the proviso to sub-section (2) of Section 17 (of Income Tax Act, 1961),

according to which the Tribunal has power to waive or reduce

the amount. While waiving the condition of depositing the

amount or reducing it, the Tribunal is required to record reasons

for the same. It is submitted for the respondents that in an

appropriate case, DRT which is presided over by a Member of a

Higher Judicial Service, would exercise its discretion and may

waive or reduce the amount required to be deposited in

deserving cases. It is, therefore, not an absolute condition which

must in all cases and all circumstances be fulfilled irrespective

of the special features of a particular case.”

“61. In the case of Seth Nandlal (supra), while considering the

question of validity of pre-deposit before availing the right of

appeal the Court held:

“right of appeal is a creature of the statute and while

granting the right the legislature can impose

conditions for the exercise of such right so long as

the conditions are not so onerous as to amount to

unreasonable restrictions rendering the right almost

illusory.”

(emphasis supplied).

While making said observation this Court referred to the

decision in the case of Anant Mills Co. Ltd. (supra). In both the

above noted decisions this Court had negated the plea raised

against pre-deposit but in the case of Seth Nandlal (supra) it

was found that the condition was not so onerous since the

amount sought to be deposited was meager and that too was

confined to the landholding tax payable in respect of the

disputed area i.e. the area or part thereof which is declared

surplus by the Prescribed Authority (emphasis supplied) after

leaving the permissible area to the appellant. In the above

circumstances it was found that even in the absence of a

provision conferring discretion on the appellate authority to

waive or reduce the amount of pre- deposit, it was considered to

be valid, for the two reasons indicated above. The facts of the

case in hand are just otherwise.”

“80. Under the Act in consideration, we find that before

taking action a notice of 60 days is required to be given and

after the measures under Section 13(4) (of Income Tax Act, 1961) have been

taken, a mechanism has been provided under Section 17 (of Income Tax Act, 1961) of the

Act to approach the Debts Recovery Tribunal. The above noted

provisions are for the purpose of giving some reasonable

protection to the borrower. Viewing the matter in the above

perspective, we find what emerges from different provisions of

the Act, is as follows :-

1. Under sub-section (2) of Section 13 (of Income Tax Act, 1961) it is

incumbent upon the secured creditor to serve 60 days

notice before proceeding to take any of the measures

as provided under sub-section (4) of Section 13 (of Income Tax Act, 1961) of the

Act. After service of notice, if the borrower raises

any objection or places facts for consideration of the

secured creditor, such reply to the notice must be

considered with due application of mind and the

reasons for not accepting the objections, howsoever

brief they may be, must be communicated to the

borrower. In connection with this conclusion we have

already held a discussion in the earlier part of the

judgment. The reasons so communicated shall only

be for the purposes of the information/knowledge of

the borrower without giving rise to any right to

approach the Debts Recovery Tribunal under Section

17 of the Act, at that stage.

2. As already discussed earlier, on measures

having been taken under sub-section (4) of Section

13 and before the date of sale/auction of the property

it would be open for the borrower to file an appeal

(petition) under Section 17 (of Income Tax Act, 1961) before the

Debts Recovery Tribunal.

3. That the Tribunal in exercise of its ancillary

powers shall have jurisdiction to pass any

stay/interim order subject to the condition as it may

deem fit and proper to impose.

4. In view of the discussion already held in this

behalf, we find that the requirement of deposit of

75% of amount claimed before entertaining an appeal

(petition) under Section 17 (of Income Tax Act, 1961) is an

oppressive, onerous and arbitrary condition against

all the canons of reasonableness. Such a condition is

invalid and it is liable to be struck down.

5. As discussed earlier in this judgment, we find

that it will be open to maintain a civil suit in civil

court, within the narrow scope and on the limited

grounds on which they are permissible, in the matters

relating to an English mortgage enforceable without

intervention of the court.”

20. The learned counsel for the petitioners had also referred to a decision

of the Division Bench of the Punjab and Haryana High Court in PML

Industries Limited (supra). Although that decision pertained to Section 35C (of Income Tax Act, 1961)

(2A) of the Central Excise Act, 1944, the provision under consideration was

somewhat similar. It pertained to the waiver of pre-deposit at the stage of an appeal pending before the Central Excise Service Tax Appellate Tribunal.

The provision indicated that the waiver would stand vacated after 180 days.

In that context, the question arose, as to whether the second proviso to

Section 2A of Section 35C (of Income Tax Act, 1961) was directory and that the Tribunal, in

appropriate circumstances, could extend the period of stay beyond 180 days.

While considering the said question, the Punjab and Haryana High Court

held as under:-

“51. Though the right of appeal is a creation of Statute and it

can be exercised only subject to the conditions specified

therein, but the conditions 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 over the

functioning of the Tribunal, then the provision of vacation of

stay cannot be sustained.

52. The assessee having preferred appeal and that Tribunal

being satisfied that condition for dispensing with the pre-

deposit of duty demanded and penalty levied is made out, is

compelled to pay the duty demanded and penalty levied, if the

appeal is not decided within 180 days. The assessee has no

control in respect of matters pending before the Tribunal; in the

matter of availability of infrastructure; the members of the

Tribunal and the workload. Therefore, for the reason that the

Tribunal is not able to decide appeal within 180 days, the

vacation of stay is a harsh and onerous and unreasonable

condition. The condition of vacation of stay for the inability of

the Tribunal to decide the appeal is burdening the assessee for

no fault of his. Such a condition is onerous and renders the right

of appeal as illusory. An order passed by a judicial forum is

sought to be annulled for no fault of assessee. Therefore, in

terms of judgments in Anant Mills Ltd. and Seth Nandlal cases

(supra), such condition of automatic vacation of stay on the

expiry of 180 days, has to be read down to mean that after 180

days the Revenue has a right to bring to the notice of the

Tribunal the conduct of the assessee in delay or avoiding the

decision of appeal, so as to warrant an order of vacation of stay.

If the provision is not read down in the manner mentioned

above, such condition suffers from illegality rendering the right

of appeal as redundant.

54. Consequently, the second proviso in sub-section (2A) of

Section 35C (of Income Tax Act, 1961) is ordered to be read down to mean that after 180

days, the Revenue has a right to seek vacation of stay on proof

of the fact that the assessee is the one, who is defaulted or taken

steps to delay the ultimate decision.”

The said Court read down the provision in question in much the same

manner as did the Bombay High Court in the case of Narang Overseas

(supra). The object being that, if the provision were to be read strictly, it would render the right of appeal to be illusory and for no fault of the

assessee.

21. The decision in Wire Netting Store, Delhi (supra) was relied upon by

the learned counsel for the petitioners for the proposition that the availability of a constitutional remedy would not remove the lacuna of a provision which was inherently unconstitutional. There can be no dispute with this proposition. The provision which is challenged, as being violative of Article 14 of the Constitution, would have to be tested on its own without recourse to the availability of the remedy of judicial review under Article 226 of the Constitution.

22. In Dr Subramanian Swamy (supra), a Constitution Bench of the

Supreme Court, while considering the parameters which needed to be kept in

mind in determining whether a particular provision of a statute was violative of Article 14 or not, made the following observations:-

“46. In Air India v. Nergesh Meerza and Ors. : (1981) 4 SCC

335, the three-Judge Bench of this Court while dealing with

constitutional validity of Regulation 46(i)(c) of Air India

Employees' Service Regulations (referred to as 'A.I.

Regulations') held that certain conditions mentioned in the

Regulations may not be violative of Article 14 on the ground of

discrimination but if it is proved that the conditions laid down

are entirely unreasonable and absolutely arbitrary, then the

provisions will have to be struck down. With regard to due

process clause in the American Constitution and Article 14 of

our Constitution, this Court referred to State of West Bengal v.

Anwar Ali Sarkar : (1952) SCR 284, and observed that the due

process clause in the American Constitution could not apply to

our Constitution. The Court also referred to A.S. Krishna v.

State of Madras: 1957 S.C.R. 399 (of Income Tax Rules, 1962) wherein Venkatarama Ayyar,

J. observed:

"13. ....The law would thus appear to be based on

the due process clause, and it is extremely doubtful

whether it can have application under our Constitution."

47. In D.S. Nakara and Ors. v. Union of India: (1983) 1 SCC

305, the Constitution Bench of this Court had an occasion to

consider the scope, content and meaning of Article 14. The

Court referred to earlier decisions of this Court and in para 15,

the Court observed:

“15. Thus the fundamental principle is that

Article 14 forbids class legislation but permits

reasonable classification for the purpose of legislation

which classification must satisfy the twin tests of

classification being founded on an intelligible

differentia which distinguishes persons or things that

are grouped together from those that are left out of the

group and that differentia must have a rational nexus

to the object sought to be achieved by the statute in

question.””

“Court's approach

49. Where there is challenge to the constitutional validity of a

law enacted by the legislature, the Court must keep in view that

there is always a presumption of constitutionality of an

enactment, and a clear transgression of constitutional principles

must be shown. The fundamental nature and importance of the

legislative process needs to be recognized by the Court and due

regard and deference must be accorded to the legislative

process. Where the legislation is sought to be challenged as

being unconstitutional and violative of Article 14 of the

Constitution, the Court must remind itself to the principles

relating to the applicability of Article 14 in relation to

invalidation of legislation. The two dimensions of Article 14 in

its application to legislation and rendering legislation invalid are

now well recognized and these are (i) discrimination, based on

an impermissible or invalid classification and (ii) excessive

delegation of powers; conferment of uncanalised and unguided

powers on the executive, whether in the form of delegated

legislation or by way of conferment of authority to pass

administrative orders-if such conferment is without any

guidance, control or checks, it is violative of Article 14 of the

Constitution. The Court also needs to be mindful that a

legislation does not become unconstitutional merely because

there is another view or because another method may be

considered to be as good or even more effective, like any issue

of social, or even economic policy. It is well settled that the

courts do not substitute their views on what the policy is.”

It is clear that where a legislation is sought to be challenged, as being

unconstitutional or violative of Article 14 of the Constitution, the Court must keep in mind the principles relating to the applicability of Article 14 in relation to invalidation of a legislation. The two dimensions of Article 14 in its application to legislation and for rendering legislation invalid are well settled and these are – (i) discrimination, based on an impermissible or an invalid classification and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders. The Constitution Bench also cautioned that the Courts need to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy.

23. Keeping in mind the principles set out by the Supreme Court in

Dr Subramanian Swamy (supra), we need to examine whether the present

challenge to the validity of the third proviso to Section 254(2A) (of Income Tax Act, 1961) can be

sustained. This is not a case of excessive delegation of powers and,

therefore, we need not bother about the second dimension of Article 14 in its application to legislation. We are here concerned with the question of

discrimination, based on an impermissible or invalid classification. It is

abundantly clear that the power granted to the Tribunal to hear and entertain an appeal and to pass orders would include the ancillary power of the Tribunal to grant a stay. Of course, the exercise of that power can be

subjected to certain conditions. In the present case, we find that there are

several conditions which have been stipulated. First of all, as per the first proviso to Section 254(2A) (of Income Tax Act, 1961), a stay order could be passed for a period not exceeding 180 days and the Tribunal should dispose of the appeal within that period. The second proviso stipulates that in case the appeal is not disposed of within the period of 180 days, if the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to extend the stay for a period not exceeding 365 days in aggregate. Once again, the Tribunal is directed to dispose of the appeal within the said period of stay. The third proviso, as it stands today, stipulates that if the appeal is not disposed of within the period of 365 days, then the order of stay shall stand vacated, even if the delay in disposing of the appeal is not attributable to the assessee.

While it could be argued that the condition that the stay order could be

extended beyond a period of 180 days only if the delay in disposing of the

appeal was not attributable to the assessee was a reasonable condition on the power of the Tribunal to the grant an order of stay, it can, by no stretch of imagination, be argued that where the assessee is not responsible for the delay in the disposal of the appeal, yet the Tribunal has no power to extend the stay beyond the period of 365 days. The intention of the legislature, which has been made explicit by insertion of the words – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– renders the right of appeal granted to the assessee by the statute to be illusory for no fault on the part of the assessee. The stay, which was available to him prior to the 365 days having passed, is snatched away simply because the Tribunal has, for whatever reason, not attributable to the assessee, been unable to dispose of the appeal. Take the case of delay being caused in the disposal of the appeal on the part of the revenue. Even in that case, the stay would stand vacated on the expiry of 365 days. This is despite the fact that the stay was granted by the Tribunal, in the first instance, upon considering the prima facie merits of the case through a reasoned order.

24. Furthermore, the petitioners are correct in their submission that

unequals have been treated equally. 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. It is for this reason that we find that 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 assesses 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’ assesses 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 revertus to the position of law as interpreted by the Bombay High Court in Narang Overseas (supra), with which we are in full agreement. Consequently, we hold 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 writ petitions are allowed as above.

25. Consequently, the petitioners may approach the Tribunal for extension

of stay in each of the cases before us and till the Tribunal passes such orders, the interim orders granted by us in these matters shall continue. The petitioners shall move the Tribunal within four weeks from the date of this judgment. The parties are left to bear their own costs.

BADAR DURREZ AHMED, J

SANJEEV SACHDEVA, J

MAY 19, 2015