2021 (4) TMI 369 - SC - Income Tax

Constitutional validity of the third proviso to Section 254(2A) - automatic vacation of a stay as granted on the completion of 365 days - HELD THAT - It is settled law that challenges to tax statutes made under Article 14 of the Constitution of India can be on grounds relatable to discrimination as well as grounds relatable to manifest arbitrariness. These grounds may be procedural or substantive in nature There can be no doubt that the third proviso to Section 254(2A) of the Income Tax Act, 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 assessee 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) of the Income Tax Act, making it clear that a stay order may be extended upto a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee. 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 so far as the assessee is concerned. The object sought to be achieved by the third proviso to Section 254(2A) of the Income Tax Act is without doubt the speedy disposal of appeals before the Appellate Tribunal in cases in which 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. 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 law laid down by the impugned judgment of the Delhi High Court in M/s Pepsi Foods Ltd. 2015 (5) TMI 655 - DELHI HIGH COURT is correct. Resultantly, the judgments of the various High Courts which follow the aforesaid declaration of law are also correct. Consequently, the third proviso to Section 254(2A) of the Income Tax Act 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

Summary

Issues Involved:
1. Constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961.
2. Discrimination and arbitrariness under Article 14 of the Constitution of India.
3. Interpretation of the legislative intent and statutory provisions.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Third Proviso to Section 254(2A) of the Income Tax Act, 1961:
The appeals raised an important question regarding the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act. The third proviso restricted the extension of stay orders beyond 365 days, even if the delay was not attributable to the assessee. The Delhi High Court had previously struck down this proviso, arguing that it was arbitrary and discriminatory, as it treated assessees who were not responsible for delays the same as those who were. The Supreme Court upheld this view, affirming that the proviso violated Article 14 of the Constitution by not differentiating between assessees responsible for delays and those who were not.

2. Discrimination and Arbitrariness under Article 14 of the Constitution of India:
The judgment emphasized that the third proviso to Section 254(2A) violated Article 14 of the Constitution, which guarantees equality before the law. The proviso was deemed discriminatory as it treated unequals equally by not distinguishing between assessees responsible for delays and those who were not. The court highlighted that such a classification lacked a rational nexus with the object sought to be achieved by the legislation, which was the speedy disposal of appeals. The court also found the proviso to be manifestly arbitrary, as it resulted in automatic vacation of stay orders even if the delay was due to reasons beyond the assessee's control, including delays caused by the revenue or the tribunal itself.

3. Interpretation of the Legislative Intent and Statutory Provisions:
The court traced the legislative history of Section 254(2A) and its amendments, noting that the original provision allowed the Appellate Tribunal to grant stay orders without any time limit. Subsequent amendments introduced time limits and conditions for extending stay orders. The court referred to previous judgments, including those of the Bombay High Court and the Delhi High Court, which had interpreted the provisos to Section 254(2A). The court concluded that the third proviso, as amended by the Finance Act, 2008, was inconsistent with the legislative intent and the constitutional mandate. The court held that the proviso should be read without the words "even" and "is not" after the words "delay in disposing of the appeal," thereby allowing the tribunal to extend stay orders if the delay was not attributable to the assessee.

Conclusion:
The Supreme Court upheld the Delhi High Court's judgment, declaring the third proviso to Section 254(2A) of the Income Tax Act as unconstitutional. The court emphasized the need for legislative provisions to be fair, non-discriminatory, and rationally connected to their objectives. The judgment reinforced the principle that statutory provisions must not violate constitutional guarantees of equality and non-arbitrariness. Consequently, the appeals of the revenue were dismissed, and the third proviso was read down to allow extensions of stay orders if the delay in disposing of the appeal was not attributable to the assessee.