Income Tax Appeals: Supreme Court Strikes Down Restriction on Stay Orders

The legal dispute between the Deputy Commissioner of Income Tax and M/S Pepsi Foods Ltd. (now Pepsico India Holdings Pvt. Ltd.) revolved around the constitutionality of a provision in the Income Tax Act that imposed a limitation on stay orders granted by the Income Tax Appellate Tribunal (ITAT). The Supreme Court of India, in a landmark decision, ruled against the automatic vacation of stay orders beyond 365 days, even if the delay was not attributable to the taxpayer.

Background of the Case

The dispute arose when Pepsi Foods Ltd. filed an appeal before the ITAT challenging an adverse assessment order. Initially, the Tribunal granted a stay on the recovery proceedings for a period of six months, as per Section 254(2A) of the Income Tax Act. However, despite repeated extensions, the appeal remained undecided beyond 365 days, triggering the automatic vacation of the stay due to the third proviso to Section 254(2A).

Pepsi Foods Ltd. challenged this provision in the Delhi High Court, which ruled that denying further stay due to the Tribunal’s delay was unconstitutional. The Income Tax Department appealed against this decision in the Supreme Court.

Read also: https://judgmentlibrary.com/customs-duty-exemption-dispute-supreme-courts-ruling-on-canon-india-vs-commissioner-of-customs/

Petitioners’ Arguments

The Income Tax Department contended that:

• The right to an appeal is statutory, and there is no inherent right to a stay.
• Tax laws are designed to ensure revenue collection, and indefinite stay orders hamper this objective.
• Legislative intent behind the provision was to prevent prolonged litigation delays.

Respondents’ Arguments

Pepsi Foods Ltd. countered that:

• The provision unfairly penalized taxpayers who were not responsible for delays in the appellate process.
• It violated Article 14 of the Constitution by treating compliant and non-compliant taxpayers equally.
• The restriction made the appeal process meaningless if taxpayers were forced to pay disputed taxes due to automatic vacation of stay.

Supreme Court’s Findings

The Supreme Court, in a judgment delivered by Justices Rohinton Fali Nariman, B.R. Gavai, and Hrishikesh Roy, held:

• The third proviso to Section 254(2A) was unconstitutional as it arbitrarily vacated stay orders even when the taxpayer was not at fault.
• “Unequals” were being treated equally, as taxpayers responsible for delays were subjected to the same consequence as those who were not.
• The restriction was manifestly arbitrary and violated Article 14 of the Constitution.
• The stay provision should be applicable only where delays are attributable to the taxpayer.

Judgment and Conclusion

The Court ruled:

“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.”

With this decision, the Supreme Court ensured fairness in tax litigation by preventing undue hardship to taxpayers. The ruling reinforces the principle that procedural delays by tribunals or the government should not penalize taxpayers who seek legitimate appellate remedies.

Read also: https://judgmentlibrary.com/excise-duty-dispute-on-railway-relays-supreme-court-overrules-cestat-decision/

Petitioner Name: Deputy Commissioner of Income Tax & Another.
Respondent Name: M/S Pepsi Foods Ltd. (Now Pepsico India Holdings Pvt. Ltd.).
Judgment By: Justice Rohinton Fali Nariman, Justice B.R. Gavai, Justice Hrishikesh Roy.
Place Of Incident: India.
Judgment Date: 06-04-2021.

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