The Supreme Court of India, on April 6 2021, pronounced an important ruling in Pepsi Foods Ltd (DCIT v. Pepsi Foods Ltd) relating to stay of demand. The Supreme Court declared a certain part of the third proviso of section 254(2A) of the Income Tax Act, 1961 (IT Act) as being unconstitutional.
This proviso authorises automatic vacation of stay of demand after a certain period, even in cases where a delay in hearing of appeals is not attributable to the taxpayer.
Tribunal's power to grant stay of demand
The Appellate Tribunal (Tribunal) is the second appellate authority in the appellate mechanism under the IT Act. Being conferred with the power to hear and dispose of appeals, the tribunal also has an inherent power to grant interim relief.
To ensure that the power to grant stay does not come at the cost of depriving the tax department of its right to recover taxes, certain legislative amendments were made to section 254(2A) over a period of time. In summary:
- The tribunal can initially grant stay for a period not exceeding 180 days and dispose the appeal within such period – first proviso;
- If an appeal is not disposed before the aforesaid period, the tribunal may extend the stay for further period not exceeding 365 days in total. This extension of stay can be allowed only in situations where the delay is not attributable to the assessee – second proviso; and
- Where the appeal is not disposed of with the extended period, the stay shall stand automatically vacated "even if the delay is not attributable to the assessee" – third proviso.
Order of the Supreme Court
"Even if the delay is not attributable to the assessee" was challenged before the Delhi High Court which held that this provision would not stand the test of being constitutionally valid. The Revenue appealed against the order passed by the High Court before the Supreme Court.
The Supreme Court held that such an automatic vacation of stay where the taxpayer is not at fault would be violative of Article 14 of the Constitution. It was held that vacation of stay in favour of revenue for no fault of the taxpayer would render the proviso manifestly arbitrary.
Can the tribunal grant stay beyond 365 days?
The ruling raises an important question as to whether the tribunal has the power to extend stay beyond 365 days in cases where the delay is not attributable to the assessee, especially considering that the cap of 365 days contained in the second proviso is not upset by this ruling.
An earlier decision rendered by the Bombay High Court in Narang Overseas Pvt Ltd (Narang Overseas P Ltd v. ITAT [2007] 295 ITR 22) held that that it would not be possible to hold on one hand that there is a vested right of appeal and on the other hand hold that there is no power to continue the interim relief for no fault of the taxpayer. The court held that such a reading would be unreasonable and violative of Article 14.
Therefore, it may still be possible for the taxpayer to seek extension of stay in genuine cases where the delay in disposal of appeal is not attributable to the taxpayer. The tribunals have discretion to extend the stay even beyond 365 days provided the case of the taxpayer merits such an interim relief to be granted or extended.
Comparable GST provisions
It may be interesting to note that the provisions in GST Law (sections 107 and 112 of the Central Goods and Services Tax Act) provides for a complete stay of demand on a condition that a stipulated percentage of the total demand be deposited before filing the appeal.
Under the IT Act, a similar amendment has been made effective from AY 2020–2021. This amendment has the effect of restricting the tribunal's power to grant a full stay. A minimum of 20% of the demand amount is required to be deposited in cash or given in the form of security. Unlike GST Law, if a taxpayer pays 20% of demand, it does not result in an automatic stay of the balance amounts. Stay for the balance amount is at the discretion of the tribunal.
COVID-19
Hardships may be faced by the taxpayers as a result of the ongoing pandemic where they may not be able to argue their cases before the tribunals due to health reasons or difficulties that are caused by lockdowns imposed in different states in India.
Extensions granted by different high courts to interim orders passed would certainly come to the aid of taxpayers facing imminent action of recovery from the tax authorities.
Nevertheless, there can be circumstances where it may be necessary for the tribunals to consider such instances as not being cases of dilatory tactics.
Closing remarks
The ruling granted by the Supreme Court is a welcome step for taxpayers seeking stay beyond 365 days. However, considering previous experience with the tax authorities, this issue is likely to see further developments in the future.
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