Amendment of third proviso to S.254(2A) by the Supreme Court’s order- Delay in disposing of appeal is not attributable to assessee, then stay will not automatically lapse. The Supreme Court amends S. 254 to remove arbitrariness

[DEV KUMAR KOTHARI]

Amendment of third proviso to S.254(2A) by the Supreme Court’s order-

Delay in disposing of appeal is not attributable to assessee, then stay will not automatically lapse.  The Supreme Court amends S. 254 to remove arbitrariness

Provision From the Constitution of India

Article.14. Equality before law.-

The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

Section 254 of the Income Tax Act, 1961.

Relevant proviso, before amendment by the Supreme Court   reads as follows:

Proviso to S.254(2A) as amended w.e.f. 01.10.2008:

[''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]

Note:

The proviso as above, with highlights added by author about amendment,  was substituted by Finance Act, 2008, w.e.f. 1.10.2008. Prior to substitution it was read as under:

[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, the order of stay shall stand vacated after the expiry of such period or periods.]"

Effect of amendment of 2008:

By the amendment of 2008 various periods of extensions were included, upper limit of 365 days was fixed and it was provided that stay shall lapse even if the delay in disposal of appeal is not attributable to the assessee

Therefore, even if delay in disposal of the appeal was attributable to the Tribunal, or the Assessing Office (AO)  or the Departmental Representative (DR) stay granted was to vacate, although the assessee had complied with requirements for hearing and disposal of appeal and the assessee is not at default in relation to effective hearing and disposal of appeal. By the Tribunal.

This situation is really just against any principal of law governing equality before law and delivery of justice. This proviso was challenged as unconstitutional in view of Article 14 of the COI.

Amendment by the order of the Supreme Court:

The honourable Supreme Court in ultimate held that the  words “ even”  and” not”  shall  stand omitted from the said proviso. 

After  Amendment by the Supreme Court’s order  the third proviso to S. 254 (2A) will read as follows:

[''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, if the delay in disposing of the appeal is attributable to the assessee]

Therefore, the Third proviso to section 254(2A) stand  amended vide  in the case of DEPUTY COMMISSIONER OF INCOME TAX & ANR. VERSUS M/S. PEPSI FOODS LTD. (NOW PEPSICO INDIA HOLDINGS PVT. LTD.) - 2021 (4) TMI 369 - SUPREME COURT

Applicability of the amendment:                  

The amendment by the order of the Supreme Court has effect of amending the said proviso from its inception and therefore it will apply to all pending cases of appeals in which stay has been granted but appeal has not been decided and delay in disposal of appeal is not attributable to the assessee.

When a tax provision can be challenged as invalid:

In view of the judgment we  can summarise  some of principals as follows:

  Although in this judgment constitutional validity of the third proviso to Section 254(2A) was the issue before the Supreme Court, However, principals laid down can apply in relation to other provisions which seems in valid.

The third proviso to Section 254(2A), after the said amendment, provided for automatic vacation of a stay or stays  as granted on the completion of 365 days.

 As held  and reiterated by the Supreme Court  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.

The Supreme Court found and held that undoubtedly 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.

 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 responsbile.

Seemingly the supreme Court also found contradiction in provisions and so held that “ 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.

 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.

Non disposal of appeal may be attributable to the Tribunal and assessee may not be at fault. 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.

These principals can be checked vis a vis some other provisions which are discriminatory and arbitrary. For example,  even when S.68 is there to treat unexplained cash credits as income,  the provision  to presume  many type of capital receipts as income under section 56  may not be constituently valid.