No Automatic Vacation Of Stay Under 3rd Proviso To Section 254(2A) Income Tax Act If Assessee Is Not Responsible For Delay In Hearing Appeal: Supreme Court

The Supreme Court upheld a Delhi High Court judgment which read down the third proviso to Section 254(2A) of the Income Tax Act, 1961.

"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", the bench headed by Justice RF Nariman said.

The third proviso to Section 254(2A) did not permit the extension of a stay order beyond 365 days even if the assessee was not responsible for delay in hearing the appeal. The Delhi High Court partly struck down this proviso. Section 254(2A) read thus: 

(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) of section 253:... 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.

While dismissing the appeal filed by Revenue, the bench, also comprising Justices BR Gavai and Hrishikesh Roy, observed that the proviso treats unequals  equally in that no differentiation is made between the assessees who are responsible for delaying the proceedings and assessees 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.", the court said.

The court noted that the object sought to be achieved by the third proviso to Section 254(2A) of the Income Tax Act is the speedy disposal of appeals before the Appellate Tribunal in cases in which a stay has been granted in favour of the assessee. The bench observed:

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 25 proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned.

We have already seen how unequals have been treated equally so far as assessees who are responsible for delaying appellate proceedings and those who are not so responsible, resulting in a violation of Article 14 of the Constitution of India. Also, the expression "permissible" policy of taxation would refer to a policy that is constitutionally permissible. If the policy is itself arbitrary and discriminatory, such policy will have to be struck down, as has been found in paragraph 17 above.

The judgment authored by Justice RF Nariman held that the provision was violative of Article 14 for being arbitrary and discriminatory. The automatic vacation of stay provision was termed "manifestly arbitrary", "capricious", "irrational" and "disproportionate" as far as the assessee is concerned. It was noted that the stay would become automatically vacated after the prescribed period even if the non-disposal of the appeal was due to the inability of the Tribunal to take up the matter in time or due to the acts of the Revenue.

"..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 judgment said.

Case: Deputy Commissioner Of Income Tax vs. Pepsi Foods Ltd. [CA 1106 OF 2021]
Coram: Justices RF Nariman, BR Gavai and Hrishikesh Roy
Counsel: ASG Vikramjit Banerjee, Sr. Adv Ajay Vohra, Adv Himanshu S. Sinha,  Adv Deepak Chopra,  Adv Sachit Jolly
Citation: LL 2021 SC 197

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