The appeals before the SC raised an important question as to the constitutional validity of the third proviso to Section 254(2A) of the IT Act.
The assessee filed a return of income for the AY 2008-2009 declaring a total income of INR 92,54,89,822. A final assessment order was passed on 19.10.2012, which was adverse to the assessee. The assessee filed an appeal before the Tribunal on 29.04.2013.
On 31.05.2013, the Tribunal granted stay of demand for a period of six months. This stay was extended till 08.01.2014 and continued being extended until 28.05.2014. Since the period of 365 days as provided in Section 254(2A) of the IAT Act was to end on 30.05.2014, beyond which no further extension could be granted, the assessee, apprehending coercive action from the Revenue, filed a writ petition before the Delhi High Court on 21.05.2014. The assessee challenged the constitutional validity of the third proviso to Section 254(2A) of the IT Act.
The Delhi High Court {(2015) 376 ITR 87} struck down that part of the third proviso to Section 254(2A) of the IT Act which 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. Similar view was expressed by various High Courts. These judgements have been challenged by the revenue in these appeals.
The SC observed 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.
Applying above parameters, the SC held that “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 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 SC further observed that vacation of stay in favour of the revenue would ensue even if the revenue is itself responsible for the delay in hearing the appeal. The SC held that for this reason, the said proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned. The SC held that law laid down by the Delhi High Court in M/s Pepsi Foods Ltd. (supra) and other High Courts is 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”. The SC held that 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 SC dismissed the appeals of the revenue.