PepsiCo case: SC strikes down provision in tax law limiting extension of stay orders

Terming it “arbitrary and discriminatory”, the Supreme Court has partially struck down a provision of the income tax law that did not allow further extension of stay on assessment beyond 365 days even if the assessee was not responsible for any delay in hearing of appeals before a tribunal.

While upholding the Delhi High Court’s May 2015 judgment that ruled in favour of assesses, a Bench led by justice RF Nariman said 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”.

“We have already seen how unequal 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,” the apex court said while dismissing a batch of appeals filed by the department. Various companies led by Pepsi Foods (now Pepsico Indi Holdings) had challenged the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act before the HC.

“Since the object of the third proviso to Section 254(2A) 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… 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 proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned,” the judges said.

Additional Solicitor General Vikramjit Banerjee, while assailing the HC judgment argued that there was no right to stay of a judgment in an appellate proceeding as such stay is dependent upon the discretion of the appellate court. The discretion having been exercised once would not mean that automatic extensions of the same could be granted despite a reasonable period having gone-by, he said, adding that the discretionary remedy of a stay is part and parcel of the right to appeal which itself is a statutory right, and can be taken away by the legislature. He also contended that equitable considerations and arguments based on hardship were out of place when it comes to tax statutes, which must be read literally.

Senior counsel Ajay Vohra and counsel Sachit Jolly, appearing for various assessees, opposed the department’s stand, saying once discretionary relief had been granted based upon a strong prima facie case, balance of convenience, etc. would be wholly arbitrary and discriminatory that such relief be vacated automatically without reference to whether it is the assessee who is prolonging the appellate proceedings. They also argued that the State cannot take shelter under a “policy”, if the policy or object laid down in the statutory provision is itself arbitrary or discriminatory.
Once there is a vested right of appeal, there is a right to obtain a stay which, once obtained, cannot be vacated without dilatory tactics on the part of the appellant being found against the appellant, they added.