Key Takeaways: - Background and Overview of Legal Provision - Facts of the Case - Contentions of the Assessee and Revenue - Supreme Court's Verdict - Key Learnings and Way Forward

1. AUTOMATIC VACATION OF STAY GRANTED BY
TRIBUNAL
DCIT v. PEPSI FOODS LTD. [2021] 126
taxmann.com 69(SC)
CA Jugal Gala

2. RESEARCH CREDITS
Deepika S
Gracelin Lita P

3. LEGENDS USED
AO Assessment Order
AY Assessment Year
IT Income Tax
ITAT Income Tax Appellate Tribunal
SC Supreme Court
HC High Court
Hon’ble Honourable

4. PRESENTATION SCHEMA
Background
Overview of the Legal
Provision under
Challenge
Facts of the Case
Contentions of the
Revenue and Assessee
Constitutional Validity
of Third Proviso to
Section 254(2A)
SC’s Verdict
Conclusion

5. BACKGROUND AND OVERVIEW
OF LEGAL PROVISIONS

6. BACKGROUND
Taxpayers have a right of appeal against the Orders passed by the
Income Tax authorities under the Income Tax Act, 1961 (“IT Act”).
In deciding these appeals, Appellate authorities have inherent power
to grant stay against the tax demands raised by Income Tax officers.
This power to grant stay by the ITAT has been subject to numerous
litigations.
Thus, there has always been a tussle between the judiciary and
legislature on tax tribunals’ powers to grant a stay on demands raised
by the revenue department.

7. OVERVIEW OF SECTION 254
Orders of Appellate Tribunal
The purpose behind Section 254(2) is that no party appearing before the Appellate Tribunal, be it an
Assessee or the Department, should suffer on account of any mistake committed by the Tribunal.
Deals with the power of the Appellate Tribunal to pass any order after giving both parties an opportunity
of being heard.
It deals with the power of the Appellate Tribunal to amend any order passed by it under sub-section (1), if
any mistake apparent from the record is brought to its notice.
S.254(1)
S.254(2)
In every appeal, the Appellate Tribunal has to dispose an appeal within a period of four years from the end
of the financial year in which such appeal is filed under Section 253.
S.254(2A)

8. OVERVIEW OF SECTION 254 (2A) INCLUDING THE
PROVISOS
• The Appellate Tribunal has the power to pass an order of stay in any proceedings relating to
an appeal filed before it.
• The period of stay shall be for 180 days from the date of such order, on expiry of which, it shall
be automatically vacated
• The appeal shall be disposed within the said period of stay specified in the order.
Proviso 1
• In case the appeal is not disposed of within the specified period of stay, the same may be
extended to 365 days upon an application made by the assessee.
• However, such an extension may be given only when the delay is not attributed to the
assessee.
Proviso 2
• It provides that there shall be automatic vacation of the stay order after a period of 365 days
even if the delay is not attributable to the assessee.
Proviso 3

9. FACTS OF THE CASE

10. SEQUENCE OF EVENTS
Assessment order for AY 2008-
09 was passed favouring
Revenue, Assessee was
aggrieved.
Assessee approaches ITAT
appealing the additions order
passed by AO.
ITAT granted stay on the
assessment order in May 2013.
Stay order was further
extended till May 2014
Efforts to secure a further
extension on the stay order
failed owing to Third Proviso to
Section 254 (2A).
Assessee files a writ petition
before the Hon’ble Delhi High
Court challenging the
constitutional validity of the
Third Proviso
The Assessee-Respondent, Pepsi Foods Ltd. is engaged in manufacture and sale of concentrates,
fruit juices, processing of rice and trading of goods for exports.

11. FACTS OF THE CASE
The constitutional validity of the provisos to Section 254(2A) was
challenged before the Hon’ble Delhi High Court in Pepsi Foods
Ltd. v. ACIT1.
The Hon’ble Delhi HC confirmed that the Third Proviso to Section
254(2A) as being violative of Article 14 (Right to Equality) of the
Constitution of India.
Aggrieved, the Revenue appealed this order of the Delhi HC before the
Hon’ble Supreme Court.
The present case is the constitutional challenge to the provisos of
Section 254 (2A).
1 [2015] 376 ITR 87 (Del)

12. CONTENTIONS OF THE ASSESSEE
AND REVENUE

13. WHETHER PROVISIONS OF TAX STATUTES CAN BE
CHALLENGED UNDER ARTICLE 14
When Article 14 of the Constitution is applied to tax legislation, greater freedom must be allowed by the
Court in adjudging the constitutional validity of the same.
As long as the State has laid down a valid policy which it has followed without singling out anybody, no
discrimination can possibly ensue.
Thus, the test of Article 14 is to be used sparingly by Courts while testing the constitutionality of tax
statutes.
Revenue’s Contention
Discriminatory taxation can been struck down under Article 14 of the Constitution.
State cannot take shelter under a “policy” if the policy or object laid down in the statutory provision is
itself arbitrary or discriminatory.
Assessee’s Contention

14. WHETHER ASSESSEE HAS AN INHERENT RIGHT TO
OBTAIN STAY
There is no inherent right of Assessee to obtain stay of a judgment in an appellate proceeding.
The discretion to grant such stay is dependent upon the discretion of the Appellate Court.
Discretionary remedy of a stay is part and parcel of the right to appeal which itself is a statutory right and
hence, can be taken away by the legislature.
Revenue’s Contention
Assessee’s right to appeal inherently includes right to obtain a stay
Once such a stay has been obtained, it cannot be vacated without a default committed on part of the
Appellant.
Assessee’s Contention

15. CONSTITUTIONAL VALIDITY OF
THIRD PROVISO TO
SECTION 254(2A)

16. ARTICLE 14 IN CONTEXT OF TAX STATUTES
The Court holds that the challenge to tax statutes under Article 14 can be on the following grounds, be it
substantive or procedural in nature:
Discrimination Manifest Arbitrariness
•Article 14 provides the Right to Equality and Equal Protection of Laws.
•The fundamental principle encompassed in Article 14 is that
Equals must be treated equally and Unequals must be treated Unequally.
•A taxing statute may contravene Article 14 if it seeks to impose upon the same class of
property, persons, etc., something which leads to obvious inequality.

17. TEST OF DISCRIMINATION
The object of section 254(2A) seems to provide for expeditious disposal of appeals however, such
object cannot be discriminatory.
However, 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 thereby treating unequals also
equally.
•The Second proviso to Section 254(2A) stipulates that the disposal of appeal by ITAT within 365
days is directory as it uses the word “may”.
•However, the Third Proviso provides that the vacation of stay on expiry of 365 days becomes
mandatory for the assessee as it uses the word “shall”.
The Court finds that the Third Proviso is discriminatory and hence, violates Article 14.

18. TEST OF MANIFEST ARBITRARINESS
The Court referred to a Constitution Bench Decision in the case of Shayara Bano v. Union of India
[2017] 9 SCC 1 (SC)
Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally
and/or without adequate determining principle. Also, when something is done which is excessive and
disproportionate, such legislation would be manifestly arbitrary.
•The Court finds that the Third Proviso to Section 254(2A) provides for vacation of stay in favour
of the Revenue even if the Revenue is itself responsible for causing delay in hearing the
appeal.
•Thus, vacation of the stay will result even for no default from the part of the Assessee and
would thus, amount to unreasonable restriction of the Assessee’s right to appeal.
•This would give rise to a situation wherein the revenue itself might adopt delaying tactics and
thereafter would be unjustly rewarded by automatic vacation of stay.
Thus, it held that the provision is manifestly arbitrary, capricious, irrational and
disproportionate so far as the assessee is concerned and hence, violates Article 14
of the Constitution.

19. SC’s VERDICT

20. FINAL RULING
• Based on the findings discussed before, the Hon’ble Supreme Court declared the Third Proviso
as unconstitutional as it violated Article 14.
• It concluded by reading down the Third Proviso as, "Any order of stay shall stand vacated after
the expiry of the period... only if the delay in disposing of the appeal is attributable to the
assessee."
• Thus, the effect of the Third Proviso which provides for automatic vacation of the stay order
upon expiry of 365 days even for no default from the part of the Assessee was nullified.
.
Held, Third Proviso to Section 254(2A) is unconstitutional.

21. CONCLUSION

22. KEY LEARNINGS
The Court affirms that Tax policies must not be arbitrary.
Thus, automatic vacation of stay order granted by Tribunal after 365 days cannot occur if there is no default from
the part of the assessee.
It provides a welcome relief to taxpayers who were otherwise coerced by the Revenue to cough up the
outstanding demand pending disposal by the ITAT without any fault of their own.
It is noteworthy to mention that the Hon’ble SC has given the ruling ignoring the aspect of literal interpretation,
which is always envisaged in analysing the tax provisions
Further, a rationale can be extrapolated from the ruling that the fundamental rights cannot be denied if there is
no misconduct from the assessee’s end

23. WAY FORWARD
• The Finance Act, 2020 has amended Section 254(2A)
• More conditions and limitation to the power of the Tribunal in grant of stay of recovery of demand
have been introduced (e.g. Assessee has to deposit 20% of dues or provide security thereof)
• It reflects the intent of the legislature to curb the Tribunal’s unconditional power to grant stay, even
where the assessee has established a prima facie case and is undergoing financial / genuine
hardship.
• It would be interesting to see amendments in Sec 254(2A) based upon the precedence given in this
ruling
• The precedence of this ruling may be used by various assessees where literal interpretation of the
tax provisions can be challenged for denial of fundamental rights

24. Thank You!
Scan the QR Code to Join our
Research Group on WhatsApp
Scan the QR Code to explore more
Research from our Website
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
Copyrights © 2021 DVS Advisors LLP