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)

2. Legends Used
AO Assessing Officer
AY Assessing Year
FY Financial Year
HC High Court
IT Income Tax
ITAT Income Tax Appellant Tribunal
SC Supreme Court

3. Presentation Schema
BACKGROUND AND
OVERVIEW OF LEGAL
PROVISIONS
FACTS OF THE CASE
CONTENTION OF THE
PARTIES
OBSERVATIONS BY
HON’BLE SC
DECISION CONCLUSION

4. BACKGROUND AND OVERVIEW
OF LEGAL PROVISIONS

5. 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.

6. 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)

7. 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. (in aggregate period of stay
shall not exceed 365 days)
• 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 aggregate
365 days even if the delay is not attributable to the assessee.
Proviso 3

8. FACTS OF THE CASE

9. FACTS OF THE CASE
•The Assessee-Company (Pepsi Foods Ltd.) is engaged in the business of manufacture and sale of concentrates,
fruit juices, processing of rice and trading of goods for exports.
•On 30-9-2008, Assessee filed ITR for FY 2008-2009 declaring a total income of INR 92,54,89,822. An assessment
order was passed on 19-10-2012 against the assessee and an appeal to Hon’ble ITAT was filed on 29-4-2013.
•On 31-5-2013, a stay order was granted by the ITAT for a period of 6months. This stay was extended till 8-1-2014
and continued being extended until 28-5-2014.
•As the period of 365 days provided in Section 254(2A) of IT Act was to end on 30-5-2014 beyond which no further
extension could be granted, the assessee filed a writ petition before the Hon’ble Delhi HC on 21-5-2014
challenging the constitutional validity of the third proviso to Section 254(2A) of the IT Act.
•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.
•This judgment was been challenged by the Revenue in the appeals made to SC. The present case is the
constitutional challenge to the provisos of Section 254 (2A).

10. CONTENTION OF THE PARTIES

11. 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

12. 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

13. OBSERVATIONS BY SC

14. 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.

15. 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 the
aggregate 365 days is directory as it uses the word “may”.
•However, the Third Proviso provides that the vacation of stay on expiry of aggregate 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.

16. 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.

17. DECISION

18. DECISION
Law laid down by the impugned judgment of the Delhi HC in M/s Pepsi Foods Ltd. is
correct. Resultantly, the judgments of the various HC which follow the same declaration of
law are also correct.
Consequently, the third proviso to Section 254(2A) of the IT 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 appeals of the revenue are, therefore, dismissed.
Held, Third Proviso to Section 254(2A) is unconstitutional.

19. CONCLUSION

20. 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

21. 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

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