The Delhi High Court has struck down as “unconstitutional” a provision under the Income-tax Act which restricts the power of the Tax Tribunal to grant a stay on recovery of the Tax demand beyond a 365-day period.  The decision was taken in response to a batch of petitions filed before the Court by Petitioners Pepsi foods, Ericsson Ab and Aspect Software Inc.

The Issue Involved

Under the Income-tax Act, where an appeal is pending before the Tax Tribunal, the related Tax demand can be stayed by the Tribunal for a period of 180 days and the Tribunal has to decide the case within that time. If the Appeal is not decided within the 180-day period, the stay can further be extended to 365 days if the delay is not on account of the Taxpayer and the Appeal would then have to be decided within the extended period of 365-days.

Practically, in quite a few instances involving complex issues, the Appeal process before the Tribunal can stretch even beyond the 365-day period. In all such cases, the law provided that the Tribunal cannot extend the stay beyond the 365-day time-limit even if the delay in disposal of the Appeal is not on account of the Taxpayer [Third proviso to section 254(2A) is the relevant provision]. This provision under the law was challenged by a batch of Petitioners before the Delhi High Court as “unconstitutional” and it was also argued that the provision restricting the time-limit for Stay of demand to 365-days rendered the Appeal mechanism an “illusory remedy” and rendered it nugatory. 

The Decision of the Court

Under Article 14, a provision of law can be struck down as unconstitutional if the same is found to be “discriminatory”. The High Court was of the view that the provision restricting the stay to 365 days, even where the delay in deciding the appeal was not attributable to the Taxpayer, is discriminatory. The Court ruled that a “well-behaved” Taxpayer (i.e.one who does not adopt dilatory tactics) cannot be clubbed with another who resorted to dilatory tactics, and both the classes of the Taxpayer cannot be made to face the same consequences.

Impact of the Ruling

This ruling would clear the air on an issue where different practices were being followed by various benches of the Tax Tribunal.  The ruling would of course would be of no consequence where the delay in deciding the appeal is on account of the Taxpayer and would benefit only those Taxpayers who have been co-operative in the appellate process before the Tribunal.

Our View – A fallacy in appreciating the “discrimination” angle

In general, a Court would be slow to strike down a provision of law as unconstitutional – challenges to various pieces of legislation as “unconstitutional” under Article 14 on the grounds of “discrimination” have been turned down more often by the Courts than upheld.

In the above ruling, the Court has taken a view that the provision to deny the stay beyond 365, even if the Taxpayer was not at fault,  was discriminatory since such a Taxpayer would be placed on the same footing as another who was indeed at fault, say, by having adopted dilatory tactic.

However, it is noteworthy that the stay on demand is granted on a staggered basis – initially for a 180-day period which is further extended to 365 days ONLY in those cases where the Taxpayer has co-operated in the proceedings and delay is not on his account. A recalcitrant Taxpayer who adopts dilatory tactics would not even be granted a stay beyond the initial time-limit of 180-days, and the extension of stay to 365-days itself is reserved only for “well-behaved” Taxpayers. It is only at the end of the 365-day period, that the “well-behaved” would be relegated to the same position as the not so well-behaved. As the ruling itself notes, even after the 365-day period, the “well-behaved” would have the liberty to approach the High Court for extension of stay, which option would not be available to a recalcitrant. This would no doubt make the appeal process more onerous, but whether that would warrant  a provision of law being construed as “discriminatory” and struck down as “unconstitutional” is a moot question, which probably the Supreme Court would be called upon to answer.