February 18, 2020

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Budget 2020: Disenfranchisement of the Income Tax Appellate Tribunal

- Mukesh Butani, Managing Partner [ BMR Legal ]
- Shreyash Shah, Managing Associate [ BMR Legal ]


Two amendments in the Finance Bill of 2020, though conjoint yet carrying distinctive implications, have caught the attention of the taxpayers and legal fraternity alike. They relate to the amendments proposed to Section 254 of the Income Tax Act, 1961 (IT Act). In this column, we seek to demystify the proposals and their rationale as well as the concerns arising out of these proposals....

Setting the context

Income Tax Appellate Tribunal (‘the Tribunal’), an appellate forum, is the final fact-finding authority under the provisions of the IT Act. It is the oldest tribunal in India and its setup pre-dates independence. Its functioning, importance to the legal system, contribution to fiscal jurisprudence, etc. have been lavishly credited with congratulatory messages from eminent jurists, Supreme Court and legal luminaries like Late Nani Palkhivala.

Opining that the Tribunal had the necessary trappings of a judicial institution, the power to grant interim stay was inherent in the Tribunal. The Supreme Court in the Mohammed Kunhi case1 permitted it to pass necessary order in the ends of justice, observing that express grant of statutory appellate power carries necessary implication including, the authority to use all reasonable means to make such grant effective. This power has subsequently been a subject of legislative intervention and refinement by successive amendments and the proposals in the Finance Bill, 2020 are an attempt to revisit such powers.

Enactments & Earlier amendments

Up until 1998, no time limit was prescribed for disposal of appeals by the Tribunal, which invariably resulted in delays. For making the ends of justice meet, Section 254(2A) was inserted to ensure accountability and timely disposal of appeal by providing a time period of 4 years from end of the financial year in which appeal was filed. Since the amendment, the functioning of the tribunals in so far as disposals are concerned did show a visible improvement, despite the 4-year limit being loosely worded. Up until 2007, the Tribunal exercised inherent powers, as directed by the Supreme Court to grant stay of demand. The rationale was to alleviate taxpayers’ difficulty to pay up the demand until disposal of the appeal. Thereafter, provisos to section 254(2A) were subsequently added by Finance Act, 2007 which clearly stipulated that, in the first instance, a stay order could be passed for a period, not exceeding 180 days and the Tribunal was required to dispose the merits appeal within that period. The second proviso stipulated that in case the appeal was not so disposed within the 180 days period, the Tribunal on being satisfied that the delay was not attributable to the taxpayer, could extend such stay up to a maximum of 365 days. This meant that the Tribunal took upon itself, the responsibility to decide the merits appeal within a year. The 2007 amendments received judicial consideration.

The effect of these amendments as they then existed came up for consideration before the Bombay High Court in Narang Overseas2 and it was held that the provisos did not exclude or negate the power of the Tribunal to grant relief beyond the period of 180 days. The intent of the Parliament was not to denude the Tribunal of its inherent power to continue the interim reliefs including relief by staying tax demand. The Bombay High Court opined that if it were to be held that the Tribunal, would have the power to pass an order in an appeal, but not have the power to continue the grant of interim relief for no fault of the taxpayer, that would be unreasonable or violative of fundamental rights under Article 14 of the Constitution. In other words, the Bombay High Court took the view that the Tribunal had the power to extend the stay beyond the period of 365 days, provided the delay in disposal of the appeal was not attributable to the taxpayer. The Bombay High Court was mindful that Courts are required to interpret the law consistent with the Constitutional mandate so as to avoid a provision being rendered unconstitutional. It is in this light that the Court read down and interpreted the law (prior to the 2008 amendment) that the Tribunal has an inherent power to extend the stay beyond 365 days.

As reaction to the High Court’s interpretation, the law was amended by way of insertion of a third proviso vide Finance Act, 2008 which stipulated that if the appeal had not been disposed within 365 days, the order of stay will automatically stand vacated. The Bombay High Court in the case of Jethmal Faujimal Soni3 interpreted the 2008 amendment holding that the Tribunal is under a bounden duty to ensure that the appeal is disposed of within 365 days, so as not to cause any prejudice to the taxpayer, particularly in a situation, where no fault could be found with the conduct of the taxpayer. Further, the Court opined that in view of the amendment, the Tribunal lost its power to grant stay beyond 365 days and only High Court, exercising its writ jurisdiction, could consider interim relief for stay of demand. This decision resulted in High Courts flooded with writ petitions for stay of demand beyond 365 days.

In a turn of events, the Delhi High Court in Pepsi Foods4 quashed the 2008 amendment in a writ petition challenging its vires. The High Court opined that the amendment introduced by the Finance Act, 2008, which added the words ‘even if delay in disposing of appeal is not attributable to assessee’ has to be struck down, being violative of Article 14 of the Constitution. This decision was subsequently upheld by the Supreme Court5 and it could be very well said to be a law declared under Article 141 of the Constitution of India. Since this was a law declared by the Apex Court, tribunals started extending the stay beyond 365 days where delay in hearing the merits appeals was not attributable to the taxpayer.


Proposals in Finance Bill, 2020

The Finance Bill, 2020 has proposed two amendments to Section 254 (2A) of the IT Act. These amendments are as under:

(a) in the first proviso, after the words “from the date of such order”, the words “subject to the condition that the assessee deposits not less than twenty per cent. of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act, or furnishes security of equal amount in respect thereof” shall be inserted;

(b) for the second proviso, the following proviso shall be substituted, namely:

“Provided further that no extension of stay shall be granted by the Appellate Tribunal, where such appeal is not so disposed of within the said period of stay as specified in the order of stay, unless the assessee makes an application and has complied with the condition referred to in the first proviso and the Appellate Tribunal is satisfied that the delay in disposing of the appeal is not attributable to the assessee, so however, that the aggregate of the period of stay originally allowed and the period of stay so extended shall not exceed three hundred and sixty-five days and the Appellate Tribunal shall dispose of the appeal within the period or periods of stay so extended or allowed”.

The purport of the first proposal is that the Tribunal can grant stay but not completely and a minimum of 20% of the disputed tax, interest, penalty or other sums payable need to be paid by the taxpayer (or equivalent security) as a condition for grant of stay. In other words, the power of the Tribunal to grant stay is proposed to be circumscribed up to 80% of the tax demand.

The second amendment appears to be a re-enactment of the provision struck-down earlier by the Bombay High Court as well as Delhi High Court, declared as violative of Article 14 of the Constitution. In addition, restrictions have been placed upon the powers of the Tribunal in so far as its power to grant of stay is considered.

Validity of the proposals

It is without doubt that, both as an intrinsic feature as also a concomitant of the judicial opinion, the power to grant a stay is not just incidental or ancillary to the appellate jurisdiction of the Tribunal, but also an inherent power. From the legal principles governing power to grant stay, which necessarily requires reference to (i) prima facie case, (ii) consideration of balance of convenience, and (iii) assessment of irreparable loss in event of refusal of stay, particularly financial hardship to taxpayers, it is clear that the power to grant stay, though discretionary, is well hinged with sufficient safeguards to avoid its abuse.

There are multifarious aspects emanating from decisions of the Supreme Court which govern the exercise of such power and wherefrom it is clear that the power of stay exercised by the Tribunal is not likely to be exercised in a routine way or as a matter of course in view of the special nature of taxation. The Tribunal is obliged to grant a conditional stay where the circumstances so warrant, besides an overwhelming mandate that such stays are granted only in deserving and appropriate cases where the Tribunal is satisfied that the entire purpose of the appeal will be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal.

Besides the aforesaid, it is curious to note that the provision which was struck down as unconstitutional is proposed to be re-enacted. The decisions of the Bombay & Delhi High Courts relate to a perceived violation of fundamental rights under Article 14. The two dimensions of Article 14 in its application to fiscal legislation and for rendering a legislation invalid are: (i) discrimination, based on an impermissible or an invalid classification and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders. The Budget proposals in effect have amended the law and attempted to present the same outcome as it stood when it was inserted by the Finance Act, 2007.

More crucially, the proposals clearly underscore the functioning of the Tribunal, in so far as exercise of its power to grant stay and requires to be revisited. Not only the Tribunal’s discretion is being taken away, it has been directed to function, with a dictate to collect 20% tax on disputed demand, even in deserving cases where taxpayer make out a prima facie case. The memorandum explaining the provisions in the Finance Bill has not given any cogent reasons or rationale other than stating the ‘law as it stands’ and the ‘law as it should stand’. Instead, the head note states that the amendments issued clarify the powers of ITAT on stay of demand.

As a practitioner, I have no doubt that the amendment, if passed in the Parliament shall cause undue hardship and harassment to taxpayers who are unable to pay up to 20% of the disputed demand. Undoubtedly, taxpayers will rush to High Courts invoking Writ jurisdictions and thereby clogging the dispute resolution system. Given the larger message of the Modi Government for ease of doing business, and efforts to instill taxpayers’ charter, this proposal should be re-examined before the passage of the bill.

1 ITO v. M.K. Mohammed Kunhi [1969] 71 ITR 815 (SC).
2 Narang Overseas (P.) Ltd. v. ITAT [2007] 295 ITR 22 (Bom).
3 Jethmal Faujimal Soni [2011] 333 ITR 96 (Bom).
4 Pepsi Foods Pvt Ltd v. ACIT [2015] 376 ITR 87 (Del).
5 [2017] 79 251

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

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