Supreme Court Grants Relief to Pepsi Co. By Partially Striking Down IT Provisions On Stay of Tax Assessment
The Supreme Court in the case of Deputy Commissioner Of Income Tax v. Pepsi Foods Ltd. upheld the decision of Delhi High Court (HC) which read down the third proviso to Section 254(2A) of the Income Tax Act, 1961 (IT Act).
The SC three-judge bench comprising of Justices RF Nariman, BR Gavai, and Hrishikesh Roy noted that the third proviso to Section 254(2A) of the IT Act treats unequal equally where no differentiation is made between the assessee who is responsible for the delay and the ones who are not responsible for the delay.
The Top Court noted that "This is a little peculiar in that the legislature itself has made the aforesaid differentiation in the second proviso to Section 254(2A) of the Income Tax Act, making it clear that a stay order may be extended up to a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee."
The factual matrix of the case is that the Respondent-assessee, M/s Pepsi Foods Ltd. has been engaged in the business of manufacture and sale of concentrates, fruit juices, processing of rice, and trading of goods for exports. The assessee is a group company of the multi-national Pepsico Inc., a company incorporated and registered in the United States of America.
The assessee-company merged with Pepsico India Holdings Pvt. Ltd., in terms of a scheme of arrangement duly approved by the Punjab and Haryana High Court. A return of income was filed for the assessment year 2008-2009 declaring a total income of INR92,54,89,822.
A final assessment order was passed which was adverse to the assessee. Aggrieved by the aforesaid order, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT) wherein a stay of the operation of the order of the assessing officer was granted by the Tribunal for a period of six months. This stay was extended.
Since the period of 365 days as provided in Section 254(2A) of the IT Act was to end on 30 May 2014 beyond which no further extension could be granted, the assessee, apprehending coercive action from the Revenue, filed a writ petition before the HC challenging the constitutional validity of the third proviso to Section 254(2A) of the IT Act. The HC struck down that part of the third proviso to Section 254(2A) of the IT Act.
The SC noted that the object sought to be achieved by the third proviso to Section 254(2A) of the IT Act is the speedy disposal of appeals before the Appellate Tribunal in cases in which a stay has been granted in favour of the assessee.
The judgment authored by Justice RF Nariman held that the provision was violative of Article 14 of the Constitution for being arbitrary and discriminatory. The automatic vacation of stay provision was termed 'manifestly arbitrary', 'capricious', 'irrational' and 'disproportionate' as far as the assessee is concerned.
The SC bench noted that the stay would become automatically vacated after the prescribed period even if the non-disposal of the appeal was due to the inability of the Tribunal to take up the matter in time or due to the acts of the Revenue.
The Top Court concluded that "The law laid down by the impugned judgment of the Delhi High Court in M/s Pepsi Foods Ltd. is correct. Resultantly, the judgments of the various High Courts which follow the aforesaid declaration of law are also correct. Consequently, the third proviso to Section 254(2A) of the Income Tax Act will now be read without the word 'even' and the words 'is not' after the words 'delay in disposing of the appeal'."
The Court held, "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 constitutionally permissible policy. If the policy is itself arbitrary and discriminatory, such policy will have to be struck down."