2015 (5) TMI 655 - HC - Income Tax

Court invalidates Income Tax Act amendment, upholds Tribunal's power to extend stay beyond 365 days if delay not assessee's fault.

The court declared the amendment to Section 254(2A) of the Income Tax Act, 1961, introduced by the Finance Act, 2008, as unconstitutional under Article 14 ... Third proviso to Section 254(2A) of the Income-tax Act - aggregate stay limit - incidental power of the Tribunal to grant and extend interim stay - Article 14 - impermissible classification and unequal treatment - reading down to avoid constitutionality strain - right of appeal rendered illusoryThird proviso to Section 254(2A) of the Income-tax Act - aggregate stay limit - Article 14 - impermissible classification and unequal treatment - incidental power of the Tribunal to grant and extend interim stay - Constitutional validity of the expression 'even if the delay in disposing of the appeal is not attributable to the assessee' in the third proviso to Section 254(2A) as inserted by the Finance Act, 2008, and the extent of the Tribunal's power to extend stay where delay is not attributable to the assessee. - HELD THAT: - The Court held that the statutory scheme recognises the Tribunal's ancillary/incidental power to grant stay as necessary to make appellate jurisdiction effective. The 2008 insertion - making the stay vacate after 365 days 'even if the delay in disposing of the appeal is not attributable to the assessee' - treats assessees who have not caused delay the same as those who have, thereby creating a classification without rational nexus to the legislative object. Applying the Article 14 principles (intelligible differentia and rational nexus), the Court found the added words to render the right of appeal illusory for well-behaved assessees and to be hostile discrimination. The Court relied on the jurisprudence that (i) incidental powers of an appellate forum include stays to prevent rendering an appeal nugatory, (ii) statutory conditions may be upheld if reasonable but cannot be so onerous as to nullify the appeal right, and (iii) a provision should be read consistently with constitutional mandates where possible. The Court therefore struck down the 2008 insertion as violative of Article 14 and restored the earlier construction (as in Narang Overseas) that, in deserving cases where delay is not attributable to the assessee, the Tribunal retains power to extend stay beyond 365 days. The Court clarified that this does not condone routine stays; the Tribunal's exercise remains discretionary and fact-sensitive, and High Courts retain their writ jurisdiction under Articles 226/227. [Paras 23, 24]The words inserted by the Finance Act, 2008 - 'even if the delay in disposing of the appeal is not attributable to the assessee' - are struck down as violative of Article 14; the Tribunal may, in deserving cases where delay is not attributable to the assessee, grant extension of stay beyond 365 days.Final Conclusion: The writ petitions are allowed; the 2008 amendment phrase is struck down for violating Article 14 and the Tribunal retains power to extend stay beyond 365 days where delay is not attributable to the assessee; petitioners may apply to the Tribunal for extension and interim orders granted shall continue until the Tribunal acts. Issues Involved:1. Constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961.2. Interpretation and implications of the amendment introduced by the Finance Act, 2008.3. Whether the amendment violates Article 14 of the Constitution of India.4. The power of the Income Tax Appellate Tribunal to grant interim relief beyond 365 days.Detailed Analysis:1. Constitutional Validity of the Third Proviso to Section 254(2A)The primary issue in these writ petitions is the challenge to the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961, particularly the amendment introduced by the Finance Act, 2008. The petitioners argue that the amendment, which added the words 'even if the delay in disposing of the appeal is not attributable to the assessee,' is arbitrary and violates Article 14 of the Constitution of India. They contend that the right to obtain a stay of demand/penalty is integral to an effective right of appeal, and the amendment makes this right illusory.2. Interpretation and Implications of the Amendment Introduced by the Finance Act, 2008The amendment in question nullified the interpretation by the Bombay High Court in Narang Overseas Private Limited v. Income Tax Appellate Tribunal, which allowed the Tribunal to extend the stay beyond 365 days if the delay was not attributable to the assessee. The petitioners argue that this amendment introduces a classification that clubs assessees who are responsible for delays with those who are not, causing hostile discrimination.3. Violation of Article 14 of the Constitution of IndiaThe petitioners argue that the amendment violates Article 14 by treating unequals equally. Assessees who delay the proceedings and those who do not are treated the same, leading to discrimination against law-abiding assessees. The court agrees, stating that this classification has no rational nexus with the object sought to be achieved and is therefore violative of Article 14.4. Power of the Income Tax Appellate Tribunal to Grant Interim Relief Beyond 365 DaysThe court examined whether the Tribunal's power to grant interim relief is limited by the third proviso. The Supreme Court in ITO v. M. K. Mohammed Kunhi held that the power to grant a stay is incidental to the Tribunal's appellate jurisdiction. The court noted that the Tribunal's power to grant stay should not be rendered nugatory by the proviso, especially when the delay is not attributable to the assessee.Conclusion:The court struck down the expression 'even if the delay in disposing of the appeal is not attributable to the assessee' as violative of Article 14 of the Constitution. This reverts the legal position to the interpretation by the Bombay High Court in Narang Overseas, allowing the Tribunal to extend the stay beyond 365 days if the delay is not attributable to the assessee. The writ petitions were allowed, and the petitioners were directed to approach the Tribunal for extension of stay. The interim orders granted by the court were to continue until the Tribunal passed its orders.