2021 (4) TMI 369 - SC - Income Tax

Supreme Court Affirms Delhi High Court: Income Tax Act Provision Unconstitutional Due to Equal Treatment of Assessees.

The SC upheld the Delhi HC's decision, declaring the third proviso to Section 254(2A) of the Income Tax Act unconstitutional. It violated Article 14 by ... Constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961 - incidental power of the Appellate Tribunal to grant stay - discrimination under Article 14 of the Constitution of India - manifest arbitrariness under Article 14 - reading down / severance to save statute - legal maxim actus curiae neminem gravabitConstitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961 - discrimination under Article 14 of the Constitution of India - manifest arbitrariness under Article 14 - reading down / severance to save statute - Whether the third proviso to Section 254(2A) of the Income Tax Act, 1961, as substituted by the Finance Act, 2008, is constitutionally valid under Article 14 and, if not, whether it can be read down or severed to cure any constitutional infirmity. - HELD THAT: - The Court held that the expression inserted by the Finance Act, 2008 - which provided that a stay order shall stand vacated after expiry of 365 days 'even if the delay in disposing of the appeal is not attributable to the assessee' - results in treating unequals alike by denying any distinction between assessees who cause delay and those who do not. That classification impermissibly defeats the vested right of appeal and makes the statutory stay illusory in cases where delay is not attributable to the assessee. The provision therefore offends the equal protection guarantee under Article 14 both as discriminatory (clubbing distinct classes without rational relation to the object) and as manifestly arbitrary, being capricious and disproportionate to its ostensible object of speedy disposal. Applying the remedial doctrine of reading down/severance, the Court removed the words 'even' and the words 'is not' after the words 'delay in disposing of the appeal', thereby preserving the remainder of the proviso while allowing the Tribunal power to extend stay where delay is not attributable to the assessee. The Court relied on established principles that where a statutory provision produces an unconstitutional result it may be confined by severance or reading down to effectuate the legislative purpose without invalidating the statute in toto. [Paras 13, 17, 25]The third proviso to Section 254(2A) as amended by the Finance Act, 2008 is struck down to the extent that it mandates vacatur of stay 'even if the delay in disposing of the appeal is not attributable to the assessee'; the provision is read down so that stay shall stand vacated after the specified period only if the delay is attributable to the assessee.Incidental power of the Appellate Tribunal to grant stay - reading down / severance to save statute - Whether the Appellate Tribunal retains the incidental power to grant or extend stay orders in appeals and how that power operates in light of the read-down proviso. - HELD THAT: - The Court reaffirmed that the power to grant stay is ancillary to the appellate jurisdiction of the Tribunal and may be exercised in deserving cases where prima facie grounds, balance of convenience and likelihood of rendering the appeal nugatory exist. The read-down construction leaves intact the Tribunal's power to extend stay beyond the specified periods where it is satisfied that the delay in disposal of the appeal is not attributable to the assessee. Thus the legislative aim of expedited disposal is preserved while ensuring that the Tribunal's incidental power to prevent frustration of the appeal remains available in appropriate cases. [Paras 6, 7, 25]The Tribunal retains the incidental power to grant and, where justified, to extend stay orders; under the read-down provision it may extend stay where delay is not attributable to the assessee.Final Conclusion: The appeals of the Revenue are dismissed. The third proviso to Section 254(2A) is read down so that a stay order shall stand vacated after the prescribed period only if the delay in disposing of the appeal is attributable to the assessee; the Tribunal's ancillary power to grant or extend stay in deserving cases where delay is not the assessee's fault is preserved. Issues Involved:1. Constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961.2. Discrimination and arbitrariness under Article 14 of the Constitution of India.3. Interpretation of the legislative intent and statutory provisions.Issue-wise Detailed Analysis:1. Constitutional Validity of the Third Proviso to Section 254(2A) of the Income Tax Act, 1961:The appeals raised an important question regarding the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act. The third proviso restricted the extension of stay orders beyond 365 days, even if the delay was not attributable to the assessee. The Delhi High Court had previously struck down this proviso, arguing that it was arbitrary and discriminatory, as it treated assessees who were not responsible for delays the same as those who were. The Supreme Court upheld this view, affirming that the proviso violated Article 14 of the Constitution by not differentiating between assessees responsible for delays and those who were not.2. Discrimination and Arbitrariness under Article 14 of the Constitution of India:The judgment emphasized that the third proviso to Section 254(2A) violated Article 14 of the Constitution, which guarantees equality before the law. The proviso was deemed discriminatory as it treated unequals equally by not distinguishing between assessees responsible for delays and those who were not. The court highlighted that such a classification lacked a rational nexus with the object sought to be achieved by the legislation, which was the speedy disposal of appeals. The court also found the proviso to be manifestly arbitrary, as it resulted in automatic vacation of stay orders even if the delay was due to reasons beyond the assessee's control, including delays caused by the revenue or the tribunal itself.3. Interpretation of the Legislative Intent and Statutory Provisions:The court traced the legislative history of Section 254(2A) and its amendments, noting that the original provision allowed the Appellate Tribunal to grant stay orders without any time limit. Subsequent amendments introduced time limits and conditions for extending stay orders. The court referred to previous judgments, including those of the Bombay High Court and the Delhi High Court, which had interpreted the provisos to Section 254(2A). The court concluded that the third proviso, as amended by the Finance Act, 2008, was inconsistent with the legislative intent and the constitutional mandate. The court held that the proviso should be read without the words 'even' and 'is not' after the words 'delay in disposing of the appeal,' thereby allowing the tribunal to extend stay orders if the delay was not attributable to the assessee.Conclusion:The Supreme Court upheld the Delhi High Court's judgment, declaring the third proviso to Section 254(2A) of the Income Tax Act as unconstitutional. The court emphasized the need for legislative provisions to be fair, non-discriminatory, and rationally connected to their objectives. The judgment reinforced the principle that statutory provisions must not violate constitutional guarantees of equality and non-arbitrariness. Consequently, the appeals of the revenue were dismissed, and the third proviso was read down to allow extensions of stay orders if the delay in disposing of the appeal was not attributable to the assessee.