Finance Bill, 2020: Stay of Demand – Curtailment Of Powers Of The ITAT?

Advocate Shashi Bekal has studied the provisions of clause 97 of the Finance Bill 2020 which seeks to regulate the power of the Tribunal to grant stay on recovery of demand. He has considered whether the said provision is directory in nature and not mandatory. He has also opined on whether the provision can be said to be arbitrary and therefore ultra vires the Constitution. The author has also argued that the provision will compel taxpayers to file Writ Petitions in the High Courts for stay of demand and thereby lead to unnecessary burden on the Courts

1. Proposed amendment:

The Finance Bill 2020, vide clause 97 proposed to provide that ITAT may grant stay under the 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 furnish security of equal amount in respect thereof.

In the first proposed proviso to Sub-section (2A) of section 254 Act after the words “from the date of such order” the following has been inserted:

“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”

It is also proposed to substitute second proviso to provide that no extension of stay shall be granted by ITAT, where such appeal is not so disposed of which the said period of stay as specified in the order of stay. However, on an application made by the assessee, a further stay can be granted, if the delay in not disposing of the appeal is not attributable to the assessee and the assessee has deposited 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 furnish security of equal amount in respect thereof. The total stay granted by ITAT cannot exceed 365 days.

2. Existing law:

The existing provisions of the first proviso to sub-section (2A) of section 254 of the Act, inter-alia, provides that the ITAT may, after considering the merits of the application made by the assessee pass an order of stay for a maximum period of 180 days in any proceedings against the order of the Commissioner of Income-tax (Appeal). Second proviso to the said sub-section prescribes that where the appeal is not so disposed of, the ITAT on being satisfied that the delay is not attributable to the assessee, extend the stay for a further period subject to the restriction that the aggregate of the periods originally allowed and the period so extended shall not, in any case, exceed 365 days and the Appellate Tribunal shall dispose of the appeal within the period or periods of stay so extended or allowed. The third proviso of the said sub-section also provides that if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed 365 days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee.

3. Issues:

3.1. Constitutionality

Firstly, It is pertinent to understand that, the inherent powers were thrust upon the Second Appellate Authority i.e. the Income tax Appellate Tribunal in matters of stay of demand and treating the assessee as an assessee not in default, wherein the Tribunal in its powers could analyse all relevant factors such as, the case set out by the assessee; the nature of addition; In cases where the assessed income under the impugned order far exceeds returned income the authority will consider whether the assessee has made out a case for unconditional stay.; In cases where the assessee relies upon financial difficulties, the authority concerned can briefly indicate whether the assessee is financially sound and viable to deposit the amount if the authority wants the assessee to so deposit; In caseses where the issue is covered by an order of the same assessee in earlier years; In cases where the issue is a well settled position of law. Considering all the possible relevant factors and submissions made by the assessee, the Tribunal was empowered to pass an order granting a conditional or unconditional stay on demand of the assessee.

Section 254(1) of the Income tax Act, 1961(‘Act’) is usefully extracted as under

“Orders of Appellate Tribunal.

254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.”

The Hon’ble Supreme Court in the case of  ITO v. M. K. Mohammed Kunhi [1969] 71 ITR 815 (SC) held that Tribunal’s powers in dealing with appeals are of widest amplitude and is identical with powers of an appellate Court under Civil Procedure Code, and  section 254 confers appellate jurisdiction, it impliedly grants power of doing all such acts, or employing such means, as are essentially necessary to its execution and that statutory power carries with it duty in proper cases to make such orders for staying proceeding as will prevent appeal if successful from being rendered nugatory.

This amounts interference in the quasi-judicial functioning of the Tribunal. Therefore, the wide powers envisaged by Section 254 (1) of the Act to the appellate Tribunal to pass such an order as it deems fit; with the introduction of this provision, this power has been curtailed. This this proposed provision is arbitrary & restricts the powers of the Tribunal and therefore ultra vires the Constitution.

To further buttress the case of the Tribunal, it could be argued that the words used in the memorandum to the Finance Bill, 2020while referring to granting a stay of demandis ‘may’. This would imply that the said insertion is only directory in nature and not mandatory.

The proposed change in law is brought through an insertion in the ‘proviso’ to the first proviso to section 254 (2A) of the Act. As a cardinal rule, a proviso does not travel beyond the section and is always subordinate to the main section.

The Doctrine of Harmonious Construction states that, a provision of the statue should not be interpreted or construed in isolation but as a whole, so as to remove any inconsistency or repugnancy. Therefore, although a stay of demand may be granted by the Tribunal on deposit of the required percentage as per the new Bill; The Tribunal is still at the liberty considering all relevant factors pertaining to the case to grant a stay as it deems fit in exercise of its inherent powers.

3.2. Interpretation of ‘security’

Secondly, with respect to the option to ‘furnish security’ in lieu of the deposit of 20 percent for granting a stay on demand, the types and classes of surety/ security that can be furnished needs to be explicitly mentioned by the department.

It is pertinent to note that, this practice has been implemented in the past by the Hon’ble Tribunal at Mumbai in the case of Dhruv N. Shah vs. Deputy CIT [2003] 1 SOT 528 (Mum) (Tri) where In the order of the Tribunal granting stay, the assessee was directed to furnish security to the satisfaction of the Assessing Officer. Accordingly, the assessee had offered the flat which was stated to be worth Rs. 30 lakhs as security. The outstanding demand was Rs. 15,86,865. However, the Assessing Officer rejected the assessee’s offer as not acceptable and directed him to furnish security in the form of bank guarantee equivalent to the outstanding demand. It was held that The Assessing Officer was not justified in insisting on a security in the form of a bank guarantee, when the Tribunal directed that the assessee shall offer security to the satisfaction of the Assessing Officer, what was meant was that the satisfaction should not be a subjective satisfaction, but one arrived at on an objective basis. It has to be seen is whether the security offered is acceptable in law and whether it covers the outstanding demand, thereby protecting the interests of revenue. The Assessing Officer cannot insist on security being offered only in a particular form as was done by him in the instant case. 

Further, Reliance is placed on the decision Shanti Builders v. JCIT [2002] 74 TTJ 578 (Pune) where the petitioner submitted that if the Assessing Officer is allowed to proceed with the assessment as per the directions given by the CIT under section 263, great injury would be caused to the petitioner because the principal tax liability would be around Rs. 11.60 crores and another liability of about Rs. 6 crores on account of interest. The assesee was allowed to furnish a security deposit consisting of variousassets  such as residential flats, office spaces, car parking spaces and bonds.

Since the word ‘or’ gives the assessee an option to pay the deposit or furnish a security of an equal amount. In a case where the assessee is undergoing a cash crunch, however, the assessee has enough assets in illiquid form. The Tribunal can take an assessee favourable view and allow him to deposit the sale deeds in lieu of furnishing security deposit for the purpose of granting a stay.

Further in the event the assessee wishes to pay part of the 20 per cent in cash and the other part via furnishing a security, the word ‘or’ in the proposed amendment should able to be read as ‘and’.

This proposal will adversely impact cash flows and working capital of businesses. As there are neither criterions nor conditions laid down to help assesses from genuine hardships as the circulars and instructions did in the past, in such a scenario, the High Court will play a pivotal role in protecting the tax payers.

3.3. Stay beyond 365 days

Thirdly, when a stay is granted, and the matter has not been disposed off even after a period of 265 days, without any delay being attributed to the assessee. The Tribunal cannot extend the stay for beyond 365 days. This has been well settled by the Hon’ble Delhi High Court in the case of Pepsi Foods (P.) Ltd. v. ACIT [2015] 376 ITR 87 (Del)(HC) wherein it was held that the third proviso to section 254(2A) and, particularly, amendment introduced therein by virtue of Finance Act, 2008, with effect from August 1, 2008, which added words ‘even if delay in disposing of appeal is not attributable to assessee’ has to be struck down being violative of Article 14 of Constitution of India, and therefore where delay in disposing of appeal is not attributable to assessee, Tribunal has power to grant extension of stay beyond 365 days in deserving cases.

Further, the Hon’ble High Court of Telengana & Andhra Pradesh in the case of CIT (TDS) v. Vodafone Mobile Services Ltd. (2018) 408 ITR 140 (T&AP) (HC) it has been held that the third proviso has to be understood primarily as directory and not mandatory-Stay will not stand automatically vacated under third proviso to sub -section 2(A) of section 254 , unless the Tribunal records a finding that the assessee was responsible for the procrastination of hearing of the appeal- Interim stay granted to continue .

Further, in the event the stay is vacated for any reason,  the High Court in exercise of its extraordinary jurisdiction under Article 226 of the Constitution of India can grant a stay of demand even for a period greater than 365 days. The Hon’ble Delhi High Court in the case of CIT v. Maruti Suzuki India Ltd. [2014] 362 ITR 215 held that the assessee always had recourse to filing a Writ Petition under Article 226 of the Constitution of India, before the High Court which had the power and jurisdiction to issue directions to the ITAT.

4. Conclusion:

The only silver lining with this proposal would be that the assessee is not in a position to opt for delay tactics and the Tribunal will take proactive steps in expediting the matter thereby providing speedy justice, and living up to its motto ‘Nishpaksh Sulabh Satvar Nyay‘ which means impartial, easy and speedy justice.

On the other side, in the event an order is passed against the assessee and the assessee is are unable to cough up the proposed statutory requirement of 20 percent, or the stay granted by the Tribunal stands vacated, they will be forced to approach their jurisdictional High Court with a Writ Petition seeking a stay on demand. This will adversely lead to increase in litigation before the Hon’ble High Courts.