Whether Amendments To First And Second Proviso To Section 254(2A) Of The Income Tax Act 1961 Are Constitutionally Valid?

Advocate Fenil Bhatt has raised the seminal question whether the amendments by the Finance Act 2020 to section 254(2A) of the Income-tax Act, 1961, which curbs the powers of the Tribunal to grant a stay of demand, is constitutionally valid. The Ld. Author has argued that the amendment is not permissible as it affects the decision-making independence of the Tribunal and obstructs dispensation of justice. He has also pointed out that the amendment is wholly arbitrary and unreasonable. No reasons have been given by the legislature as to the need for curbing the powers of the Tribunal. He has relied on several landmark judgements to support his contentions

The urge of sharing thoughts on the aforesaid issue arose to me in a very trying time for humanity. A microorganism has forced us to surrender significant portion of one of our much-cherished civil liberties. Though, for the greater good but one cannot deny the fact that it is a little unsettling. Taking a cue from autonomy of an individual, autonomy of a judicial institution is equally important, if not more, because of a simple fact that it decides upon the rights between two parties. The Income tax Appellate Tribunal (“the Tribunal”) is one such judicial body, which adjudicates upon disputes between the State and an Assessee under the Act. It is the oldest Tribunal in India and its functioning is as robust as when it was established. There can be no quarrel with the fact that the Tribunal has lived upto the faith bestowed by its Stakeholders, including the Bar.

To drive home the point, it would be sufficient to quote from the Speech delivered by the Hon’ble Chief Justice of India on the occasion of 79th Foundation Day Celebration of the Tribunal and the Hon’ble Chief Justice had the following to say “You will recall that Chandra Kumar’s (1) case, the Supreme Court observed that the Tribunals in this Country had not performed upto expectations. However, if there is one Tribunal in India that has made its mark for its professional excellence, independence and neutrality, it is the Income tax Appellate Tribunal.”. Therefore, it would be safe enough to conclude, that the Tribunal, as an Institution, has performed its duties judicially. The reason to discuss the aforesaid aspect is that in the Finance Act, 2020, legislature has amended the first proviso and second proviso to section 254(2A) of the Act which regulates Tribunal’s power of dealing with stay applications in connection with the appeals pending before it, and through that, the legislature has invaded into its decision making sphere, gravely curbing powers of the Tribunal. It is my submission that strong contentions can be raised challenging the constitutional validity of these amendments.

Prior to discussing the contentions with regard to constitutional validity of the amendments, it would be appropriate to first appreciate the amendments so brought in by the Finance Act, 2020. Finance Act, 2020 has made two amendments to provisos to section 254(2A) of the Act, the relevant extract of the amended section 254 of the Act is reproduced as under:

“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.

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(2A) In every appeal, the Appellate Tribunal, where it is possible, may hear and decide such appeal within a period of four years from the end of the financial year in which such appeal is filed under sub-section (1)  or sub-section (2) of section 253:

Provided that the Appellate Tribunal may, after considering the merits of the application made by the assessee, pass an order of stay in any proceedings relating to an appeal filed under sub-section (1) of section 253, for a period not exceeding one hundred and eighty days from the date of such order 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 and the Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order:

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:

Provided also 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 three hundred and sixty-five 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.”

The first proviso to section 254(2A) of the Act has now been amended to put a further embargo upon the Tribunal, stipulating that it shall be able to order, after considering the merits of the application, stay of any proceedings relating to an appeal pending before it, subject to the condition that the Assessee deposits not less than twenty percent of the tax, interest, penalty, fee or any other sum payable under the Act or furnishes a security of an equivalent amount thereof. Prior to the amendment, the only embargo in the proviso was that stay shall not be granted for a period exceeding one hundred and eighty days. Further, second proviso to section 254(2A) of the Act has been substituted. The amended second proviso provides that if the appeal could not be disposed off within a period of one hundred and eighty days, upon application filed by the Assessee, the Tribunal may extend the stay beyond the period of one hundred and eighty days provided the condition prescribed under the first proviso is satisfied. It puts a further condition that the aggregate period of stay, originally allowed and the extended period, shall not exceed three hundred and sixty-five days and the Tribunal shall dispose of the appeal within that period. It is pertinent to note here that the entire second proviso has been substituted even though the only effective change which has been brought in, pertains to the satisfaction of the condition prescribed under the first proviso. Aforesaid is the basic purport of the amended provisos.

Constitutional validity of amendment to first and second proviso of section 254(2A) of the Act:

Before dwelling into the aforesaid question, it would be apposite to discuss evolution of jurisprudence with respect to the power of the Tribunal in granting stay of proceedings in connection to an appeal pending before it. The Hon’ble Supreme Court in the celebrated decision of Mohammed Kunhi (supra) handed down to us, not only the principle of ancillary , that powers of the Tribunal to safeguard the fruits of successful appeal are inherent in the powers of the Tribunal, but also guidelines as to when the Tribunal should consider granting stay. The first principle, as seen above, that the powers of the Tribunal conferred in section 254 of the Act are of widest possible amplitude and from those wide powers, flow incidental powers to safeguard the fruits of a successful appeal. The second being that only in cases where strong prima facie case is made out, the Tribunal would consider granting stay of proceedings, and that too on conditions which the Tribunal considers fit and stay would be granted only in most deserving cases where the entire purpose of the appeal would stand frustrated by allowing recovery proceedings. The aforesaid principle has been applied to other such situations also, as discussed above. Further, challenge towards the constitutional validity of a provision is also not new to section 254(2A) of the Act.

We all would recall that the Hon’ble Bombay High Court in the case of Narang Overseas P. Ltd. vs. ITAT (295 ITR 22) read down the third proviso in order to give a construction consistent with the constitutional mandate. The third proviso, prior to it being amended by Finance Act, 2008, provided that if the appeal could not be disposed off within the period prescribed in the first proviso or the extended period prescribed in second proviso, stay would be vacated. The Court, read down the third proviso in order to save it from being rendered unconstitutional on the basis that the provision cannot be read in such fashion that on one hand, there is a vested right of an appeal and on the other hand, there is no power to continue grant of interim relief for no fault of Assessee, by stripping Tribunal from ancillary power of continuing interim relief. The Court held that such an interpretation would be unreasonable and violative of Article 14 of the Constitution of India (“the Constitution”) and read it down to mean that the Tribunal will have the power to extend stay beyond the period of 365 days, if the delay in disposal of the appeal is not attributable to the Assessee. As we all are aware, pursuant to this, the legislature amended the third proviso to section 254(2A) of the Act by Finance Act, 2008,to provide that even if the delay is not on account of the Assessee, stay shall be vacated.

The question of constitutional validity of the aforesaid amendment came up before the Delhi High Court in the case of Pepsi Foods Pvt. Ltd. vs. ACIT (376 ITR 87). The Court struck down the amendment as being constitutionally invalid by giving two reasons. The first being that the condition, that stay can be extended beyond the period of 365 days, as held by the Bombay High Court in the case of Narang Overseas (supra), was a reasonable condition on the power of the Tribunal to grant stay. The amendment is unreasonable and arbitrary in nature as it renders the right of appeal illusory for no fault on the part of the Assessee. Stay which was available to the Assessee prior to 365 days is snatched away even though fault of non-disposal of appeal could not be attributed to the Assessee. The second reasoning given by the Court is that it treats un-equals as equals by treating the Assessees towards whom non-disposal of appeal cannot be attributed to, and those Assessees who have caused delay in disposal of appeals. This clubbing lead to hostile discrimination to the Assessees to whom delay is not attributable to, which makes the provision violative of Article 14 of the Constitution. Further, Supreme Court has admitted SLP on the aforesaid issue.

It would also be appropriate to appreciate the distinction between the amendments under consideration and the requirement of pre-deposit of the disputed tax demand in several indirect tax legislations. The Supreme Court in a recent case of Technimont P. Ltd. vs. State of Punjab (111 taxmann.com 263),while dealing challenge to constitutional validity of Section 62 of Punjab VAT Act, 2005, which required pre-deposit of 25% of disputed demand and proof of the same to be submitted with the appeal, reiterated the principles laid down in the case of Anant Mills Ltd. vs. State of Gujarat (1975 (2) SCC 175) and held that right to appeal is a creature of the statute and there is no reason why the legislature while granting such right cannot impose conditions for exercise of such appeal so long as the conditions are not unreasonable making the right to appeal illusory. It is my submission that conditions imposed for exercising the right to appeal are different from amendments under consideration and the those principles will not be applicable for the amendments under consideration.

First contention against the constitutional validity of the amendment:

The first argument, in my opinion, which can be advanced against the amendment to first proviso to section 254(2A) of the Act is that the parliament cannot encroach upon the decision-making autonomy of the Tribunal. By amending the first proviso, the legislature has taken away the discretion of the Tribunal of deciding the stay application on the basis of the facts available before it and the prevailing law. This, in my submission, is transgressing into the judicial sphere and directing a judicial body to adjudicate matters in a particular fashion only. It is my submission that it infringes upon the independence of the Tribunal. The concept of independence of judiciary is something which usually has been associated with higher judiciary and we all are aware that Tribunal is not a Court. However, Tribunal has trappings of Court.

Therefore, a question which would be required to be answered is whether the principle which is usually associated with higher judiciary can it be applied to the Tribunal as well. Prior to dwelling into the aforesaid question, it would be useful to appreciate the distinction as well as the common features between a Court and a Tribunal. The common features between a Court and a Tribunal has been expounded by the Supreme Court in the case of Associated Cement Companies Ltd. vs. P.N. Sharma ((1965) 2 SCR 366), in which it was, inter alia, held that, in both, the Court as well as the Tribunal, it is the State’s inherent judicial power which has been transferred and by virtue of the said power, it is the State’s inherent judicial functioning both discharge. In the case of UOI vs. R. Gandhi & Ors. (2010 (5) SCALE 514], the Supreme Court further reiterated the aforesaid position and also pointed out the distinction between a Court and a Tribunal. The Supreme Court held that all Courts are Tribunals but not all Tribunals are Courts.

In income tax jurisprudence also, the Supreme Court has reiterated the aforesaid principle. The Supreme Court in the case of Mohammed Kunhi (supra), held that Tribunal is not a Court but it exercises judicial powers. Further, the Supreme Courtin the case of Ajay Gandhi vs. B. Singh (265 ITR 451) once again observed that the “the Income tax Appellate Tribunal exercises judicial functions and has trappings of Court.” Therefore, though Tribunal is not a Court but as it exercises judicial functions, its independence also has to be protected in similar fashion as in the case of higher judiciary. The Courts have time and again stepped in and struck down violating provisions or legislations which meddled with the independence of such Tribunals. The question which now would have to be addressed is how the first proviso is infringing the independence of the Tribunal.

The Supreme Court in Mohammed Kunhi (supra), inter alia, observed that only in cases where strong prima facie case is made out, the Tribunal will consider whether to stay the recovery proceedings. The Court further directed that only in cases most deserving and appropriate cases where the Tribunal is of the opinion that recovery proceedings during the pendency of the appellate proceedings would make the right to appeal nugatory, the Tribunal will stay the recovery proceedings.Therefore, only in the cases where Tribunal is of the opinion that continuation of recovery proceedings would make the right to appeal nugatory, it can grant stay of recovery of demand and that too subject to conditions imposed by it. The Supreme Court has equated ancillary power of granting stay as equally important, therefore, any interference in such powers has to be examined with same parameters, as it would have been done with respect to interference in substantive powers of deciding an appeal. It is my submission that amendment affects the seamless process of deciding an appeal (stay applications being a part of the appeal process itself).

In my submission, the first proviso leads to a crippling effect on the decisional making autonomy of the Tribunal while deciding whether to grant stay of recovery proceedings or not, keeping in mind the dictate of the Supreme Court. Even in cases where it would shock judicial conscience, Tribunal would be constrained, even while passing interim orders, under first proviso to section 254(2A) of the Act in order to grant stay would have to either direct the deposit of twenty percent of the outstanding amount or furnish security of equivalent amount. Consider for an example, the issues involved in the appeal filed before the Tribunal are admittedly covered by the decision of the High Court in the Assessee’s own case, making out a very prima facie strong case for seeking stay of demand, however, the Tribunal would be constrained, even after being prima facie satisfied that the matter is admittedly covered in Assessee’s own case, to either direct the deposit of twenty percent of the outstanding demand or furnishing of a security of equivalent amount.

We can consider one more situation, where during the time stay application was pending before the Tribunal for disposal, the Revenue without awaiting the result of such application, initiates coercive recovery proceedings and attaches bank accounts of the Assessee as well as withdraws money from the same. Upon hearing the merits of the stay application and after being satisfied that the Assessee has a strong prima facie case, the Tribunal would be able to direct refund of the amount and staying recovery only after ruling that either twenty percent of the outstanding amount be withheld from the refund of amount coercively recovered from the Assessee or the Assessee in order to obtain the coercively recovered money would have to furnish a security!The emphasis is on the point that even if the Tribunal is satisfied with the merits of the application, before granting refund of amount coercively recovered, the proviso would hinder the Tribunal from granting the relief which the Tribunal considers fit in its judicial wisdom. This, in my submission is an instrusion of judicial body’s decisional discretion, which affects dispensation of justice. It would be apposite here to refer to the decision of the Supreme Court in the case of Supreme Court Advocates on Record Association & Ors. Vs. UOI (2015 (11) SCALE 1) wherein Justice Madan Lokur in a separate concurring judgment in striking down Constitution (Ninety Ninth) Amendment Act, 2014, which altered the procedure of appointment of judges of the Supreme Court and High Courts, had the following to observe “861. Generally speaking, therefore, the independence of the judiciary is manifested in the ability ofa judge to take a decision independent of any external (or internal) pressure or fear of any external(or internal) pressure and that is ‘decisional independence’. It is also manifested in the ability ofthe institution to have ‘functional independence’. A comprehensive and composite definition of ‘independence of the judiciary’ is elusive but it is easy to perceive.”

It is my submission that amendment to first proviso affects the decision-making independence of the Tribunal, which is not permissible as it obstructs dispensation of justice as whole. If the Tribunal is satisfied that the case before it deserves full stay of demand considering facts of the case before them and the prevailing law, the Tribunal would be impaired to do so.If in opinion of either party, discretion has not been applied within the confines of law, the aggrieved party can very well challenge the same before the Higher Courts. The aforesaid contention would have to deal with the point that that legislature bestowed power upon the Tribunal and now the legislature is merely regulating the said power. It is my submission that legislature can very well regulate the powers of the Tribunal, however, it cannot infringe it in such a manner that it undermines the independence of the Tribunal, being its decision making independence. The Supreme Court in the case of Roger Mathew vs. South Indian Bank Ltd. & Ors. (2019 (15) SCALE 615 / Manu/SC/1563/2019), struck down the Tribunal, Appellate Tribunal and other Authorities (Qualifications, Experience and other Conditions of Service Members) Rules, 2017 (“the Rules”) formulated under section 184 of the Finance Act, 2017, as being unconstitutional, inter alia, on the ground that it dilutes the involvement of judiciary in the process of appointment of members of the Tribunal which is in effect, an encroachment by the executive over the judiciary and directed the Central Government to formulate the Rules in conformity with the earlier decisions of the Supreme Court as well as the observations made in the appeal under consideration. The Supreme Court struck down the Rules, inter alia, on ground that primacy of judiciary is imperative in selection and appointment of judicial officers and there is compulsory need for exclusion of control of executive over judicial bodies of Tribunals discharging responsibilities akin to Court. The Court further observed that the same would tantamount to encroachment in judicial domain and would be affront to the doctrine of separation of powers. The Supreme Court in the aforesaid decision has made very poignant observations which would throw light on the concept of independence of institution like Tribunal, which is ultimately a creature under a Statute. The Supreme Court while dealing with the contention whether section 184 of the Finance Act, 2017 amounted to excessive delegation by the legislature to the Government had the following to observe:

“ 144. Independence of a quasi-judicial authority like the tribunal highlighted in theabove decisions would be, therefore, read as the policy and guideline applicable. Principle of independence of judiciary/tribunal has within its fold two broad concepts, as held in Supreme Court Advocates-On-Record Association and Another v. Union of India MANU/SC/1183/2015 : (2016) 5 SCC 1 {See paragraph 714}, (i) independence of an individual judge, that is, decisional independence; and(ii) independence of the judiciary or the Tribunal as an institution or an organ of the State, that is, functional independence. Individual independence has various facets which include security of tenure, procedure for renewal, terms and conditions of service like salary, allowances, etc. which should be fair and just and which should be protected and not varied to his/her disadvantage after appointment. Independence of the institution refers to sufficient degree of separation from other branches of the government, especially when the branch is a litigant or one of the parties before thetribunal. Functional independence would include method of selection and qualifications prescribed, as independence begins with appointment of persons of calibre, ability and integrity. Protection from interference and independence from the executive pressure, fearlessness from other power centres-economic and political, and freedom from prejudices acquired and nurtured by the class to which the adjudicator belongs, are important attributes of institutional independence.
(emphasis supplied)

As discernible from above, the Supreme Court has in fact applied the principle of independence of higher judiciary to the that of a Tribunal. It is my submission that amendment to first proviso to section 254(2A) of the Act infringes upon the functional independence of the Tribunal and, therefore, amenable to being struck down as unconstitutional. There have been other instances also where the Courts have either struck down the action which resulted into encroachment upon the functioning of the Tribunal or has not taken severe action such as punishing for contempt. The Supreme Court in the case of ITAT vs. V. K. Agrawal (235 ITR 175), held the then Law Secretary in Contempt of Court for gross interference in judicial functioning of the Tribunal. In classic treatise Kanga & Palkhivala (2) , the observation made with respect to the aforesaid decision is also very instructive. It is observed as follows “This ruling clearly demonstrates the anxiety of the Supreme Court to preserve the judicial independence of the Tribunal.”.

Also, the Supreme Court in the case of Ajay R. Gandhi (supra) again emphasised, while dealing with the question whether the Central Government has the power to transfer and post members, that independence of Tribunal is essential. The Court further observed that power of the President to transfer members is incidental to the power of constitution of Benches. Thereafter, the Court issued further directions for effective functioning of the Tribunal. Reference can also be made to the decision of the Supreme Court in the case of R.K. Jain vs. UOI (1993 (2) SCALE 843),with respect to Customs, Excise and Gold Control Appellate Tribunal (“CEGAT”), wherein the Court observed that CEGAT is a creature of the Statute yet intended to have all the flavours of judicial dispensation by independent members and President. The Court, inter alia, observed that Rules made under the legislation had given an option in appointing a sitting or retired High Court Judge as the President of CEGAT, the same went contrary to the spirit and object of the Act and the solemn assurance given by the Minister to the parliament that the Tribunal would bear a judicious blend by appointment of a High Court judge as the President. The Court observed that the Rules, though statutory, defeat the object of the Act. In view of the aforesaid, it can be contended,that even though Tribunal is a creature under the Act, yet it enjoys a significant degree of independence and that independence has to be guarded. Further, in view of the aforesaid principles, it can be contented that the first proviso and second proviso are under the threat of being rendered unconstitutional, as it infringes upon the independence of the Tribunal.

Second contention against the constitutional validity of the amendment:

The other contention which can be advanced is that the first proviso to section 254(2A) of the Act is wholly arbitrary and unreasonable and no reason whatsoever has been given by the legislature as to why a need of curbing ancillary powers of the Tribunal had arisen. The Memorandum explaining the Finance Bill, 2020 merely states that it is proposed to provide that the Tribunal may  grant stay under first proviso subject to the condition that the Assessee deposits not less than twenty percent of outstanding tax, interest, penalty, as the case may be or furnish a security of equivalent amount. It is my submission that parameters which are to be considered while granting of stay of recovery of demand have long been settled namely; there has to be prima facie case, if stay not granted the irreparable loss or inconvenience which it would cause to the Assessee, interest of the revenue and overall balance of convenience. Therefore, when upon settled principle if Tribunal had been deciding stay applications through reasoned orders, what necessitated the Legislature to bring such a blanket condition, must be brought out. It is my submission that the amendment so made is without any rational basis, except for the uncanny resemblance it has with Office Memorandum dated February 29, 2016, subsequently modified vide Office Memorandum dated July 31, 2017, and, therefore, arbitrary in nature and liable to be struck down. It is pertinent to note here that the aforesaid office memorandums give discretion to the Commissioner, on application being made by the AO, to sanction lower percentage than twenty percent and as an example it cites a situation where addition has been deleted by a higher authority. However, no such leeway has been provided for the in amendments. If it is looked from a slightly different angle it can be contended that it has become cumbersome to seek stay of recovery of demand from a higher appellate authority than a lower appellate authority.A similar contention can be raised that it is unreasonable that stricter norms prevail for seeking stay before higher appellate authority than the first appellate authority. The Supreme Court has in series of decisions elucidated that an action can be held to be violative of Article 14 of the Constitution if it is arbitrary, because if the action is arbitrary it necessary involves negating of equality enshrined under Article 14 of the Constitution.  Reference can be made to the decisions such as of E.P. Royappa vs. State of T.N. (1974) 4 SCC 3, Maneka Gandhi vs. UOI (1978) 1 SCC 248,A.L. Kalra vs. Project & Equipment corporation (1984) 3 SCC 316and alsorecent decision of Shayara Bano & Ors. vs. UOI(2017) 9 SCC 1.Further, another contention that can be advanced is that the amendment has lead to hostile discrimination against the Assesses who have a prima facie strong case deserving complete stay of recovery of demand in comparison to others by mandating them to comply with new condition imposed by first proviso. The Supreme Court, in a catena of judgments have laid down the parameters for determining whether a provision of a statute is violative of Article 14 of the Constitution or not. Reference can be made to one of the earliest judgments of the Supreme Court in the case of State of Bombay & Anr. Vs. F.N. Balsara (1951 SCR 682), wherein the Court, inter alia, observed that the presumption is always in favour of the Constitutionality of an enactment. Every classification is in some degree likely to produce some inequality, and mere production of inequality is not enough. Thereafter, the Court observed that while reasonable classification is permissible, such classification must be based upon some real and substantial distinction bearing a reasonable and just relation to the object sought to be attained, and the classification cannot be made arbitrarily and without any substantial basis. It is my submission that the aforesaid contention also can be advanced to challenge constitutional validity of the amendment to first proviso and the second proviso to section 254(2A) of the Act. It is my submission that the aforesaid contention also can be advanced to challenge constitutional validity of the amendment to first proviso and the second proviso to section 254(2A) of the Act.

It would be indeed very intriguing to behold as to how the Courts interpret the aforesaid two amendments, as and when it is challenged, and, if at all, challenge is made to the amendments’ constitutional validity.