The author argues that the verdict of the Special Bench in Tata Communications vs. DCIT that stay of demand can be extended by the Tribunal beyond 365 days is the result of inept handling by the department. He calls the situation a “fiasco” for the department and dishes out advice on what can be done to remedy the situation
The judgement of the Special Bench in Tata Communications vs. DCIT that the Tribunal has the power to extend stay beyond 365 days despite the clear language of the Third Proviso to s. 254(2) of the Act must have come as a big surprise to even the most optimistic tax-payer. Certainly, the decision caught battle-hardened tax professionals by surprise.
The blame for the fiasco lie squarely with the department for their inept handling of the matter. Of course, it is another matter that the provision of law is itself grossly misconceived.
The Tribunal’s power to grant stay of demand was recognized by the Supreme Court as early as in the year 1969 in ITO vs. M.K. Mohammed Kunhi 71 ITR 815 where it was held that the power to give final relief in the appeal included the power to grant interim relief to stay the demand.
Well this verdict must have had the wise men of South Block fuming so now they amended the Third Proviso by the Finance Act, 2008 w.e.f. 1-10-2008 to provide that it did not matter that the assessee was as innocent as a lamb. The stay had to be vacated on the expiry of 365 days. Come what may. Period!
Matters rested peacefully for several decades till it was suddenly realized by the mandarins of South Block that assessee’s were obtaining stay of demand and sitting pretty without any urgency to dispose of the appeal. This resulted in thousands of crores of arrears being blocked up, it was felt. So, a legislative provision seeking to curb the Tribunal’s power to grant indefinite stay was inserted in the form of the Second Proviso to s. 254 (2A) by the Finance Act 1999 w.e.f. 1.6.1999 to provide that “If a stay is granted and the appeal is not disposed of within the period of 180 days, the stay order shall stand vacated”.
However, this amendment became a dead-letter because the Tribunal took the view in Centre for Women’s Development Studies vs. DDIT 257 ITR 60 that “Yes, the stay is vacated but that does not mean that we cannot grant fresh stay if the assessee is not at fault for the delay in disposal”.
Smarting at having been out-smarted by the assessees, the Finance Act, 2007 amended the Second Proviso w.e.f. 1-6-2007 to provide that the aggregate period of stay “shall not, in any case” cannot exceed 365 days.
Well, if the draftsman thought that the use of imperative language would put a quietus to the controversy, he was sadly mistaken because the assessees dragged the amendment to Court on the ground that it frustrated the right to appeal and was unconstitutional.
In Narang Overseas Pvt. Ltd vs. ITAT 295 ITR 22 (Bom) the Bombay High Court agreed with the assessees and held that the power to grant stay or interim relief was inherent and not defeated by the Third Proviso to section 254 (2A). It was held that the Third Proviso was a limitation on the power of the Tribunal to continue the stay only where the hearing of the appeal had been delayed for acts attributable to the assessee. It was held that if the delay was due to the department seeking incessant adjournments or the Tribunal’s inability to take up the hearing, stay of demand could not be denied to the assessee.
Well this verdict must have had the wise men of South Block fuming so now they amended the Third Proviso by the Finance Act, 2008 w.e.f. 1-10-2008 to provide that it did not matter that the assessee was as innocent as a lamb. The stay had to be vacated on the expiry of 365 days. Come what may. Period! This time, the draftsman had learnt his lesson and used the plainest language possible: “...the order of stay shall stand vacated after the expiry of 365 days even if the delay in disposing of the appeal is not attributable to the assessee” the provision declared solemnly.
Well the department proposes and the department disposes.
In Ronak Industries Ltd (S.A. No. 137/M/09 dated 22.05.2009), the Tribunal granted stay, relying on Narang Overseas P. Ltd 295 ITR 22 (Bom), beyond the period of 365 days by an order dated 22.05.2009 even after the amendment made with effect from 1.10.2008 .
Did anyone point out to the Tribunal that Narang Overseas was no longer good law? Well, nobody knows.
One can well imagine the scenario in the Court room when the matter must have been called out for hearing. The department’s advocate must have hurriedly opened the brief at the last moment and rushed to see what the Tribunal had said. He must have let out a gasp of relief at noting that the Tribunal had followed the High Court’s verdict in Narang Overseas and blurted out excitedly “My Lord, the issue is covered against the department”
Anyway, whatever may be said of the departmental representative who appeared before the Tribunal in Ronak Industries, the department’s counsel who drafted the appeal to the High Court against the order in Ronak Industries was diligent. He formulated a specific question referring to the Third Proviso to section 254(2A) and complained that the Tribunal was wrong in ignoring that provision and relying on Narang Overseas. Of course, on what basis an appeal under section 260A was filed against an order on a stay application is a mystery in itself!
Well, a job well begun is half done but you to have pay attention to finishing the job as well. One can well imagine the scenario in the Court room when the matter must have been called out for hearing. The department’s advocate must have hurriedly opened the brief at the last moment and rushed to see what the Tribunal had said. He must have let out a gasp of relief at noting that the Tribunal had followed the High Court’s verdict in Narang Overseas and blurted out excitedly “My Lord, the issue is covered against the department by the judgement of your Lordships. The appeal may please be dismissed”.
Of course, one cannot blame the Hon’ble Judges if the department chooses to commit hara kiri in Court. The department’s counsel are paid to take care of the interests of the revenue; not the Judges!
And so it is that when the matter came up before the Special Bench in Tata Communications to decide whether Ronak Industries was correctly decided, the Special Bench was left with little choice but to observe that Ronak Industries having been affirmed by the High Court, it could not be said that the Tribunal did not have the power to extend stay beyond 365 days despite the amendment.
Of course, the Tribunal could have treated the order of the High Court in Ronak Industries as per incuriam and declined to follow it. To the credit of the departmental representative who argued the matter before the Special Bench, he did put up a strong fight and made all the right submissions on why Ronak Industries was not a binding precedent. Kanel Oil 121 ITD 596 was a strong precedent where the Third Member there (who was also on the Special Bench) had held the judgement of the Bombay High Court in Snowcem to be per incuriam and refused to follow it. However, the dice was heavily loaded against the department because not only was Ronak Industries a verdict of the jurisdictional High Court but the question posed before the High Court specifically referred to the amendment made to the Third Proviso. To still hold that the High Court gave its verdict without being aware of the statutory provisions may be going too far, the Special Bench must have felt.
So what is the way out for the department? One can already see the mandarins of South Block, sitting irritably with furrowed brows, wondering what further amendment to bring about in the law. But if one may give the wise men some advice, it is that their attention should not merely be on changing the letter of the law but in ensuring that their representatives who argue the matters before the Tribunal and the High Court know what to argue. The department must investigate how the matter was argued before the Tribunal and the High Court in Ronak Industries. Was the Tribunal / Court’s attention drawn to the amendment in the law. If not, why not and what is the corrective steps to be taken to ensure that such carelessness does not occur again? These are important issues that should grab the attention of the law makers.
Of course, the Revenue will take some solace from the fact that for Tata Communications itself, the litigation was futile. This is because during the pendency of the matter before the Special Bench, the AO adjusted the refunds due for earlier years against the demand of Rs. 369.40 crores. And when the assessee pleaded before the Special Bench that the adjustment of the refunds was wrong, it was rebuffed on the ground that the AO’s act was bona fide and that the adjustment of the refunds was not a “coercive measure”. To add insult to injury, the assessee’s stay applications were treated as “virtually infructuous” and dismissed.
On a serious note, from the Tribunal’s perspective, one needs to examine why appeals are not getting disposed off despite 12 months passing by. After all, the Tribunal also has a duty to ensure that appeals are disposed of expeditiously especially in stay granted matters. In Shri Jethmal Faujimal Soni vs. ITAT 231 CTR 332 (Bom) the Tribunal had kept the appeal pending on the ground that a similar issue was pending in some other case before the Special Bench. The High Court came down quite heavily on the Tribunal by observing that it was unfortunate that the Tribunal did not dispose of the appeal on the ground of pendency before the Special Bench. The High Court made it clear that the Tribunal was under a bounden duty and obligation to ensure that the appeal is disposed off within the stipulated period so as to not result in prejudice to the assessee.
However, at the ground level, there is not much improvement in the situation despite the directives of the High Court and stay-granted appeals continue to get adjourned for one pretext or the other. In my humble & respectful submission, the Tribunal needs to do bit of soul-searching as well to determine the reasons for it not being able to honour the legislative mandate of timely disposal of stay-granted matters.
CA Vellalapatti Swaminathan Iyer