1. Introduction
Section 254(2-A) of the Income Tax Act, 1961 (“the Act”), inter alia, deals with power of the Income Tax Appellate Tribunal (“the ITAT”) in respect of granting stay in any proceedings relating to an appeal filed before the ITAT. Section 99 of the Finance Act, 2020 has amended Section 254(2-A) of the Income Tax Act, 1961 (“the Act”). This amendment has the potential to be interpreted in a manner that can cause immense hardship to the taxpayers thereby increasing litigation. This article is an attempt to argue that even after the amendment the discretionary powers in respect of stay conferred upon the ITAT remains intact. Any other view would be unconstitutional. The unconstitutionality is elaborated in this article.
The relevant part of Section 254(2-A) of the Act, is reproduced hereunder:
“(2-A) * * *
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 [1][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:
[2] [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 …..”
2. Part 1: Literal interpretation
On reading of the amended proviso, it may be interpreted that on an application of stay by the assessee, the ITAT must hear the parties and consider whether a stay ought to be granted or not. In case where the stay application find favour with the ITAT, the same may be granted with a condition that 20% of the tax, interest, fee, penalty, or any other sum payable under the provisions of the Act (hereinafter for sake of better understanding is referred to as “the disputed demand”)[3] or an equivalent amount of security must be provided. The period of stay granted by the ITAT under the first proviso, however, cannot exceed 180 days.
The second proviso has added a condition that the ITAT, on an application made by the assessee may extend the period of stay subject to compliance with the condition referred to in the first proviso.
3. Part 2: Interpretation in favour of assessee
The following aspects are considered necessary to argue in favour of assessee.
3.1 Inherent jurisdiction to grant stay
Under the scheme of the Act, orders appealable before the ITAT have been provided under Section 253 of the Act. Section 254(1) of the Act confers jurisdiction on the ITAT to pass such orders thereon as it thinks fit after giving both the parties to the appeal an opportunity of being heard.
Section 254(1) at the time when introduced under the Act did not have a specific provision for stay. In ITO v. M. K. Mohammad Kunhi [4] (hereinafter for sake of brevity referred to as “Kunhi”) an issue arose that whether the ITAT has the power to stay the recovery of therealization of the penalty imposed during the pendency of an appeal. An application for stay was rejected by the ITAT which was reversed by the High Court holding that ITAT can grant stay under its inherent powers. On appeal before the Supreme Court, the High Court’s decision was affirmed. The reasons which were in favour of assessee are summarised hereunder:
- Comparing the power of the Assessing Officer under Section 220 of the Act, it was argued by the Department that there is no express power conferred to the ITAT to grant a stay of recovery. This argument was rejected and it has been held that the ITAT has been conferred wide powers under Section 254(1) of the Act to pass such orders as it thinks fit after giving full hearing to both the parties to the appeal. A substantive right to prefer an appeal to ITAT where the orders of the lower authorities can be challenged on questions of law as well as question of fact.
- If it is held that there is no power to grant stay on recovery, then the entire purpose of appeal can be defeated if the orders of lower authority are ultimately set aside. Such a situation on part of the legislature was considered to be unintended. Where jurisdiction has been conferred, it is implied that it also grants power of doing all such acts or employing such means as are essentially necessary for its execution.
- The principle laid down by the Court of Appeal in Polini v. Gray[5] [to grant a stay to the authority who has been conferred the jurisdiction to decide the appeal] was considered to be applicable in this case and the same is reproduced hereunder:
“It appears to me on principle that the court ought to possess that jurisdiction, because the principle which underlies all orders for the preservation of property pending litigation is this, that the successful party in the litigation, that is, the ultimately successful party, is to reap the fruits of that litigation, and not obtain merely a barren success. That principle, as it appears to me, applies as much to the court of first instance before the first trial, and to the Court of Appeal before the second trial, as to the court of last instance before the hearing of the final appeal”.
(emphasis supplied)
- At the same time, it is not open to the ITAT to grant a stay as a matter of course. It is only when facts and circumstances of the case so warrant on terms as it deems fit.
To overcome this aspect, the Department may argue that the decision of Kunhi[6] (supra) was rendered at a time when the Act was not specific. After having introduced Section 254(2-A) and the amendment by Finance Act, 2020, the decision would no longer hold the field and stay shall be governed by such amended provisions.
The above argument would be contrary to (i) the presumption that the Legislature being the representatives of the people enacts laws which the society considers as honest, fair and equitable (ii) the decisions of various High Courts which have held that the Appellate Authority has the inherent right to grant stay and (iii) the decision of the Bombay High Court in Narang Overseas (P) Ltd. v. Income Tax Appellate Tribunal[7], (hereinafter referred to as “Narang Overseas” for sake of brevity) in the context of proviso to Section 254(2-A) of the Act which has applied the ratio of Kunhi (supra) and held that power to grant interim is co-extensive with the power to grant final relief on the principle that absent power to grant interim relief, the power to grant final relief may be defeated. Basis this, it was held that ITAT may grant stay beyond period of 365 days if the delay is not attributable to the assessee.
The amended provision may cause injustice in genuine cases. Further, the argument would also be contrary to the decisions which have interpreted the amendments to Section 254(2-A) of the Act which sought to curtail the powers of the ITAT. The Courts have intervened to hold that assessee cannot be made to suffer for no fault of his. This was the position taken by the Courts despite the provisions under the Act to the contrary. The same is elaborated at para 3.2. in detail.
Applying this principle, it is submitted that an assessee has no control over the manner in which the Department or the CIT(A) would pass an order. It is submitted that where it demonstrates that 20% is excessive and that he would suffer immense hardship, the ITAT, on the basis of the principles laid down by Kunhi and Narang Overseas case, must have the inherent power to grant stay and relax the condition of 20%.
Proposition (i)
It is presumed on the part of the Legislature that the laws are passed which the society considers as honest, fair and equitable. The 20% condition dislodges this presumption. In cases where a prima facie case and that the demand raised is likely to not survive is established, then it shows that the correctness of the orders of the lower authorities are not free from doubts. In such situation, allowing recovery would amount to giving Department premium over their own wrong. Non-granting of stay would be harsh and not according to reason. It is held in K. P. Varghese v. ITO[8] that the Court should, as far as possible, avoid that construction which attributes irrationality to the Legislature. The rigid condition of 20% would be irrational for the condition of stay generally differs from one case to another. In Ravi Gupta v. Commissioner of Sales Tax[9] , it is held that three factors that must be considered while granting or rejecting stay application. These factors are (i) prima facie case (ii) balance of convenience and (iii) irreparable loss. It was further held that if the demand raised appears to be unsustainable, then the benefit may be considered in favour of assessee. In CIT v. Bansi Dhar & Sons[10], it is held that an appellate authority must have the incidental/inherent power for the disposal of an appeal to grant/reject a stay. Thus, pending disposal of appeals before the ITAT, and in view of above principles, it is submitted that ITAT has the discretion to grant stay below 20%.
It is submitted that the above consequences would cause grave injustice in the course of administration of the appeals under the Act. In Bhudan Singh v. Nabi Bux[11], it was held that the Legislature is presumed to be acting in a manner which advances the cause of justice. The relevant part is reproduced hereunder:
“9. Before considering the meaning of the word “held” in Section 9, it is necessary to mention that it is proper to assume that the lawmakers who are the representatives of the people enact laws which the society considers as honest, fair and equitable. The object of every legislation is to advance public welfare. In other words as observed by Crawford in his book on Statutory Constructions the entire legislative process is influenced by considerations of justice and reason. Justice and reason constitute the great general legislative intent in every piece of legislation. Consequently where the suggested construction operates harshly, ridiculously or in any other manner contrary to prevailing conceptions of justice and reason, in most instances, it would seem that the apparent or suggested meaning of the statute, was not the one intended by the law-makers. In the absence of some other indication that the harsh or ridiculous effect was actually intended by the legislature, there is little reason to believe that it represents the legislative intent”
(emphasis supplied)
Law applicable in respect of “stay” has been well settled. One common principle being that a stay may be granted if after having regard to the facts and circumstances of the case, the Court/Tribunal is satisfied that the assessee has demonstrated prima facie case that he is likely to succeed and demand may not survive, balance of convenience and there would be irreparable injury to the assessee. No straitjacket formula can be applied. It is submitted that the Legislature cannot envisage every situation and in appropriate cases, the power to grant stay may become necessary for an effective adjudication of the appeal.
Proposition (ii)
The argument that the amendment to Section 254(2-A) limits the width of Section 254(1) is contrary to the following decisions:
- ITC Ltd v. Union of India ILR[12]
- Collector of Customs v. Madras Electro Castings (P) Ltd.[13]
- Poly Fill Sacks v. Union of India[14]
In ITC Ltd. (supra), the issue arose in respect of difference of opinion between the Excise Authorities and the Assessee to classify the goods. The said difference, contended by the assessee arose on account of directive contained in a letter dated 7th April, 1982 issued by the Central Board of Excise and Customs to all Collectors of Central Excise. A writ petition was filed challenging the decision of the authorities. Considering that independent authorities would adjudicate the appeals, first at the level of Collector (Appeals) and the second before the Customs, Excise & Gold (Control) Appellate Tribunal, the High Court on the issue of alternative remedy relegated the assessee to the appellate authorities under the Act. At the time of arguing that the alternate remedy would not enable the assessee justice on the ground that (i) Collector (Appeals) would be influenced by the directive and (ii) that the condition of appeal is mandated with the pre-deposit. This argument was rejected on the ground that proviso to Section 35-F of the Central Excises and Salt Act, 1944 confers discretion to the Collector (Appeals) and the Customs, Excise & Gold (Control) Appellate Tribunal (hereafter referred to as “ CEGAT”) to waive the condition of pre-deposit.
The Court has further proceeded to hold that the Collector (Appeals) and CEGAT has inherent power of granting interim relief in exercise of its appellate jurisdiction. This was the ratio of the Court on the basis of the decision of the Supreme Court in M. K. Mohammad Kunhi [15](supra). This was held by the Court despite the requirement of pre-deposit. However, insofar as the provisions under Section 35-F is concerned, the same have been regarded to be in the nature of guidelines in respect of granting a stay.
In the decision of Madras Electro Castings (P) Ltd.[16] (supra), the issue arose in assessing the value of products imported. Arriving at a value higher than that declared by the assessee, the assessable value was worked out and demand was raised based on differential duty. Consequently, confiscation of goods was ordered and the goods were permitted to be released on payment of redemption fine. The order of adjudication was challenged in appeal before the CEGAT and writ petition was filed for release of goods because the assessee was of the opinion that CEGAT does not have power to permit release of goods and thus relief is sought before the Court.
This argument was rejected on the basis that wide powers have been conferred to secure the ends of justice insofar the CEGAT has the authority to confirm, modify or annul the decision or order appealed against. It is also open to remit the matter back for fresh adjudication. The power to confirm, modify or annul the decision or order appealed against takes in its fold to pass such interim orders as are necessary in order to aid the main relief sought for in the appeal. The decision in State of Orissa v. Madan Gopal[17] which has held that interim orders are passed in aid of the main relief was followed. Therefore, it is held that it is quite inherent in the appellate power and more so in the case of the CEGAT to pass such interim orders as are necessary for the purpose of ensuring that the main relief sought in the appeal is available to the party at the end of the proceeding. The provisions of Section 129-E of the Customs Act, 1962 which provides relieving the assessee from pre-deposit does not take away the inherent power of the CEGAT to pass such interim orders as are necessary.
The decision in ITC Ltd.[18] (supra) and Madras Electro Castings (P) Ltd.[19] (supra) was followed in by the Customs, Excise and Service Tax Appellate Tribunal (hereafter referred to as “CESTAT”) in IPCL v. Commissioner of Central Excise, Vadodara[20]. The decision of IPCL was affirmed by the Supreme in Commissioner of Customs & Central Excise, Ahmedabad v. Kumar Cotton Mills (P) Ltd. The decision in Kumar Cotton Mills (P) Ltd.[21] was followed in Narang Overseas[22].
In Poly Fill Sacks[23] (supra) before the Gujarat High Court, the Excise Authorities had encashed the bank guarantee on interpreting that the power of CESTAT is limited to pass stay order beyond period of 180 days and consequently, stay stands vacated. This argument was rejected based on the principles laid down in Kunhi case[24] (supra). Held that Section 35-C(1) of the Central Excise Act, 1944 is of widest amplitude in dealing with the appeals before it and by implication, in a proper case, there exists a power staying the recovery of demand, etc. pending an appeal in a manner which prevents the right of appeal being rendered nugatory.
The decision of Poly Fill Sacks[25] has been followed by Gujarat High Court in DCIT v. Vodafone Essar Gujarat Ltd.[26] .
Though these decisions have been rendered in the context of Excise and Customs, it is submitted that the provisions are pari materia. A provision for stay and a provision for granting appeal existed even under those statutes. These decision as stated above, have been followed in context of other provisos to Section 254(2-A) as it existed prior to amendment. In view of ratio of above decisions, it is submitted that the wide interpretation of the language of Section 254(1) of the Act has not been curtailed. An appellate authority has the inherent jurisdiction to grant stay in a fit case on terms as it may deem fit with the only limitation that the discretion exercised be a judicious one. Therefore, Section 254(1) is independent of the amended Section 254(2-A) of the Act.
Alternatively, in view of above, it is submitted that the amended first proviso of Section 254(2-A) by Finance Act, 2020 may be regarded as a provision which is directory in nature and ITAT is not bound by the same. In other words, ITAT has the power to grant stay on such terms as it may deem fit.
Apart from the aforesaid proposition that Section 254(1) is independent of Section 254(2-A), it is submitted that the first proviso by itself confers wide discretion upon ITAT.
Attention is invited to the amended proviso. On a reading of the same, it is submitted that the proviso states that ITAT “may” after considering the merits of application pass an order of stay. It would also be correct to state that ITAT may reject the application of stay. Thus, it is submitted that the power to accept an application for stay or reject it is discretionary in entirety. In case where the ITAT rejects the application of stay, there does not arise any difficult.
However, the issue arises when ITAT is of the opinion that a stay ought to be granted. To address such a situation, it must be appreciated that since the power to grant stay is discretionary in its entirety, it would also be a matter of discretion of ITAT to pass an order of stay which “may or may not be” subject to the condition that the assessee must deposit amount which is not less than 20% of disputed demand.
Depending upon facts and circumstances of the case, ITAT may require the assessee to deposit 50% of the disputed demand. In other cases, it may be below 20% (say 5% or even nil) of the disputed demand. Reliance in this regard is placed on the decision of Ravi Gupta[27] (supra), Kunhi[28] (supra) and Bansi Dhar & Sons[29] (supra).
In view of above, it is submitted that the inherent power of ITAT is independent of the amendment brought in by the Finance Act, 2020.
3.2 Amendments to Section 254(2-A) of the Act and judicial pronouncements on the said amendments
The case of M. K. Mohammad Kunhi (supra) decided on September 11, 1968 had merely held that ITAT has the authority to grant stay and that such stay may be subject to conditions as it may deem fit.
The Finance Act, 2007 had substituted the provisos inserted by the Finance Act, 2001. The effect of the amendment was that ITAT may grant stay for a period of 180 days and that such stay can be extended at the highest for a further period of 185 days. The effect of the first two provisos was that the total period of stay which ITAT could grant was restricted to a total period of 365 days. The third proviso as inserted by the Finance Act, 2007 had the effect of vacating the stay originally granted if the appeal was not disposed within the total period of 365 days.
In Narang Overseas[30] (supra), it was held that ITAT has the power to grant stay even beyond the period of 365 days only if the delay in disposing of the appeal was not attributable to the assessee. This would be a reasonable way to interpret the provisions keeping in mind the object of the Legislature in expediting stay granted matters. It was also held that it would not be reasonable to recover from the assessee in case of non-disposal of appeal for no fault on the part of such assessee. To arrive at this conclusion, the principle in Kumar Cotton Mills (P) Ltd.[31] (supra) was followed.
The Finance Act, 2008 amended the third proviso having the effect that the order of stay would stand vacated even if the delay in not disposing the appeal was not attributable to the assessee.
The constitutional validity of the amended third proviso to Section 254(2-A) of the Act which added the words “even if the delay in disposing of the appeal is not attributable to the assessee” in Pepsi Foods (P) Ltd. v. Assistant Commissioner of Income Tax[32]. It was held that the said provision which allows the Revenue to recover the dues on which stay has been granted pending disposal of the appeal beyond 365 days even when the delay is not attributable to the assessee is unconstitutional on the ground that it discriminates between assessees whose stay should stand vacated on account delay attributable to them vis-à-vis those assessees whose conduct cannot be questioned during the period of stay in appeal before ITAT and such being violative of Article 14 of the Constitution.
In Vodafone Essar Gujarat Ltd. (supra), the Revenue had been aggrieved by stay extension beyond a period of 1000 days and the Department had argued that jurisdiction to extend stay must be governed by the provisions of the Act. The arguments put forth by the Revenue were rejected for the reason that there may be many factors that the appeal was not disposed within the time limit and held that there cannot be any intent to punish the assessee for no fault of his.
In view of the above, it is submitted that the amendments made to Section 254(2-A) though were introduced with the laudable objective that after having granted stay from recovery of taxes, the appeals must be disposed within a given time frame. However, at the same time, the Courts did not allow it go overboard to the extent that if the appeal was not disposed, the stay would stand vacated.
Based on the above principle, it is reiterated that when the assessee demonstrates satisfaction (based on the principle in Ravi Gupta) that stay below 20% ought to be granted, it means that correctness of orders of lower authorities is not free from doubt and thus allowing to recover 20% of disputed demand would be allowing them premium of their own wrong.
4. Part 3: Constitutional validity of Section 99 of Finance Act, 2020 amending proviso to Section 254(2-A) of the Act
It is submitted that if a view in favour is taken that the powers under Section 254(1) of the Act is still preserved and that the condition of 20% is directory, then it may not be necessary to consider the constitutional validity of the provision for it is settled law that an interpretation which saves the provision from being rendered unconstitutional must be preferred over the one which makes it constitutionally invalid. If the view in favour of Department is taken and the rule of 20% is held to be mandatory, then the amendment brought in by the Finance Act, 2020 to Section 254(2-A) of the Act would suffer from the vice of arbitrariness, unreasonable and excessive and impinge upon the independence of the judiciary and separation of powers thereby violating Article 14 of the Constitution. These aspects are separate and mutually exclusive and it is submitted that it stands violated.
4.1 Independence of the Judiciary and separation of powers
In order to appreciate this ground of attack on Section 99 of the Finance Act, 2020 amending the first proviso to Section 254(2-A) of the Act, it is first necessary to appreciate the background in which the Tribunals in India have come to stay and have become an inherent part of our judiciary who has the task of discharging judicial functions.
Secondly, the difference between the Courts and the Tribunals (which are substituting the Courts) would have to be considered. Despite the differences, the two authorities are sharing the judicial power of the State. Therefore, just as independence of the Court is safeguarded, it becomes necessary to safeguard the independence of the Tribunals as well.
Origin and need for tribunalisation of justice
Traditionally, the task of adjudicating the disputes was entrusted upon the Courts. This was slowly and gradually shifted to the Tribunals formed under the specific statute. The system of adjudication through the Tribunals started in the year 1941 with the setting up of ITAT. With the passage of time, the number of cases and consequently, the burden to dispose of cases increased. There was a need to set up alternative institutions which would adjudicate disputes in a quick, effective and efficient manner which would reduce the burden of the courts and also aim to achieve justice for the litigants.
The movement towards setting up the Tribunals was hastened by the need for specialisation. An underlying assumption behind the setting up of specialised Tribunals was that the individuals who decide, possess the qualities necessary for adjudication in that specific field.
Apart from specialisation, domain expertise, particularly in a complex area, is considered to be means of allowing adjudicators who understand the subject to decide quickly and effectively. It may also be noted that apart from transferring jurisdiction from Courts to Tribunals, various statutes, for instance, Section 63 of the Insolvency and Bankruptcy Code, 2016, the Tribunals have been conferred the jurisdiction on the National Company Law Tribunal or the National Company Law Appellate Tribunal to the exclusion of the Courts.
In that sense, the Tribunals have not only taken away subjects which have been carved out of the jurisdiction of courts as a matter of legislative policy, but have also fostered a new culture of adjudication over areas in which a traditional court mechanism had little experience and expertise. In that sense, tribunalisation represents an amalgam of the old and the new. A combination of the role which was traditionally performed by the court together with new functional responsibilities, quite unlike the dispute resolution function which was traditionally performed by the Courts[33].
Thus, as can be seen, the Tribunals are being formed and jurisdiction of courts is being excluded in order to achieve the objective of quick resolution of disputes through institutions manned by person with judicious mind and having specialised knowledge of the subject.
Difference between Court and Tribunal
Strictly speaking, a Tribunal is not a court. There are many decisions which have highlighted the difference between a court and Tribunal. However, it would be sufficient if the case of S. P. Sampath Kumar v. Union of India[34] is referred to. The said differences are noted as under:
- Courts are established by the State and entrusted with the State’s inherent judicial power for administration of justice in general. Tribunals are established under a statute to adjudicate upon disputes arising under the said statute or disputes of a specified nature. Therefore, all courts are Tribunals but all Tribunals are not courts.
- Courts are exclusively manned by judges. Tribunals can have a Judge as the sole member, or can have a combination of judicial member and a technical member who is an “expert” in the field to which the Tribunal relates.
- Courts are governed by detailed statutory procedural rules, in particular the Code of Civil Procedure and the Evidence Act, requiring an elaborate procedure in decision-making, Tribunals generally regulate their own procedure applying the procedure of the Code of Civil Procedure where it is required and without being restricted by the strict rules of rhe Evidence Act.
Independence of Judiciary
In order to appreciate this aspect, it is equally necessary to appreciate the theory of separation of powers as per the scheme of our Constitution which is specifically provided under Article 50. Simply put, it is the demarcation of the functions of the State to the three organs as provided under the Constitution. First, it is the Legislature (includes the Centre as well as the State), second, it is the executive authorities (for example: Income Tax Department, the Police Department, etc.) and third is the judiciary (courts and tribunals). It has been emphasised that every organ of the State must perform and exercise the functions entrusted to it without encroaching upon the functions demarcated to the other.
In Indira Nehru Gandhi v. Raj Narain[35], it was held that division of three main functions is recognised in our Constitution. Judicial power of the State is vested in the judiciary. Similarly, the Executive and the Legislature are vested with powers in their spheres. Judicial power has lain in the hands of the judiciary prior to the Constitution and also since the Constitution. It is not intended that powers of judiciary be passed to or be shared by the executive or the Legislature or that the powers of the Legislature or the Executive should pass to or be shared by the judiciary. The Constitution has a basic structure comprising the three organs of the Republic viz. the Legislature, the Executive and the Judiciary. It is through each of these organs that the sovereign will of the people has to operate and manifest itself and not through only one of them. Neither of these organs of the Republic can take over the function assigned to the other. No Constitution can survive without a conscious adherence to its fine checks and balances. Just as Courts ought not to enter into problems entwined in the ‘political thicket’, Parliament must also respect the preserve of the Courts. The principle of separation of powers is a principle of restraint.
In Chandra Mohan v. State of U.P.[36], it has been held that the people of our country come in close contact with the subordinate judiciary in comparison to the Higher Judiciary and thus, it is no less important and probably even more important that their independence should be placed beyond question than in the case of Superior Judges. Article 50 of the Directive Principles of State Policy states that the State shall take steps to separate the judiciary from the executive in the public services of the State. Simply stated, it means that there shall be a separate judicial service free from the executive control.
In S. P. Sampath Kumar (supra), it was held that judicial review is a basic and essential feature of the Constitution and Parliament cannot take it away otherwise, the Constitution would cease to be what it is. Every organ of the State must act within the limits of the authority and power derived from Constitution. A question may arise as to whether the executive has acted within the scope of its power. Firstly, determination of this question is within the domain of judiciary because it requires interpretation of the Constitution and the laws and this would pre-eminently be a matter fit to be decided by the judiciary. Secondly, the protection afforded to the citizen would become illusory, if it were left to the executive to determine the legality of its own action. The same principle applies for determination of acts of Legislature as well. It is only an independent judiciary under the Constitution assigned with the delicate task of determining what is the extent and scope of the power conferred on each branch of Government, what are the limits on the exercise of such power under the Constitution and whether any action of any branch transgresses such limits. It is also a basic principle of the rule of law which permeates every provision of the Constitution and which forms its very core and essence that the exercise of power by the executive or any other authority must not only be conditioned by the Constitution but also be in accordance with law and it is the judiciary which has to ensure that the law is observed and there is compliance with the requirements of law on the part of the executive and other authorities.
In view of the above, it is clear that Article 50 of our Constitution has been interpreted and it has been held that there is a requirement to have an independent judiciary for the purpose of adjudicating the disputes. Judicial review by an independent judiciary has been considered to be a basic and essential feature of the Constitution. On a combined reading of the above decisions, it is submitted that judiciary also includes authorities such as the Tribunals which are below the High Courts and Supreme Court.
Section 99 of the Finance Act, 2020 and impingement upon the independence of the ITAT
The amendment to the first proviso, if interpreted in a manner to say that ITAT does not have any discretion in granting stay below the limit of 20% of Indira Nehru Gandhi v. Raj Narain (supra), S. P. Sampath Kumar (supra) and the decision of Chandra Mohan v. State of U.P. (supra) which have held that it is not the function of the Legislature to enter the space in which the judiciary operates. This is exactly what the amendment does by taking away the power to grant stay below 20% of disputed demand and therefore, the said Section 99 of the Finance Act, 2020 violates the independence and discretion conferred upon the ITAT to grant stay.
An independent judicial tribunal determining the rights of citizens, and for adjudication of the disputes and complaints of the citizens, is regarded as a necessary concomitant of the rule of law in Union of India v. R. Gandhi[37]. It was held that rule of law has several facets. One such facet is that disputes of citizens will be decided by Judges who are independent and impartial at the time of deciding the legality of the actions of the Government. Another facet of rule of law is equality before the law. Essence of equality is that the disputes must be capable of being enforced and adjudicated by an independent forum. Judicial independence and separation of judicial powers from the executive are a part of the common law traditions implicit in a Constitution like ours which is based on the Westminster Model. The fundamental right to equality before law and equal protection of laws guaranteed by Article 14 of the Constitution includes a right to have the person’s rights, adjudicated by a forum which exercises judicial power in an impartial and independent manner, consistent with the recognised principles of adjudication.
It must be recalled that Kunhi case (supra) has held that ITAT is performing judicial function sitting in appeal over the decision of the lower authorities. Thus, if the ITAT, in exercise of appellate jurisdiction is of the opinion that stay ought to be granted in an appropriate case in order to ensure that the entire purpose of appeal would not be defeated, then there exists an inherent and implied power to grant a stay. The power to grant stay is based on the recognised principle of adjudication viz. that the successful party must enjoy the fruits of litigation and not obtain merely a barren success.
At the same time, ITAT was also cautioned against granting stay pending appeal as a matter of course for it is indeed necessary to protect the interest of Revenue. Thus, it is submitted that another principle of adjudication that was applied was that pending disposal of appeal, interest of both the parties must be protected for it is necessary that the successful party must enjoy the benefits of the outcome effectively and not a barren success.
In Bansi Dhar & Sons (supra), Kunhi’s principle was reiterated and held that an appellate authority must have the inherent power for the disposal of an appeal to grant a stay or not to grant a stay.
It is my submission that the amendment brought in by Section 99 of the Finance Act, 2020, to the provisions of Section 254(2-A) of the Act has disturbed the well-recognised principle of adjudication that pending disposal of an appeal, in appropriate cases, the appellate authority can exercise its discretion, pass an order of stay in a manner which would ensure that right of appeal and obtain relief is not rendered nugatory. Further, by mandating the rigid condition of 20%, it is the interest of the assessee only which it has failed to protect.
In view of above, the amendment is violative of the principle of independence of judiciary and against the recognised principles of adjudication and thereby, unconstitutional.
4.2 Doctrine of Arbitrariness
The principle that arbitrariness as a facet of Article 14 in itself is a ground to attack the constitutional validity. This proposition of law has been authoritatively laid down in Shayara Bano v. Union of India[38].
It has been held that Article 14 strikes at the arbitrariness in State action and ensures fairness and equality of treatment. The principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omnipresence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14. Arbitrariness as a doctrine is distinct from discrimination under Article 14 because any action that is arbitrary must necessarily involve the negation of equality. The concept of reasonableness and non-arbitrariness pervades the entire constitutional scheme and is a golden thread which runs through the whole of the fabric of the Constitution. The arbitrariness doctrine contained in Article 14 would apply to negate legislation, subordinate legislation and acts of the executive.
Arbitrariness in Section 99 of the Finance Act, 2020
The concept of arbitrariness as held in Shayara Bano case (supra) means that when something is done by the legislature capriciously, irrationally and/or without an adequate determining principle, when something is excessive and disproportionate, which is not fair, not reasonable, which is discriminatory, not transparent, biased, with favouritism or nepotism and not in pursuit of promotion of healthy competition and equitable treatment. Positively speaking, it should conform to norms which are rational, informed with reason and guided by public interest.
Attention is invited to the amended first proviso to Section 254(2-A). On a reading of the amended proviso, it appears that ITAT, on hearing the application of the assessee may grant a stay. However, this stay may be granted subject to the condition that not less than 20% of the disputed demand or equivalent amount of deposit would have to be placed and that ITAT shall dispose the appeal within a period of 180 days.
Prior to the amendment, ITAT exercised complete discretion in respect of the terms upon which stay could be granted. Kunhi case (supra) decided on September 11, 1968 had applied one of the most well-recognised principles of adjudication that the power to grant interim relief (in an appropriate case) is co-extensive with the power to grant final relief for if there is no power to grant interim relief as such, the right to obtain final relief may be rendered nugatory. This principle was found to be applicable in Narang Overseas to hold that despite a statutory provision restricting the power to extend stay beyond 365 days, it does possess the power of extension provided the delay was not attributable to the assessee. The principles based on which the issue was decided in favour of the assessee is sound and unimpeachable.
Pursuant to Kunhi case, ITAT has exercised the power to grant stay in the cases which it thought fit and not a case that the same was granted as a matter of course for the mere asking. This is statistically noted in CIT v. Maruti Suzuki (India) Ltd.[39] In the years 2011, 2012 and 2013, the appeals in which stay has been granted does not even amount to 10% of the total appeals filed by the assessee. Thus, it can be seen that ITAT is cautious in its approach to grant stay. On basis of the above, the Revenue may not be in a position to say that its interest has not been protected.
On the other hand, the amendment fails to protect interest of the assessee. It is also contrary to one of the principles of adjudication i.e. granting of interim relief in fit cases. The purpose behind granting of interim relief is to ensure that the right of obtaining final relief may not be rendered illusory. The intention behind such a mandatory condition does not seem to be clarified either by the Memorandum to the Finance Bill, 2020 nor does it come out clearly from the notes to clauses.
In other words, the reasons as to why the amendment seeks to undo the right of the assessee to obtain relief from a judicial authority is not forthcoming. It is submitted that a taxpayer is entitled to reasons as to why such a right is being taken away which is vested upon him by the authority of the Supreme Court.
Apart from the above, the excessiveness and unreasonableness of the amendment can be better understood with the following consequences that would flow:
- The first proviso mandates that assessees would have to pay 20% of the disputed demand or the equivalent amount of security deposit would have to be placed notwithstanding the fact that the assessee is in a position to satisfy (i) prima facie case (ii) balance of convenience and (iii) irreparable loss would be caused if the Department is allowed to proceed with the recovery.
This goes contrary to the decision in Ravi Gupta (supra) which held that the above three factors must be considered and that the appellate authority must exercise the discretion judiciously. The Supreme Court had also held that if it appears that the demand raised would be deleted, then the assessee must not be burdened with payment. It also goes against the decision of the Bombay High Court in UTI Mutual Fund v. ITO[40], wherein it has been held that if an assessee is in a position to demonstrate the strength of his case, then asking him to make a payment by itself would cause hardship.
- The entire principle behind the concept of granting interim relief is that a successful party must enjoy the fruits of litigation. In a case where the assessee demonstrates that he is likely to succeed, it is submitted that until the outcome of the appeal is not pronounced by ITAT, this condition of mandatory pre-deposit operates in a biased manner in favour of the Department. The condition of paying 20% of the disputed demand fails to protect the interest of the parties in the litigation and especially the party who is in fact likely to succeed in such scenario.
- Indeed, it is embarrassing and an absurd situation that where CBDT Instruction No. 1914 dated 21.03.1996 as modified from time to time allows the Assessing Officer (executive authority) under Section 220(6) to relax the directory rate of 20% of the outstanding demand in certain scenarios but ITAT (judicial authority), who has the authority to either confirm, modify or annul the order of the very Assessing Officer, would not be in a position to grant the assessee the relief which it deems fit.
- To add insult to injury, it is submitted that the inherent powers of CIT(A) who happens to be an authority lower in rank than ITAT continues to hold unrestricted inherent power to grant a stay. It is interesting to note that restriction of limitation of 180 days and/or 365 days as provided under Section 254(2-A) is completely absent in such case. It is submitted that the judicial hierarchy prevailing under the scheme of the Act up to the stage of ITAT has been turned on its own head by the amended first proviso to Section 254(2-A) of the Act insofar as the powers to grant stay to the assessee is concerned.
- Consider a case where the issue under consideration in the appeal can be argued by the assessee on the strength of the decision and/or principles laid down by ITAT, High Court or the Supreme Court and after hearing the stay application, ITAT is of the opinion that a case for 100% stay has been made out. Nevertheless, mandating the assessee to pay in accordance with the amended first proviso to Section 254(2-A) of the Act would make the assessee suffer with harsh and unjust consequences and make ITAT face such an embarrassing situation that it cannot grant the assessee any relief even it has, as an institution decided the case in favour of the assessee.
- The condition under the amended first proviso mandates the ITAT to commit breach of judicial discipline. For instance, consider a situation where a decision/ principle laid down by the jurisdictional High Court is applicable which makes it likely for the assessee to succeed. However, the ITAT may not be able to grant the assessee any stay merely because of the condition of pre-deposit of 20% of the disputed demand.
Consider another situation where the ITAT has decided the issue in the assessee’s own case in his favour for an earlier assessment year. Yet, he may not be able to obtain complete stay because of the mandatory condition of 20%. It is indeed a dangerous situation where the ITAT itself is not able to enforce its own order. It is submitted that when rights of a person are injured, a judicial forum is the last resort that is available. Unfortunately, it is this right in respect of stay matters that has been sought to be taken away without providing for any reason and in a manner, which is excessive and disproportionate.
Judicial discipline demands that a decision of the Co-ordinate Bench ought to be followed [see Hatkesh Co-Op. Housing Society Ltd. v. ACIT[41]]. Further, it is not unknown that the Department makes the addition to the income of the assessee despite a favorable decision in assessee’s own case merely because an appeal is preferred before a higher forum [see Union of India v. Kamlakshi Finance Corporation[42] and also see HDFC Bank Ltd. v. ACIT[43]]. In these cases, the Courts have expressed strong displeasure for not following the principle of judicial discipline.
The only remedy available to the assessee would be that of approaching the High Court under Article 226 of the Constitution. The situation brought about is indeed strange especially considering the cautious manner in which ITAT grants stay as judicially noted in Maruti Suzuki case. Due to such situation, more assessees would approach the High Court under Article 226 of our august Constitution. Precious time of the Courts would get applied unnecessarily when the ITAT discharges such function under its appellate jurisdiction. Indeed, the remedy of stay would not remain an effective and efficacious remedy anymore.
One of the policies of the State is to reduce the litigation and enable the citizens to obtain justice as early as possible. The amendment is contrary to this policy for it would increase the burden upon the higher judiciary.
The decision of the Constitution Bench in Rojer Mathew v. South Indian Bank Ltd.[44] in the opinion authored by the then Chief Justice has expressed its strong displeasure and noted a non-exhaustive list of at least a dozen of statutes providing direct appeal from the orders of the Tribunals which has the effect of reducing the focus of the Court in matters which otherwise deserve more attention. For instance, it has noted that the judicial pronouncements by the Constitution Bench of the Supreme Court in the early 1960s had decided hundreds of cases in comparison to cases not more than a dozen at the present time.
The above observation of the Constitution Bench in Rojer Mathew (supra) has only been pointed out to highlight the need to decongest our higher judiciary. On the contrary, this amendment has the tendency to increase numerous writ petitions wherein the assessees would have to seek stay which otherwise could have been obtained from ITAT.
In view of the above, it can be seen that firstly, there is no reason forthcoming as to why the powers of ITAT to grant stay which were wholly discretionary in nature and exercised in a judicious manner is being restricted to the rigid condition of 20% especially when it has been performing this function since 1968.
Secondly, the excessiveness and unreasonableness of the amendment and the severe adverse consequences it has on the rights of the assessee and the authority of ITAT is a serious matter of concern.
Thirdly, the rigid limit of 20% operates in a biased manner in favour of the Department. It is submitted that stay is granted in matters only when the assessee has been able to establish that the demand raised may not survive. This is despite going through the assessment proceedings as well the proceedings before first appellate authority. The assessee has no control over them in the matter of passing orders. Where a prima facie case is still established, then the correctness of the order of lower authorities is not free. Thus, it is submitted that the condition of allowing collection of 20% of disputed demand is biased and in favour of Department. In Mardia Chemicals Ltd. v. Union of India[45], despite the existence of the provisions for waiving the pre-deposit (75%), the condition of pre-deposit was found to be heavily in favour of the respondent. On this principle, the same was struck down.
In view of the above, it is submitted that the amendment to the first proviso to Section 254(2-A) attracts the vice of arbitrariness, excessiveness and unreasonableness, brought in without an adequate determining principle without any fairness and equitable treatment. The amendment operates with a heavy bias in favour of the Department. It is therefore submitted that the amendment mandating payment of 20% ought to be struck down as arbitrary.
5. Conclusion
Whenever the rights of parties are affected, the forum of last resort is a judicial forum. This forum must necessarily be independent and must be in a position to uphold the rights and condemn the wrong. The Supreme Court has expressed its displeasure in at least five[46] of its Constitutional Bench decisions in the manner in which the minimum standards of judicial independence as are required to be maintained have been diluted. It is sincerely submitted that the amendment brought in by Section 99 of the Finance Act, 2020 if not held to be directory in nature would be another dilution to the independence of the judiciary which is necessarily required to be maintained in order to enable the citizens to obtain justice and relief from the institution of last resort. I would conclude with a passage from the decision of the Supreme Court in Union of India v. R. Gandhi[47] (supra) is reproduced hereunder:
“115. The need for vigilance in jealously guarding the independence of Courts and Tribunals against dilution and encroachment, finds an echo in an advice given by Justice William O. Douglas to young lawyers (The Douglas Letters: Selections from the Private Papers of William Douglas, edited by Melvin L. Urofsky – 1987 Ed., p. 162, – Adler and Adler): (SCC pp. 62-63)
“… The Constitution and the Bill of Rights were designed to get Government off the backs of people – all the people. Those great documents did not give us the welfare State. Instead, they guarantee to us all the rights to personal and spiritual self-fulfilment.
But that guarantee is not self-executing. As nightfall does not come all at once, neither does oppression. In both instances, there is a twilight when everything remains seemingly unchanged. And it is in such twilight that we all must be most aware of change in the air – however slight — lest we become unwitting victims of the darkness”.
(emphasis in original)
* Advocate, Bombay High Court
[1] Inserted with effect from 01.04.2020.
[2] This proviso has been inserted to replace the second proviso as it stood before the amendment brought in by the Finance Act, 2020.
[3] The condition of 20% is in line with the CBDT Instruction No. 1914 dated 21.03.1996 as modified from time to time.
[7] [2007] 295 ITR 22 (Bombay)
[8] (1981) 4 SCC 173 : 1981 SCC (Tax) 293
[10] (1986) 1 SCC 523 : 1986 SCC (Tax) 233
[20] 2004 SCC OnLine CESTAT 3467
[21] [2005] 180 ELT 434 (SC)
[22] [2007] 295 ITR 22 (Bombay)
[30] [2007] 295 ITR 22 (Bombay)
[31] [2005] 180 ELT 434 (SC)
[33] Rojer Mathew v. South Indian Bank Ltd., 2019 SCC OnLine SC 1456
[39] [2014] 362 ITR 215 (Delhi)
[41] [2016] 243 Taxman 213 (Bombay)]
[46] (i) L. Chandrakumar v. Union of India, (1997) 3 SCC 261;(ii) Union of India v. R. Gandhi, (2010) 11 SCC 1; (iii) Madras Bar Association v. Union of India, (2015) 8 SCC 583 ; (iv) Madras Bar Association v. Union of India, (2014) 10 SCC 1 and (v) Rojer Mathew v. South Indian Bank Ltd., 2019 SCC OnLine SC 1456.
