Supreme Court Declares Third Proviso to Section 254(2-A) of Income Tax Act Unconstitutional for Violating Article 14

Introduction

The case of Deputy Commissioner Of Income Tax And Another v. Pepsi Foods Limited (now Pepsico India Holdings Private Limited) adjudicated by the Supreme Court of India on April 6, 2021, addresses a critical constitutional challenge against the third proviso to Section 254(2-A) of the Income Tax Act, 1961. This proviso was scrutinized for its compliance with Article 14 of the Indian Constitution, which guarantees equality before the law and equal protection of the laws.

The appellants, representing the Revenue, contested the constitutional validity of the third proviso, arguing that it imposed unjustifiable and discriminatory restrictions on taxpayers. Pepsi Foods Limited, the respondent assessee, sought relief by challenging the proviso on the grounds that it resulted in unequal treatment of assessees, irrespective of whether they were responsible for delays in appellate proceedings.

Summary of the Judgment

The Supreme Court, after an exhaustive review of prior judgments and statutory provisions, held that the third proviso to Section 254(2-A) of the Income Tax Act was unconstitutional as it violated the non-discrimination principle enshrined in Article 14 of the Constitution. The Court observed that the proviso mandated the automatic vacation of stay orders after 365 days, irrespective of whether the delay in disposing of the appeal was attributable to the assessee or not. This blanket approach was deemed arbitrary and discriminatory, particularly disadvantaging those assessees who did not cause the delay.

Consequently, the Supreme Court struck down the third proviso, thereby reinforcing the principle that legislative provisions must adhere to constitutional mandates against arbitrary and discriminatory practices.

Analysis

Precedents Cited

The judgment extensively referenced several landmark cases to substantiate its stance:

• Income Tax Officer, Cannanore v. M. K. Mohammed Kunhi (1969): Established that appellate tribunals possess inherent powers to grant stay orders as part of their appellate jurisdiction.
• Commr. of Customs v. Kumar Cotton Mills (P) Ltd. (2005): Reinforced the Tribunal's inherent power to extend stay orders based on merit and convenience.
• Subramanian Swamy (2014): Emphasized non-discrimination and rational classification under Article 14.
• Kunnathat Thatehunni Moopil Nair v. State of Kerala (1961), Union of India v. A. Sanyasi Rao (1996), and others: Highlighted instances where taxation statutes were struck down for discrimination and arbitrariness.

These precedents collectively underscored the imperative for legislative provisions, especially in taxation, to be non-arbitrary and equitable.

Legal Reasoning

The Court's legal reasoning hinged on the violation of Article 14, focusing on both discrimination and arbitrariness:

• Discrimination: The third proviso did not differentiate between assessees based on their conduct concerning delays in appellate proceedings. Both those responsible for delays and those not were equally subjected to automatic vacation of stay orders after 365 days.
• Arbitrariness: By mandating the automatic vacation of stay irrespective of the assessee's responsibility for delays, the proviso imposed an unreasonable and disproportionate restriction on the right to appeal.
• Legislative Intent: While the legislature aimed to expedite appellate proceedings and prevent misuse of stay orders, the Court held that the means employed were flawed as they resulted in unfair and unequal treatment.

The Court concluded that any classification must satisfy the test of being founded on rational classification and having a nexus with the legislative objective. The third proviso failed on both counts, rendering it unconstitutional.

Impact

This landmark judgment has significant implications for the interpretation and application of appellate provisions in taxation:

• Enhancement of Fairness: Ensures that assessees are not unfairly penalized for delays beyond their control, thereby promoting equitable treatment.
• Legislative Scrutiny: Mandates that tax statutes and their provisos undergo stringent constitutional scrutiny to prevent arbitrary and discriminatory provisions.
• Judicial Oversight: Empowers courts to strike down legislative provisions that violate fundamental rights, reinforcing the judiciary's role in upholding constitutional mandates.

Future legislative amendments to taxation laws will need to carefully consider these constitutional principles to avoid similar challenges.

Complex Concepts Simplified

Conclusion

The Supreme Court's decision in Deputy Commissioner Of Income Tax And Another v. Pepsi Foods Limited marks a pivotal moment in Indian taxation jurisprudence. By declaring the third proviso to Section 254(2-A) unconstitutional, the Court reinforced the sanctity of constitutional safeguards against discrimination and arbitrariness. This judgment not only upholds the fundamental rights of assessees but also imposes a higher standard of fairness and reasonableness on legislative provisions. Moving forward, this precedent serves as a guideline for both lawmakers and taxpayers, ensuring that taxation laws align with constitutional norms and principles of justice.