India has a high incidence of disputes pending before various tax forums. As the Income-tax Act, 1961, allows tax officers to recover tax demands while appeals are pending, the powers of administrative and judicial authorities to stay recovery proceedings are crucial from the assessee’s perspective. Yet, the powers of the Income Tax Appellate Tribunal (ITAT) to stay demands have been the subject of controversy. This article deals with one such controversy.
Initially, the ITAT had no statutory power to stay demands. The Supreme Court in Income Tax Officer v MK Mohammed Kunhi (1968) held that the ITAT possessed this power inherently on the basis that: (1) the power to decide appeals must carry with it the ability and duty to make the exercise of that power fully effective; and (2) the winning party must be able to reap the fruit of its success.
The power of the ITAT to grant a stay was statutorily provided in section 253(7) and by way of the insertion of a proviso to section 254(2A) of the act. In 2007, it was stipulated that the ITAT could not extend the stay period beyond 365 days. Contrary to this legislative intent, but given the overload and functioning of the ITAT, stay orders routinely had effect beyond 365 days. An amendment in 2008 further stipulated that the outer limit of 365 days cannot be breached, even where the delay in the disposal of the appeal is not attributable to the assessee.
In this context, courts have taken varying views on the effect that the 2008 amendment had on the ITAT’s powers to stay demands. Bombay High Court in CIT v Ronuk Industries Ltd has taken the view that the ITAT continues to have the power to extend stays beyond 365 days, while the high courts of Karnataka, Delhi and Uttarakhand have held that the ITAT, as a creature of the statute, is bound to stay within four corners of the statute, and cannot grant stays beyond the statutorily permitted period of 365 days, even if the delay in deciding the appeal is not attributable to the assessee.
Read strictly, the statutory provision leaves an assessee, who has been granted a stay but whose appeal cannot be decided in the prescribed time, in a vulnerable position. Such an assessee is liable to be proceeded against for recovery of dues and be considered as an “assessee in default”.
To protect against this possibility, where the assessee is not at fault for the delay in disposing of the appeal, Delhi High Court’s recent decision in CIT v Maruti Suzuki spells out that an assessee can file a writ petition in the high court seeking a stay in such circumstances and the court has power to stay demands and issue directions to the ITAT for this purpose.
While the statute governs the ITAT, given the spate of differing views by high courts, how different benches of the ITAT apply and follow these decisions and interpret the provisions will be closely watched. The Special Bench and the Ahmedabad Bench have held that the ITAT retains the power to grant a stay beyond 365 days. Should another bench of the ITAT now endeavour to adopt a contrary view (apart of those within the jurisdiction of the Karnataka, Delhi and Uttarakhand high courts), it will be proper for such a bench to make a reference to the president of the ITAT as provided in section 255(3) of the act to constitute a special bench to resolve the controversy.
That apart, given that previously courts had read down this provision, it needs to be seen whether it can withstand a constitutional challenge.
As the ITAT was constituted to dispense specialist and speedy justice, this restriction on the powers of the ITAT, without ensuring that it is equipped with the proper infrastructure to deal with its workload, may be viewed as unfair. Where a stay expires after 365 days entailing a payment and the assessee can expect relief only at the stage of final disposal of the appeal, justice is effectively denied and the winning litigant is ultimately handed a “barren success”.
In terms of section 151 of the Code of Civil Procedure, the ITAT may be seen to possess the powers to pass all orders necessary to do justice. Therefore, where a stay of demand has run its course of 365 days, the ITAT must be trusted to grant a stay beyond 365 days in deserving cases, and in terms of established guidelines.
Besides, it is an established legal principle that no party should be prejudiced due to action or inaction on the part of the court. As the absence of a stay resulting from the court’s inaction (owing to the overload) with no fault of the assessee can have serious and detrimental cash flow implications, the present situation deserves a legislative relook.
Disclaimer: This article was first published in the May 2014 issue of the India Business Law Journal magazine. It has been authored by Ranjeet Mahtani, who is an associate partner and Stella Joseph, who is an associate manager at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at email@example.com or firstname.lastname@example.org for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.