DEPUTY COMMISSIONER OF INCOME TAX vs M/S PEPSI FOODS LTD. (NOW PEPSICO INDIA HOLDINGS PVT. LTD.)

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURI ICTION CIVIL APPEAL NO. 1106 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.30284 OF 2015] DEPUTY COMMISSIONER OF INCOME TAX & ANR. ..APPELLANTS VERSUS M/S. PEPSI FOODS LTD. ..RESPONDENT (NOW PEPSICO INDIA HOLDINGS PVT. LTD.) WITH CIVIL APPEAL NO. 1125 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.32081 OF 2017] CIVIL APPEAL NO. 1107 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.34987 OF 2015] CIVIL APPEAL NO. 1108 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.31311 OF 2015] CIVIL APPEAL NO. 1109 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.31295 OF 2015] CIVIL APPEAL NO. 1110 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.30283 OF 2015] CIVIL APPEAL NO. 1111 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.31297 OF 2015] CIVIL APPEAL NO. 1112 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.34142 OF 2016] CIVIL APPEAL NO. 1113 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.3138 OF 2017] 1 Digitally signed by R Natarajan Date: 2021.04.08 16:21:50 IST Reason: Signature Not Verified

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CIVIL APPEAL NO. 1128 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.33218 OF 2017] CIVIL APPEAL NO. 1129 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.12200 OF 2018] CIVIL APPEAL NO. 1130 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.4186 OF 2018] CIVIL APPEAL NO. 1131 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.12202 OF 2018] CIVIL APPEAL NO. 1132 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.12204 OF 2018] CIVIL APPEAL NO. 1133 OF 2021 [ARISING OUT OF SLP (CIVIL) NO. OF 2021] DIARY NO.4363 OF 2018 CIVIL APPEAL NO. 1134 OF 2021 [ARISING OUT OF SLP (CIVIL) NO. OF 2021] DIARY NO.6113 OF 2018 CIVIL APPEAL NO. 1135 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.16889 OF 2018] CIVIL APPEAL NO. 1136 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.16245 OF 2018] CIVIL APPEAL NO. 1137 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.26053 OF 2018] CIVIL APPEAL NO. 1138 OF 2021 [ARISING OUT OF SLP (CIVIL) NO. OF 2021] DIARY NO.22819 OF 2018 CIVIL APPEAL NO. 1139 OF 2021 [ARISING OUT OF SLP (CIVIL) NO.10941 OF 2019] 3

J U D G M E N T R.F. Nariman, J

Delay condoned. Leave granted.

The appeals before us raise an important question as to the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961 (hereinafter referred to as “Income Tax Act”).

The facts in Deputy Commissioner of Income Tax & Anr. v. M/s Pepsi Foods Ltd. [now Pepsico India Holdings Pvt. Ltd] (Civil Appeal arising out of Special Leave Petition (C) No.30284 of 2015) may be set out as being illustrative of the facts in all the appeals before us. The Respondent-assessee is an Indian company incorporated on 24.02.1989 and is engaged in the business of manufacture and sale of concentrates, fruit juices, processing of rice and trading of goods for exports. The assessee is a group company of the multi-national Pepsico Inc., a company incorporated and registered in the United States of America. The assessee-company merged with Pepsico India Holdings Pvt. Ltd. w.e.f. 01.04.2010, in terms of a scheme of arrangement duly approved by the Hon’ble Punjab and Haryana High Court. On 30.09.2008, a return of income was filed for the assessment year 2008-2009 declaring a total income of INR 92,54,89,822. A final assessment order was passed on 19.10.2012 4

which was adverse to the assessee. Aggrieved by the aforesaid order, the assessee filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as “Tribunal”) on 29.04.2013. On 31.05.2013, a stay of the operation of the order of the assessing officer was granted by the Tribunal for a period of six months. This stay was extended till 08.01.2014 and continued being extended until 28.05.2014. Since the period of 365 days as provided in Section 254(2A) of the Income Tax Act was to end on 30.05.2014 beyond which no further extension could be granted, the assessee, apprehending coercive action from the Revenue, filed a writ petition before the Delhi High Court on 21.05.2014 challenging the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act. By a judgment dated 19.05.2015, the Delhi High Court struck down that part of the third proviso to Section 254(2A) of the Income Tax Act which did not permit the extension of a stay order beyond 365 days even if the assessee was not responsible for delay in hearing the appeal. It is this judgment and several other judgments from various High Courts that have been challenged by the revenue in these appeals.

Shri Vikramjit Banerjee, learned ASG, assailed the impugned judgment of the Delhi High Court and other judgments following it, arguing that 5

there is no right to stay of a judgment in an appellate proceeding as such stay is dependent upon the discretion of the Appellate Court. The discretion having been exercised once would not mean that automatic extensions of the same could be granted despite a reasonable period having gone-by. He also argued that the discretionary remedy of a stay is part and parcel of the right to appeal which itself is a statutory right, and can be taken away by the legislature. He then argued that Article 14 of the Constitution of India is not to be applied mechanically as a far greater freedom in the joints is given qua tax legislation and so long as the State has laid down a valid policy which it has followed without singling out anybody, no discrimination can possibly ensue. He also argued that equitable considerations and arguments based on hardship are out of place when it comes to tax statutes, which must be read literally. For all these propositions, he cited case law which will be dealt with later in this judgment.

Shri Ajay Vohra, learned Senior Advocate, Shri Himanshu S. Sinha, Shri Deepak Chopra and Shri Sachit Jolly, learned Advocates, appearing for the assessees, countered each of the submissions of Shri Banerjee, learned ASG. They relied strongly upon the reasoning of the impugned judgment of the Delhi High Court and argued that once discretionary relief has been granted based upon a strong prima 6

facie case, balance of convenience, etc. it would be wholly arbitrary and discriminatory that such relief be vacated automatically without reference to whether it is the assessee who is prolonging the appellate proceedings. Once there is a vested right of appeal, there is a right to obtain a stay which, once obtained, cannot be vacated without dilatory tactics on the part of the Appellant being found against the Appellant. They cited judgments of this Court to show that discriminatory taxation has been struck down under Article 14 of the Constitution of India. They also argued that the State cannot take shelter under a “policy”, if the policy or object laid down in the statutory provision is itself arbitrary or discriminatory. They also cited judgments to show that even in interpreting a tax statute, though equitable considerations are not to be given effect, yet they are not wholly irrelevant when the constitutional validity of the provision is itself challenged.

The genesis of the stay provision contained in Section 254 of the Income Tax Act is in the celebrated judgment of this Court in Income Tax Officer v. M.K. Mohammed Kunhi (1969) 2 SCR 65. In this judgment, Section 254 of the Income Tax Act, as originally enacted, came up for consideration before this Court. After setting out Section 254(1), this Court referred to Sutherland, Statutory Construction (3rd Edn., Arts. 5401 and 5402), and then held that the power which has 7

been conferred by the said Section on the Appellate Tribunal with the widest possible amplitude must carry with it, by necessary implication, all powers incidental and necessary to make the exercise of such power fully effective. The Court held: “Section 255(5) of the Act does empower the Appellate Tribunal to regulate its own procedure, but it is very doubtful if the power of stay can be spelt out from that provision. In our opinion the Appellate Tribunal must be held to have the power to grant stay as incidental or ancillary to its appellate juri iction. This is particularly so when Section 220(6) deals expressly with a situation when an appeal is pending before the Appellate Assistant Commissioner, but the Act is silent in that behalf when an appeal is pending before the Appellate Tribunal. It could well be said that when Section 254 confers appellate juri iction, it impliedly grants the power of doing all such acts, or employing such means, as are essentially necessary to its execution and that the statutory power carries with it the duty in proper cases to make such orders for staying proceedings as will prevent the appeal if successful from being rendered nugatory. A certain apprehension may legitimately arise in the minds of the authorities administering the Act that if the Appellate Tribunals proceed to stay recovery of taxes or penalties payable by or imposed on the assessees as a matter of course the revenue will be put to great loss because of the inordinate delay in the disposal of appeals by the Appellate Tribunals. It is needless to point out that the power of stay by the Tribunal is not likely to be exercised in a routine way or as a matter of course in view of the special nature of taxation and revenue laws. It wilt only be when a strong prima facie case is made out that the Tribunal will consider whether to stay the recovery proceedings and on what conditions and the stay will be granted in most deserving and appropriate cases where the Tribunal is 8

satisfied that the entire purpose of the appeal will be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal.” [at page 72] Importantly, this Court recognised that orders of stay prevent the appeal, if ultimately successful, from being rendered nugatory or futile, and are granted only in deserving and appropriate cases.

The judgment of this Court was followed for many decades, the Appellate Tribunal granting stay without being constrained by any time limit. However, by Finance Act, 2001 (w.e.f. 01/06/2001), two provisos were introduced to Section 254(2A) as follows: “254. Orders of Appellate Tribunal. xxx xxx xxx (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 where an order of stay is made in any proceedings relating to an appeal filed under sub- section (1) of section 253, the Appellant Tribunal shall dispose of the appeal within a period of one hundred and eighty days from the date of such order: Provided further that if such appeal is not so disposed of within the period specified in the first proviso, the stay order shall stand vacated after the expiry of the said period.”

Realising that a hard and fast provision which is directory so far as the disposal of appeal is concerned, but mandatory so far as vacation of 9

the stay order is concerned, would lead to great hardship, the legislature stepped in again and amended Section 254(2A) vide Finance Act, 2007 (w.e.f. 01/06/2007) as follows: “254. Orders of Appellate Tribunal. xxx xxx xxx (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 and the Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order: Provided further that where such appeal is not so disposed of within the said period of stay as specified in the order of stay, the Appellate Tribunal may, on an application made in this behalf by the assessee and on being satisfied that the delay in disposing of the appeal is not attributable to the assessee, extend the period of stay, or pass an order of stay for a further period or periods as it thinks fit; so, however, that the aggregate of the period originally allowed and the period or periods so extended or allowed shall not, in any case, 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, the order of stay shall stand vacated after the expiry of such period or periods.” 10

The aforementioned provision (as amended by Finance Act, 2007) became the subject matter of challenge before the Bombay High Court in Narang Overseas Pvt. Ltd. v. ITAT (2007) 295 ITR 22. The Bombay High Court, after referring to the judgment in Mohammed Kunhi (supra), then held: “ Did the section as it stood before the Finance Act of 2007, and after the Finance Act of 2007, exclude the power of the Tribunal to grant interim relief after the period provided in the proviso. Was it the intendement of Parliament that the Tribunal even in a case where the assessee was not at fault should be denuded of its incidental power to continue the interim relief granted and if so what mischief was it seeking to avoid. The mischief if and at all was the long delay in disposing of proceedings where interim relief had been obtained by the Assessee. The second proviso as it earlier stood, in a case when in an appeal interim relief was granted, if the appeal was not disposed off within 180 days provided that the stay shall stand vacated. The proviso as it stood could really have not have stood the test of non-arbitrariness as it would result in an appeal being defeated even if the assessee was not at fault, as in the meantime the revenue could proceed against the assets of the assessee. The proviso as introduced by the Finance Act, 2007 was to an extent to avoid the mischief of it being rendered unconstitutional. Once an appeal is provided, it cannot be rendered nugatory in cases were the assessee was not at fault. The amendment of 2007 conferred the power to extend the period of interim relief to 360 days. Parliament clearly intended that such appeals should be disposed of at the earliest. If that be the object the mischief which was sought to be avoided was the non- disposal of the appeal during the period the interim relief was in operation. By extending the period Parliament took note of laws delay. The object was not 11

to defeat the vested right of Appeal in an assessee, whose appeal could not be disposed off not on account of any omission or failure on his part, but either the failure of the Tribunal or acts of revenue resulting in non-disposal of the appeal within the extended period as provided. Can it then be said that the intention of Parliament by restricting the period of stay or interim relief upto 360 days had the effect of excluding by necessary intendment the power of the Tribunal to continue the interim relief. Would not reading the power not to continue the power to continue interim relief in cases not attributable to the acts of the assessee result in holding that such a provision would be unreasonable. Could Parliament have intended to confer the remedy of an Appeal by denying the incidental power of the Tribunal to do justice. In our opinion for reasons already discussed it would not be possible to so read it. It would not be possible on the one hand to hold that there is a vested right of an appeal and on the other hand to hold that there is no power to continue the grant of interim relief for no fault of the assessee by divesting the incidental power of the Tribunal to continue the interim relief. Such a reading would result in such an exercise being rendered unreasonable and violative of Article 14 of the Constitution. Courts must, therefore, construe and/or give a construction consistent with the constitutional mandate and principle to avoid a provision being rendered unconstitutional.” [at page 30-31] The High Court then referred to the judgment of this Court in Commissioner of Customs & Central Excise v. Kumar Cotton Mills (2005) 13 SCC 296, which dealt with a similar provision contained in the Central Excise Act, 1944, namely, Section 35C(2A), and then held: “ We are of the respectful view that the law as enunciated in Kumar Cotton Mills Pvt. Ltd. (supra) should also apply to the construction of the third proviso as introduced in section 254(2A) by the 12

Finance Act, 2007. The power to grant stay or interim relief being inherent or incidental is not defeated by the provisos to the sub-section. The third proviso has to be read as a limitation on the power of the Tribunal to continue interim relief in case where the hearing of the Appeal has been delayed for acts attributable to the assessee. It cannot mean that a construction be given that the power to grant interim relief is denuded even if the acts attributable are not of the assessee but of the revenue or of the Tribunal itself. The power of the Tribunal, therefore, to continue interim relief is not overridden by the language of the third proviso to section 254(2A). This would be in consonance with the view taken in Kumar Cotton Mills Pvt. Ltd. (supra). There would be power in the Tribunal to extend the period of stay on good cause being shown and on the Tribunal being satisfied that the matter could not be heard and disposed of for reasons not attributable to the assessee.” [at page 32] 10.Close on the heels of this judgment, Section 254(2A) of the Income Tax Act was again amended, this time by the Finance Act, 2008 (w.e.f. 01/10/2008). This amendment reads as follows: “254. Orders of Appellate Tribunal. xxx xxx xxx (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 and the 13

Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order: Provided further that where such appeal is not so disposed of within the said period of stay as specified in the order of stay, the Appellate Tribunal may, on an application made in this behalf by the assessee and on being satisfied that the delay in disposing of the appeal is not attributable to the assessee, extend the period of stay, or pass an order of stay for a further period or periods as it thinks fit; so, however, that the aggregate of the period originally allowed and the period or periods so extended or allowed shall not, in any case, 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.” 11.The amended provision came to be considered by a Division Bench of the Delhi High Court in Commissioner of Income Tax v. M/s Maruti Suzuki (India) Ltd. (2014) 362 ITR 215.The constitutional validity of the said provision had not been challenged, as a result of which the Delhi High Court interpreted the third proviso to Section 254(2A) as follows: “In view of the aforesaid discussion, we have reached the following conclusion:- (i) In view of the third proviso to Section 254(2A) of the Act substituted by Finance Act, 2008 with effect 14

from 1st October, 2008, tribunal cannot extend stay beyond the period of 365 days from the date of first order of stay. (ii) In case default and delay is due to lapse on the part of the Revenue, the tribunal is at liberty to conclude hearing and decide the appeal, if there is likelihood that the third proviso to Section 254(2A) would come into operation. (iii) Third proviso to Section 254(2A) does not bar or prohibit the Revenue or departmental representative from making a statement that they would not take coercive steps to recover the impugned demand and on such statement being made, it will be open to the tribunal to adjourn the matter at the request of the Revenue. (iv) An assessee can file a writ petition in the High Court pleading and asking for stay and the High Court has power and juri iction to grant stay and issue directions to the tribunal as may be required. Section 254(2A) does not prohibit/bar the High Court from issuing appropriate directions, including granting stay of recovery. We have not examined the constitutional validity of the provisos to Section 254(2A) of the Act and the issue is left open.” [at page 231] 12.Close upon the heels of the judgment in Maruti Suzuki (supra), the Gujarat High Court in DCIT v. Vodafone Essar Gujarat Ltd. (2015) 376 ITR 23, while disagreeing with the view taken in Maruti Suzuki (supra), interpreted the third proviso to Section 254(2A) of the Income Tax Act as follows: “ Applying the decision of the Division Bench of this court in the case of Small Industries Development Bank of India (supra) to the facts of the case on hand, more particularly while considering the powers of the 15

Tribunal under section 254(2A) of the Act, it is observed and held that by section 254(2A) of the Act, it cannot be inferred a legislative intent to curtail/withdraw the powers of the Appellate Tribunal to extend stay of demand beyond the period of 365 days. However, the aforesaid extension of stay beyond the period of total 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction by the learned Appellate Tribunal and on an application made by the assessee-appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant-assessee. For that purpose, on expiry of every 180 days, the appellant-assessee is required to make an application to extend stay granted earlier and satisfy the learned Appellate Tribunal that the delay in not disposing of the appeal is not attributable to him/it and the learned Appellate Tribunal is required to review the matter after every 180 days and while disposing of such application of extension of stay, the learned Appellate Tribunal is required to pass a speaking order after having satisfied that the assessee-appellant has not indulged into any delay tactics and that the delay in disposing of the appeal within stipulated time is not attributable to the assessee-appellant. However, at the same time, it may not be construed that widest powers are given to the Appellate Tribunal to extend the stay indefinitely and that the Appellate Tribunal is not required to dispose of the appeals at the earliest. The object and purpose of section 35C(2A) of the Act particularly one of the object and purpose is to see that in a case where stay has been granted by the learned Appellate Tribunal, the learned Appellate Tribunal is required to dispose of the appeal within total period of 365 days, as ultimately revenue has not to suffer and all efforts should be made by the learned Appellate Tribunal to dispose of such appeals in which stay has been granted as far as possible within total period of 365 days from the date of grant of initial stay and the Appellate Tribunal shall grant priority to such appeals over appeals in which no stay is granted. For that even the Appellate Tribunal and/or

DEPUTY COMMISSIONER OF INCOME TAX vs. M/S PEPSI FOODS LTD. (NOW PEPSICO INDIA HOLDINGS PVT. LTD.)