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Direct Tax Alert - SC holds mandatory vacation of stay on expiry of 365 days as unconstitutional

09 April 2021


With a view to bring certainty in the timeline for disposal of appeal by the Tax Tribunal, the Finance Act, 1999 inserted sub-section 2A to Section 254 of the Income-tax Act, 1961 (IT Act) to provide that the Tax Tribunals may pass the order within 4 years from end of the Fiscal Year (FY) in which the appeal was filed.

Over the years, this provision has undergone various amendments. The last such being made by Finance Act, 2008. As per the extant Section 254(2A) of the IT Act, for matters where the taxpayer has sought stay of demand, the tax tribunal shall dispose the appeal within the period of stay granted to the taxpayer. It also provides that the period for stay of demand can be extended subject to a maximum of 365 days. On expiry of 365 days, the stay shall stand vacated. Thus, the third proviso provides for mandatory vacation of stay once the statutory timeline of 365 days have expired, irrespective whether the delay is on account of taxpayer or not.

The constitutional validity of the third proviso to Section 254(2A) of the IT Act was challenged before various courts and then was challenged before the Supreme Court.

Recently, the Supreme Court1 had an occasion to delve upon the constitutional validity of third proviso to Section 254(2A) of the IT Act, viz., whether the stays stand vacated mandatorily on expiry of 365 days or not.

We, at BDO in India, have summarised the ruling of the Supreme Court and provided our comments on the impact of this decision.


The taxpayer, an Indian company, is engaged in the business of manufacture and sale of concentrates, fruit juices, processing of rice and trading of goods for exports. For FY 2007-08, the tax officer had made certain adjustments in the returned income. Aggrieved by the adjustments, the taxpayer preferred an appeal which reached before the Tax Tribunal for adjudication. As demand was raised by the Tax Officer, the Tax Tribunal granted stay of demand on 31 May 2013, which was extended until 28 May 2014. As the period of 365 days as provided in Section 254(2A) of the IT Act was expiring on 30 May 2014 beyond which no further extension could be granted, the taxpayer apprehending coercive action from the revenue authorities, filed a writ petition before the Delhi High Court on 21 May 2014 challenging the constitutional validity of the third proviso to Section 254(2A) of the IT Act. The Delhi High Court struck down the part of third proviso which denied extension of stay beyond 365 days for no fault of taxpayer. Aggrieved by Delhi High Court decision the revenue authorities approached the Supreme Court (SC).


While striking down third proviso of section 254(2A) of the IT Act, it made the following observations:

  • The genesis of stay provisions contained in Section 254 of the IT Act is referred from coordinate bench ruling in the case of M.K. Mohammed Kunhi2 wherein it was held that the power of stay by the Tax Tribunal is not likely to be exercised in a routine way. It is only when a strong prima facie case is made out that the Tax Tribunal will consider whether to stay the recovery proceedings and on what conditions. The stay will be granted in most deserving and appropriate cases where the Tax Tribunal is 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.
  • In the case of M/s Maruti Suzuki (India) Ltd3, Hon’ble Delhi High Court have held that:
    • A Tax Tribunal cannot extend stay beyond 365 days.
    • If the delay is due to revenue authorities, the Tax Tribunal could analyse if third proviso would be applicable.
    • Upon revenue authorities stating of not taking coercive steps to recover the impugned demand, the Tax Tribunal can adjourn the matter at the request of revenue authorities.
    • The Taxpayer can file a writ petition before High Court seeking stay of assessment order.
  • In the case of Vodafone Essar Gujarat Ltd4, Gujarat High Court held that the Tax Tribunal can extend stay beyond 365 days if satisfied that the taxpayer was not indulged in any delay tactics and the delay in disposing of appeal was not attributable to the taxpayer.
  • Neither Delhi High Court nor Gujarat High Court examined the constitutional validity of third proviso to Section 254(2A) of the IT Act.
  • Delhi High Court in taxpayer’s matter has dealt with the constitutional validity of the third proviso to Section 254(2A) of the IT Act and have relied on SC ruling in the case of Mardia Chemicals Ltd.5 wherein the SC struck down Section 17(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) holding that in the circumstances mentioned, the deposit of 75% of the amount claimed as a pre-condition to the hearing of an “appeal” before the Debt Recovery Tribunal under Section 17 of the SARFAESI Act was onerous, oppressive, unreasonable, arbitrary and hence violative of Article 14 of the Constitution of India.       
  • Challenges to tax statutes made under Article 14 of the Constitution of India can be on grounds (procedural or substantive) relatable to discrimination as well as manifest arbitrariness. For this, reliance was placed on few rulings6 where taxation statutes were struck down on the aforesaid grounds.  
  • There can be no doubt that the third proviso to Section 254(2A) of the IT Act would be both arbitrary and discriminatory and therefore liable to be struck down as offending to Article 14 of the Constitution of India.
  • The Delhi High Court’s observation that unequals are treated equally in the sense that no differentiation is made by the third proviso between the taxpayers who are responsible for delaying the proceedings and taxpayers who are not so responsible.
  • The Tax Tribunal is to hear and decide appeals within a period of 4 years from the end of FY in which such appeal is filed except for matter in which stay is granted.  The disposal of an appeal by the Tax Tribunal is a directory provision, but the condition pertaining to vacation of stay on expiry of the 365 days is mandatory so far as the taxpayer is concerned.
  • Referring to the decision in case of Nagpur Improvement Trust7, SC held that the object sought to be achieved by the third proviso to Section 254(2A) of the IT Act is speedy disposal of appeals before the Tax Tribunal in cases in which a stay has been granted in favour of the taxpayer but such object cannot itself be discriminatory or arbitrary.
  • The third proviso to Section 254(2A) of the IT Act is also arbitrary since the vacation of stay in favour of the revenue authorities would ensue even if the revenue authorities itself is responsible for the delay in hearing the appeal. In this sense, the proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the taxpayer is concerned.

Thus, while dismissing the appeal, the SC concluded that the third proviso to Section 254(2A) of the IT Act should now be read without the word “even” and the words “is not” after the words “delay in disposing of the appeal”. Thus, any order of stay shall stand vacated after the expiry of the period or periods mentioned in the Section only if the delay in disposing of the appeal is attributable to the taxpayer. In other words, the vacation of stay granted by the Tax Tribunal, on expiry of 365 shall not be automatic.


With the appeals pending before the Tax Tribunals increasing every year, depending upon the issue involved, the disposal by the Tax Tribunal may not be feasible within a year may not be feasible. Hence, the statute itself provides that 4 years is a recommendatory timeline and not mandatory timeline. Hence, there will be instances where the appeals may be disposed off post 4 years also. By restricting the period for which the stay of demand can be granted to 365 days (i.e., 1 year) the taxpayer could face injustice especially where the delay is not attributable to him. Hence, this is a welcome decision and would provide much needed respite to law abiding taxpayers. This Ruling will help all the pending matters where the stay order is getting time barred by operation of third proviso to section 254(2A) of the IT Act. Now, instead of approaching High Courts for seeking further stay, the taxpayer can seek the stay from the Tax Tribunal itself. However, this relaxation is available only if the delay is not attributable to the taxpayer. Hence, the taxpayer needs to satisfy the Tax Tribunal that the delay in disposal of the appeal is not attributable to it.

1DCIT & ANR vs. M/s Pepsi Foods Ltd (Now Pepsico India Holdings Pvt. Ltd), Civil Appeal No. 1106 of 2021

2Income Tax Officer vs. M.K. Mohammed Kunhi  [1969] 2 SCR 65 (Supreme Court)

3CIT vs. M/s Maruti Suzuki (India) Ltd [2014] 362 ITR 215 (Delhi High Court) 

4DCIT vs. Vodafone Essar Gujarat Ltd. [2015] 376 ITR 23 (Gujarat High Court)

5Mardia Chemicals Ltd. vs. Union of India [2004] 4 SCC 311 (Supreme Court)

6Suraj Mall Mohta and Co. vs. A.V. Visvanatha Sastri [1955] 1 SCR 448 (Supreme Court)

Kunnuthat Thatehunni Moopil Nair vs. State of Kerala [1961] 3 SCR 77 (Supreme Court)

Union of India vs. A. Sanyasi Rao [1996] 3 SCC 465 (Supreme Court) 

7Nagpur Improvement Trust vs. VIthal Rao [1973] 3 SCR 39 (Supreme Court)