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Extended stay of demand beyond 365 days-Taxpayer’s conduct important

The Income Tax Statute in India requires the taxpayer to pay tax demand arising pursuant to an order passed by the Revenue Authority within the prescribed time under the Income-tax Act, 1961 (ITA). A non-payment of the appropriate tax demand could lead to interest, penalty exposure, and a consistent default could lead to Revenue Authority taking coercive action like attachment of bank account, property, etc. of the taxpayer.

If the taxpayer decides to adjudicate and file an appeal against the order passed by the Revenue Authority, it has a remedy under the ITA to apply for a stay of demand till the appeal is disposed of. The first appeal lies before the Commissioner of Income Tax (Appeals) [CIT(A)], and the second level of appeal lies with Income Tax Appellate Tribunal (ITAT or Tribunal).

The ITA provides for a procedure for applying for a stay of demand before the Tribunal, while an appeal is pending for adjudication before the Tribunal. Also, it provides power to the Tribunal to grant stay and limitation on the period to be covered by the stay. The present provisions in the statute provide for an initial stay of 182 days followed by an extension, with an aggregate stay period not exceeding 365 days, from the date of passing the initial stay order by the Tribunal and subject to the following conditions being satisfied:-

  • Tribunal is satisfied with respect to the merits of the application (say, the financial hardship of the taxpayer, issue involved in the appeal, etc.);
  • The taxpayer pays 20% of the demand raised or furnishes security for an equivalent amount;
  • Delay in disposing of the appeal is not attributable to the taxpayer.

The provision further provides that the stay granted by the Tribunal will be automatically vacated if the appeal is not disposed of within the period of stay, irrespective of the fact that the delay in disposing of the appeal was not attributable to the taxpayer.

This has been the area of dispute between the taxpayers and the Revenue Authorities over the past few years. The taxpayer’s main contention was that where the delay in disposing of the appeal was not attributable to themselves, it should not be subject to undue hardship, which results from the automatic vacation of the stay. In order to avoid recovery of the tax demand on the automatic vacation of the stay order, the taxpayer had to then approach the for stay, which adds to the unnecessary compliance cost and undue hardship.

The Apex Court of India has recently settled this issue1 in favor of the taxpayers. The Apex court held as under:

  • Present provisions, providing for the automatic vacation of stay of demand, for no fault of the taxpayer are discriminatory as it would treat the taxpayers who are intentionally delaying the appeal, equal with the taxpayers who are not responsible in any manner for the delay in disposal of the appeal;
  • Provisions are arbitrary, for it would permit the Revenue Authorities to collect the demand, even if the delay in disposal of appeal is attributable to them;
  • The intention of the legislature for enacting such provisions is to ensure early disposal of appeals, rather than being unreasonable to the taxpayers;
  • The Apex Court also concurred with the judicial precedents, which held that such provisions curtail the Tribunal’s power of stay, which flows from its basic power of deciding an appeal,i.e., when a Tribunal has the power to adjudicate an appeal, it also has the power to stay the demand. However, such power cannot be discretionary in nature and should be exercised with caution and as per the legal provisions. However, such legal provisions restrict the Tribunal in exercising its power of stay even in genuine cases, the provisions should be held to be constitutionally invalid.

Considering the above hardship caused to the taxpayers and the judicial precedents on the subject, the Apex Court ruled in favor of the taxpayers.

Our Comments

With the Apex Court ruling, the provisions relating to the automatic vacation of stay of demand in an appeal pending before the Tribunal would now be applicable, only if the delay in disposal of an appeal before the Tribunal is on account of the taxpayer. In other words, the Tribunal is empowered to extend the stay of demand, even beyond a period of 365 days, provided the conditions bulleted above are satisfied. This decision is a big relief to the taxpayers who have applied for a stay before the Tribunal.

In view of the above decision, the taxpayer would have to be mindful of its conduct during the appeal proceedings, i.e., timely filing of appeal documents/paperbook/evidence/attending hearings, avoid taking adjournments, etc. It becomes imperative for the taxpayers to substantiate that the delay in disposing of the appeal is not attributable to the taxpayer. Also, the taxpayers whose stay period is about to expire, or where the stay order is automatically vacated can take the benefit of this decision and apply/reapply for an extension of stay to the Tribunal.

1.DCIT vs Pepsi Foods Ltd. [Civil Appeal No. 1106 to 1139 of 2021 vide Judgment dated 06 April 2021]