DCIT v PEPSI foods ltd.

Case note

Court: The Supreme Court of India 

Jurisdiction: Civil Appellate Jurisdiction 

Case No.: Civil Appeal No. 1106 of 2021 [Arising out of SLP (Civil) No. 30284 of 2015]

Bench: Rohinton Fali Nariman, B.R. Gavai, Hrishikesh Roy. 

Appellant: Deputy Commissioner of Income Tax and Another

Respondent: M/s Pepsi Foods Ltd. 

Decided on: 6^th April, 2021

Counsel on behalf of appellant: Shri Vikramjit Banerjee, learned ASG.

Counsel on behalf of respondent: Shri Ajay Vohra, learned Senior Advocate, Shri Himanshu  S. Sinha, Shri Deepak Chopra and Shri Sachit Jolly, learned Advocates. ¹

Introduction

The appeal was raised on the determination of the constitutionality of third proviso of section  254(2A) of the Income Tax Act, 1961, which states the automatic vacation of stay on  completion of 365 days, whether or not the assessee was responsible for such delay. It was  found to be arbitrary, capricious, irrational and disproportionate to the duties discharged by the  assessee. It was biased and the court applying the Golden rule of interpretation, and stated that  the order of stay shall stand vacated on the expiry of 365 days only if the delay in disposing of  the appeal is caused by the assessee, otherwise not.

Background

As per the Income Tax Act, 1961, the taxpayers have the right of appeal against the Orders that  are passed by the income Tax authorities under its provisions. Thus, the Orders passed by the  Assessing Officer, can be appealed against to the Commissioner of Income Tax, further to the Income Tax Appellate Tribunal, then to the High Court of the respective State and the Supreme  Court of India. The Appellate Authorities, as have been mentioned, have the inherent power to  grant a stay against the demands that are raised by the Income Tax Officer. It grants stay against  the tax demand. However, this grant of stay has been challenged through numerous litigations  over the years depending on the facts and circumstance. Since it is subjective in nature by being  a matter of discretion of the Income Tax Appellate Tribunal (ITAT) to decide upon the  percentage of amount demanded by way of tax to be stayed and whether or not such grant  should be made or not. Thus, it clearly reflects a conflict between the legislature and the  judiciary in the aspect of the tax-finance power to grant a stay on demands made by the  assessing officer. The overlapping nature of functionality of the three pillars of the  Government, the Legislature, which determines the power of the tax administrative  departments and the tribunals, the Executive, which executes the power envisaged upon it via  the legislations and the Judiciary, that applies the judicial mind and intelligence in interpreting  the laws and exercising the inherent powers bestowed by the legislatures.  

A conflict between section 254(1), 254(2A) along with the provisos of the income tax Act and  Article 14 of the Constitution of India have been highlighted in the judgement of the case,  which was actually the point of discussion in this case. The constitutionality of this sections  and the powers of the appellate tribunal derived from it have been determined by the apex  court. 

Facts of the case

The assessee-respondent in this case, M/s Pepsi Foods Ltd. is a company involved in the  manufacturing and sale of concentrated drinks, fruit juices, processing of rice and trading of  goods for exports. It is a multi-national company, incorporated and registered in the United  States of America. It merged with Pepsico India Holdings Pvt. Ltd. with effect from April 1^st,  2010, as per the schemes of arrangement approved by the Honourable Punjab and Haryana  High Court. 

The sequence of events begin with the assessment Order for Assessment Year 2008-09 was  passed favouring the collection of revenue. A final order passed in October 2012 proved to be  adverse for the assessee. Consequently, the assessee approached the ITAT, appealing against  the demand of additions Ordered by the Assessing officer (AO). The ITAT, by way of its  inherent power, granted a stay on such imposition and collection Order in May 2013. The stay  was further extended till January 2014 and continued to be extended till May 2014. By the month of May, 2014, the stipulated period of maximum extension for 36 days under section  254(2A) of the Income tax Act would come to an end. Apprehending coercive measures from  the Revenue, that is the appellant, the assessee filed a writ petition before the Delhi High Court  on May 21^st, 2014 challenging the constitutionality of the said section. 

The Delhi High Court struck down the third proviso to section 254(2A) which did not permit  an extension of the stay order beyond 365 days even when the assessee was not at fault for any  delay caused in the hearing of the appeal. The High Court found it to be violative of Article 14  of the Constitution of India, which provides for the Right to Equality, as the stay could get  vacated, putting the assessee in a difficult position, without a default on his part. The Revenue  has challenged this judgement by the Delhi High Court, and several others pertaining to the  issue in this present case. 

Issues raised

The issue that was raised before the Supreme court was whether the verdict of the Delhi High  court stating that the Provisions of the Income Tax Act, 1961 are ultra vires to the Constitution  is valid or not. The constitutionality of the provisions and corresponding proviso was under the  microscope of judicial interpretation of the legislations. 

Questions before the court

On the basis of the contentions advanced by both the parties, the Apex court had to consider  certain questions that may have the potential to solve the discrepancy in point of law. Following  were the questions that were raised before the court in the present case:

1. Whether the provisions under the Income Tax Act 1961 was conflicting with Article 14 of the Constitution of India?
2. Whether the assessee has an inherent Right to Apply and obtain a stay order on the payment of revenue assessed by the AO?
3. What would be the implication of a strict adherence to the third proviso of s. 254(2A) of the Income Tax Act, 1961?

Arguments advanced by the appellant

The appellants argued that a stay order that has already been granted by the Appellate Court  cannot be further appealed for. The discretion of the Appellate court once exercised, cannot lead to an automatic extension of the stay order beyond the stipulated time period of 365 days  mentioned in the s. 254(2A) proviso 3. 

The Right of the assessee to appeal before the Appellate Court is a statutory right, carries along  with it the Right to grant stay which is a discretionary remedy provided by the Appellate Court.  Thus, the legislature that creates a scope for such inherent power on both ends, can also take it  away. 

The further argument relied upon the fact that Article 14 of the Constitution was not disrupted  as the State and the Union while planning the taxation schemes and policies adheres to the  Articles that provide Constitutional backing and legitimacy to the collection of tax from the  people. In that view, everyone is equally subjected to the various tax policies, and no one can  possibly face a discrimination. Thus, the Specific provision of the Income Tax Act passes the  test of Constitutionality. He finally argues that the intention of the legislators is portrayed  through the wording of the Statue, thus, it must be read literally in order to spare the public  from any sort of discrimination which may be caused due to the interpretation of the Statute.

The above contentions find the basis in the ratio of certain other cases pertaining to similar  issue which have been discussed in the following segment. 

Arguments advanced by the respondent

The counsels on behalf of the assessee-respondent argued that the grant of the discretionary  relief is based upon the strong prima facie case and balance of convenience. In that case, it  would be completely arbitrary and discriminatory for the relief be vacated automatically  without the consideration or examination of the fact of the involvement of the assessee in the  delay of the Appellate proceedings. 

They also argued that when the State is formulating the laws and the administrative measures  to derive revenue from the public by way of taxation, it cannot take shelter behind the term  ‘policy’, if such ‘policy’ laid down in the Statutory provision is arbitrary and biased in nature. The inherent Right to appeal on the part of the assessee includes the Right to obtain the stay  thus, the automatic vacation of the stay nullifies this Right. A default on the assessee must be  proved for such vacation, otherwise, the essence of the section to protect the interest of the  assesse is negated. A mal-intention or a failure on behalf of the assessee, causing a delay in the  proceedings of the Appellate court must only be a reason for such vacation of the stay.

Also, the interpretation of a statute on taxation needs to encompass subjects such as socio economic stability and equitable considerations because of which a simple literal interpretation  or a plain reading of the statute for interpretation leaves loopholes for the biases to creep in. 

The above arguments have been based upon certain case laws which have been discussed in  the Judgement which is furnished in the following segment. 

Judgement in brief

1. In context of Article 14 of the Constitution the court pointed out the essence of it in Equal protection of law and the Right to Equality being expressed when the equals are treated equally and unequal is treated unequally. There has to be a parity between the  socio-economic status of an individual and the treatment it receives through legal or  administrative measures in a country. Thus, a Statute contravenes Article 14 when it  imposes something upon people, belonging to the different strata of the society, leading  to obvious inequality among them. The honourable Supreme Court, opined that with  respect to Article 14 and its compliance by any specific law or statute can be hampered  by way of obvious discrimination and manifest arbitrariness. In the case Suraj Mall  Mohta and Co. v A.V. Viswanatha Sastri², this Court struck down s.5(4) of the  Taxation on Income (Investigation Commission) Act, 1947 on similar grounds as the  procedure established was substantially prejudicial and drastic to the assessee than the  procedure that is contained in Indian Income Tax Act, 1922. It was held to be a  discriminatory legislation by the court, offending the substance of Article 14 of the  Constitution of India. In Kunnathat Thatehunni Moopil nair v State of Kerala³, the  apex court found the uniform “basic tax” levied under the Travancore Cochin Land Tax  Act, 1995 to be discriminatory as it treated unequal equally and was thus, struck down.  In Shayara Bano v Union of India⁴, the test for manifest arbitration was determined.  It said that manifest arbitration by the legislature is something capricious and/or without  adequate determining principle. At the same time, when something is done with  excessiveness and is disproportionate to the circumstantial requirement, a legislation of  such kind is considered to be manifestly arbitrary. Linking this with the present case,  court found that s.254(2A), Proviso 3, allows the vacation of stay in favour of the  revenue even if the revenue is responsible for the delays caused in the proceedings. 

Therefore, there is an implication that the assessee, without any default on its end,  would lose the statutory relief of the grant of stay or an extension of the same, which  amounts to unreasonable restriction on the assessee. Thus, the court held the provision  and its proviso to be capricious, irrational, disproportionate and violates Article 14 of  the Constitution. 

2. While dealing whether it is an inherent right of the assessee to appeal, the Court referred to Janardhan Rao v CIT⁵and Mardia Chemicals Ltd. v Union of India⁶. It opined that the infirmity that stays in the wording of the legislation, empowering any one side to  demand an amount of money as revenue is itself onerous and an oppressive condition.  In such a case a mere right or the power of the Tribunal to curb or curtail the burden by  ordering a grant of stay does not mitigate or remove this erroneous imposition on the  one party that is being assessed. At the very same time without the default on that party,  the grant is being called off at the discretion of the court. thus, even though the right to  appeal and the right to obtain stay run parallel to each other, it does not remove the  lacuna in the law. 

Also, the court, through a plain reading of the proviso, specifically the words “even if  the delay in disposing of the appeal is not attributable to the assessee” observed that the  intention of the legislature renders the right of appeal of the assessee to be illusory for  no fault on the part of the assessee. The right that was granted to him, the extension of  the duration of proceedings that was allowed is now taken away due to the delay in  disposal, for reasons unattributable to the assessee. This laces the right of appeal and  the simultaneous right of obtainment of stay at a difficult place Statutorily. 

3. As observed by the court in CIT v J.H. Gotla ⁷, that a literal and simple reading of the provisions can lead to a misinterpretation of the intention of the legislature. The court needs to modify the language, on order to bring a harmony bwtween what the law is  and what the circumstance and facts of a case demands for the correctness of the  judgement so pronounced. The same was said in the present case, where the literal  interpretation of the proviso 3 of the section 254(2A) could lead to an absurd result. If  another interpretation is applicable to establish the object of the words of the Statute,  then such Rule of interpretation must be applied. The point of law must be interpreted  in a way that it exempts the assessee from being liable for any delay without any default  on its end and safeguards the relief or provides a rationale behind the vacation of the  same.

The points discussed above were taken into consideration by the apex court to reach the verdict  and the pronouncement of the judgement. 

Analysis of the judgement

The analysis of the judgement runs in the Rule of interpretation that has been taken up by the  Court to bring the true intentions of the legislature and maintaining a balance between the facts  and circumstance and the provision of law. 

When the words or phrases in a provision literally has only one meaning but the application of  the same in toto will lead to miscarriage of justice, the Golden rule of interpretation is adhered  to by the Courts. At certain points, the literal rule makes no sense. At that point, the Golden  rule provides a meaning to the words and delivers justice in its truest sense. The narrow  approach in the literal rule of interpretation is avoided by the Golden rule as the court has the  power to modify the words and phrases to provide more than one understanding. It respects the  Parliamentary supremacy as it tries to bring out the best intentions of the law makers and  parallelly protects the integrity of the judiciary as provides a scope for closing of the loopholes  in the laws. 

The court identified the two components of test of discrimination and the test of manifest  arbitrariness that makes the Income Tax Act, 1961 contradictory to the Supreme law of the  land. The use of the terms “even if”, “shall” in the third proviso of s.254(2A) implies a  mandatory condition on the assessee that is to be imposed. There is no scope to avoid or to  employ a discretionary power of the court. The grant may or may not have been ordered, but  the vacation of it is automatic and mandatory in nature which makes a clear discrimination  towards the assesse and snatches his Right to the grant. The test of manifest arbitrariness stood  at the point where the provision states that the vacation of stay will happen in favour of the  revenue even if the appellant is itself responsible for the delay in disposal of the case. if the  assessee has the right to appeal and obtain and order, the provision must make the court obliged  or dutiful to the assesse itself and not to the appellant, which reflects the Hoffeldian principles  of rights and duties. 

Thus, at every point the court proved with various case laws that the provision negates the  constitutional provisions and thus, it states that the vacation of the stay of grant must happen only upon the delay caused by the assessee, declared the provision null and void and struck  down the same. The fundamental rights must be protected as it is the basic structure of the  Constitution and anything against, contradictory or ultra vires to it must be struck down by the  judiciary in order to protect the essence of the Supreme law of the land.

Conclusion  

It is to be concluded that the court upheld the supremacy of the Constitution and its basic  structure that cannot be attacked by any legislation. The fundamental rights and the duties must  be in co-operation with each other and any arbitrary legislation will be struck down by the  judiciary, favouring the Constitution. 

In this case, the Supreme court struck down the provision and an amendment to the same has  been brought about by the Finance Act, 2020, more conditions and limitations to the power of  the tribunal has been introduced. The vacation of stay cannot happen cannot take place on the  completion of 365 automatically, unless there is a default on the end of the assessee. The  literal rule of interpreting the tax provisions can be challenged for being absurd and in discord  with the Fundamental rights.

Reference(S):

¹ Deputy Commissioner Of Income Tax vs M/S Pepsi Foods Ltd. (Now Pepsico decided on 6 April, 2021) (July 27, 2025, 8:02pm) https://indiankanoon.org/doc/33094564/.

² Suraj Mall Mohta and Co. v A.V. Viswanatha Sastri, (1955) 1 SCR 448 (India).

³ Kunnathat Thatehunni Moopil nair v State of Kerala, (1961) 3 SCR 77 (India).

⁴ Shayara Bano v Union of India, (2017) 9 SCC 1(India).

⁵Janardhan Rao v CIT, (2005) 2 SCC 324 (India).

⁶ Mardia Chemicals Ltd. v Union of India, (2004) 4 SCC 311 (India).

⁷ CIT v J.H. Gotla, (1985) 4 SCC 343 (India).