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Deputy Commissioner of Income Tax & Anr. v. M/s Pepsi Foods Ltd. (now Pepsico India Holdings Pvt. Ltd.)

Civil Appeal · 2021 INSC 227Decided 6 Apr 2021
Civil Appeal No. 1106 of 2021
Justice Rohinton Fali Nariman · Justice B.R. Gavai · Justice Hrishikesh Roy

Background

Pepsi Foods had an adverse tax assessment order, appealed to the Income Tax Appellate Tribunal (ITAT), and obtained a stay of recovery that was repeatedly extended. The third proviso to Section 254(2A) of the Income Tax Act capped any such stay at 365 days, with no extension possible beyond that even if the delay in deciding the appeal was not the assessee's fault. Fearing coercive tax recovery once the 365-day cap expired, Pepsi Foods challenged the provision's constitutionality before the Delhi High Court, which struck down the "no extension beyond 365 days" rule as arbitrary where the assessee was not responsible for the delay; the tax department appealed this (and similar rulings from other High Courts in parallel cases) to the Supreme Court.

Decision Breakdown

The Supreme Court held that the provision irrationally treated assessees who caused delay in their own appeals the same as assessees who were not responsible for any delay, violating Article 14's guarantee against treating unequals equally. It rejected the Revenue's argument that courts must defer to legislative discretion in tax matters, holding that a taxing statute can still be struck down under Article 14 if it produces clear, unjustified inequality. The Court upheld the Delhi High Court's approach and effectively read down the provision so that a stay automatically lapses after 365 days only if the delay in deciding the appeal is attributable to the assessee itself, otherwise the Tribunal can continue the stay, and dismissed the Revenue's appeals.

Lesson Learnt

A law that applies the same harsh consequence (such as automatic loss of a stay/protection) to people who caused a delay and people who did not is constitutionally vulnerable for treating unequals equally, even in the field of taxation where courts otherwise give legislatures wide latitude.

Official source (sci.gov.in)View Judgment (PDF)

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