In scrutiny assessments it is sometimes seen that huge demands are created against the assessee by framing high pitched assessments due to difference in opinion on interpretation of law or interpretation of facts or due to the fact that AO is not satisfied with the explanations offered by the assessee in regard to loan creditors or cash credits or gifts etc.
After the assessment a notice u/s 156 for recovery of tax demand created in concluded assessment proceedings, is issued. If a person fails to pay such tax demand then section 220 of Income Tax Act provides for treating such assessee as assessee-in-default as a result of which not only interest @ 1% u/s 220(2) on the tax demand is charged but penalty proceedings u/s 221 may also be initiated.
The assessee may file an appeal against such huge assessment and can also consequently apply for stay of such disputed tax demand since right to request for stay of demand in question is incidental to the right of appeal.
Petition for Stay of Demand: Section 220(6) provides that Where an assessee has presented an appeal under section 246 or section 246A the Assessing Officer may, in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the assessee as not being in default in respect of the amount in dispute in the appeal, even though the time for payment has expired, as long as such appeal remains undisposed off.
Thus assessee may apply for stay of tax demand u/s 220(6) and may request that he may not be treated as assessee in default. It should be noted here that accepting the request of an assessee u/s 220(6) is within the discretionary power of the AO. But such discretionary power cannot be exercised arbitrarily but has to be exercised judicialy and reasonably as the AO while exercising such discretionary power is always treated as quasi-judicial authority.
Time limit for deposit of tax demand u/s 156: Section 220(1) provides that demand raised u/s 156 shall be paid within 30 days from the date of service of notice, however such period may also reduced to less than 30 days with the prior approval of Joint Commissioner if AO has any reason to believe that allowing full pertiod of 30 days would be detrimental to the interests of revenue.
The assessee may also apply for extension of time before the due date for the payment of demand or he may also apply for payment of demand in installments.
The assessee will be treated as assessee in default only after the end of such period as mentioned in notice u/s 156. If the installments have been allowed and installment is not paid within time fixed for payment of installment then the assessee will be treated as assessee-in-default after the end of such period fixed.
What should be done for stay of disputed demand: If the assessee has filed an appeal against any order and consequent demand, he should write to the AO for stay of such demand and request him as not to treat him as assessee in default. The petition u/s 220(6) should be formulated keeping the following points in mind:
-The petition should state the prima facie merits of the appeal. The test of merit of appeal lies mush upon the grounds of appeal, which should be strong enough.
-The hardship involved in the recovery of the disputed demand should be clearly and precisely stated. The petition should state why and how the balance of convenience is in favour of the stay, e.g. bad effect on the liquidity position of the business, jeopardy of the employment of workmen through possible closure of business and possibility dead lock in wage payment etc. as the case may be.
-Copy of grounds of appeal as well as statement of facts should accompany the petition to show the prima facie merits of the appeal.
-The petition should be submitted within 30 days of receipt of demand notice.
Stay of realization cannot be granted simply because an appeal has been preferred- Gouri Shankar Awasthi v. ITO 78 ITR 784 (Cal.)
Discretionary power has to be exercised judicially: The discretion vested in the ITO u/s 220(6) is not merely a naked and arbitrary power but a power coupled with a responsibility and the concerned officer should take all the circumstances into account and all the considerations that could be urged or are urged by the assessee as to why he should not be treated as not being in default and then make such order as is appropriate to the facts of case. In other words, a request for the exercise of the power u/s 220(6) cannot be merely summarily rejected on the basis that the power is there with the officer but that he is not bound to exercise it- M.L.M Mahalingam Chettiar v. Third ITO [1967] 66 ITR 287 (Mad.).
AO should give reasons for dismissing an application for stay: The AO cannot simply reject the stay application without giving any reason for the same., AO must pass a speaking order while dismissing stay application.
As the exercise of discretion by AO u/s 220(6) is quasi-judicial function and he has to exercise his power fairly and reasonably and not arbitrarily or capriciously, the AO should give reasons for dismissing an application made by an assessee for involving his discretion and should also hear the assessee- Cf. Seth Gopaldas Paliwal v. WTO [1983] 139 ITR 900 (MP). Teletube Electronics Ltd. V CIT [1998] 230 ITR 705, 707 (Del.); Chesebrough Pond’s Inc v A.A.C. (C.T.), [1973] 32 STC 464 (Mad.).
Assessee cannot be treated in default until stay application is disposed off: It should be noted also that until application for stay of demand is disposed off by a speaking order assessee cannot be considered as assessee in default. Moreover demand remains stayed until the disposal of the application for stay. “Where an application for stay of demand in pending for disposal u/s 220(6), the demand should be stayed until the application is considered and an order is passed”-Sat Pal v ITAT 317 (P&H); Bongaigaon Refinery and Petro Chemicals Ltd. V. CIT 256 ITR 698 (Gau.); Debasish Moulik v. DCIT 231 ITR 737 (Cal.).
Stay should be granted if grounds of appeal are not frivolous: Normally, once the officer is satisfied that an appeal has been filed (and the grounds are not frivolous), he has to treat the assessee as not in default to the extent of the portion of tax disputed in the appeal. Though section 220(6) doesnot indicate in what cases denial of discretion shall be justified, the fact that the assessee is financially sound and is in a position to pay is not in itself a ground for refusing to exercise the discretion in granting the stay- R.P. David v. Ag. ITO [1972] 86 ITR 699 (Mad.).
Penalty u/s 221 cannot be imposed before disposing off of the stay petition: As noted earlier till the time stay application is disposed off by the AO, the demand remains stayed and hence assessee is not considered in default. Thus until the time stay application is being disposed off, no penalty u/s 221 can be imposed for non-payment of demand because assessee will not be considered as assessee in default till the disposing off of stay application.
In CIT v. DLF Universal Ltd. [2008] 297 ITR 342 (Del.), the Delhi High Court held that Assessing Officer should have decided the stay applications filed by the assessee before levy of penalty u/s 221. In this case High Court held that the assessing officer should have decided the stay applications filed by the assessee before taking any steps prejudicial to the interests of the assessee.
CBDT’s guidelines on stay of demand: CBDT in its instruction No. 96 dated 21-08-1969 has also stated that where the income assessed is huge in nature say twice the amount of income returned then the collection of tax should be held in abeyance till the final disposal of appeals, provided there was no lapse on the part of assessee:
“Stay in cases of harsh assessment: - One of the points that came up for consideration at the 8th meeting of the informal consultative committee was that income-tax assessments were arbitrarily pitched at high figures and that the collection of disputed demands, as a result of these, was also not stayed inspite of the specific provision in the matter in section 220(6) of the IT Act, 1961.
The then deputy Prime Minister (who was also the finance minister at the relevant time) had observed as under: -
“(w)here the income determined on assessment was substantially higher than the returned income, say twice the later amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals, provided there were no lapses on the part of the assessee. The board desires that the above observations may be brought to the notice of all the ITOs, working under you, and the powers of stay of recovery in such cases, upto the stage of first appeal, may be exercised by the IAC/CIT.”
Subsequent Instructions
After the issue of the Instruction No 96 (supra), the CBDT has issued two more Circulars on the subject of stay of demands namely Circular No 530 dated March 6, 1989, and Circular No 589 dated. January 16, 1991. The stipulations of these circulars are: -
Circular No 530
This Circular provides that the AO may exercise his discretion u/s 220(6) and treat the assessee as not being in default in regard to demand payable in the following circumstances: -
(a) The demand in dispute has arisen because the AO has adopted an interpretation of law on which there are conflicting decisions from the High Courts or the jurisdictional High Court has adopted an interpretation, which has not been accepted by the I-T department.
(b) The demand in dispute relates to issues that have been decided in favour of the assessee in the past.
In respect of cases, which are not covered by (a) and (b), the AO has been advised to take into account all the relevant factors and communicate his decision to the assessee by a speaking order. It was said in this circular that while exercising discretion under this provision, the financial capacity of the assessee to pay the demand would not be relevant.
Circular No.589 was also issued afterwards clarifying contents of circular No 530.
Letter [F.No. 404/10/2009-ITCC], dated 1-12-2009
Many queries have been received regarding the applicability of Instruction number 95 dated 21.8.1969 vis-à-vis Instruction number 1914 dated 2.12.1993. Many assesses are taking the plea that Instruction No. 1914 does not supercede Instruction No. 95 dated 21.8.1969.
2. Instruction No. 95 dated 22.8.1969 was an assurance given by the then Deputy Prime Minister during the 8th Meeting of the Informal Consultative Committee held on 13th May, 1969. The observations made by the Deputy Prime Minister were as under:-
“Where the income determined on assessment was substantially higher than the returned income, say twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeal provided there were no lapses on the part of the assesses.”
The above observations were circulated to the field officers by the Board as Instruction number 95 dated 21.8.1969.
2. The matter has been considered by the Board and the decision of the Board has been approved by the Finance Minister. It is hereby clarified that subsequent to Instruction No. 95 following Instructions/clarifications on the stay of demand were issued till 15th October 1980:-
(i)Clarification to Instruction number 95 was issued on 14/09/1970 stating that it relates to disputed demands only.
(ii) Instruction number 635 was issued on 12/11/1973 stating that stay should be granted only in those cases where demands are attributable to substantial points of dispute.
(iii)Clarification to Instruction number 95 dated 13/07/1976 held that the Instruction becomes operative only in cases where there are no lapses on the part of the assessee.
(iv)Instruction number 1067 dated 21/06/1977 held that the ITO can pass the necessary orders u/s 220 (6) in all cases except cases under section 144A or 144B where the approval of IAC is required.
(v) Instruction number 1158 dated 27th March 1978 held that in suitable cases the assessee may be allowed to furnish security.
(vi) Instruction number 1282 dated 4th October 1979 held that requests should be made to CIT(A) and ITAT for early disposal of appeals and constant watch should be kept on progress of appeals.
(v) Instruction number 1362 was issued on 15/10/1980 in supersession of all the earlier Instructions. It was an Instruction covering the issue in detail and in para 4 of the same there was a clear reference to the proposition laid down in Instruction number 95 which is as follows:-
In exercising this discretion, the Income-tax Officer should take into account factors such as: whether the points in dispute relate to facts; whether they arise from different interpretations of law; whether the additions have been made as a result of detailed investigation; whether the additions are based on materials gathered through enquiry/survey/search and seizure operations; whether the disputed addition to income has been assessed elsewhere by way of protective assessment and the tax thereon has been paid by such person etc. The magnitude of addition to income returned cannot be the sole determinant in this regard. Each disputed addition will need to be considered to arrive at the quantum of tax that may need to be stayed.
3. It is clear that the substance of the assurance as laid down in Instruction number 95 dated 21.8.1969 was submerged in the Instruction number 1362 dated 15/10/1980 which was issued in supersession of all earlier Instructions on the subject. Instruction No. 1914 dated 2.12.1993 was issued subsequently in super-session of all the earlier Instructions on the subject and the said Instruction also covers unreasonably high pitched assessment order and genuine hardship cases.
4. It is therefore clarified that there is no separate existence of the Instruction number 95 dated 21.8.1969. Instruction number 95 and all subsequent Instructions on the issue ceased to exist from the date Instruction No. 1362 came into operation. In turn Instruction number 1362 and all subsequent Instructions on the issue also ceased to exist the day Instruction number 1914 came into operation i.e. 2/12/1993.The Instruction number 1914 holds the field currently and a copy of Instruction number 1914 is enclosed for reference.
RECOVERY OF OUTSTANDING TAX DEMANDS
[Instruction No. 1914 F. No. 404/72/93 ITCC dated 2-12-1993 from CBDT]
The Board has felt the need for a comprehensive instruction on the subject of recovery of tax demand in order to streamline recovery procedures. This instruction is accordingly being issued in supersession of all earlier instructions on the subject and reiterates the existing Circulars on the subject.
2. The Board is of the view that, as a matter of principle, every demand should be recovered as soon as it becomes due. Demand may be kept in abeyance for valid reasons only in accordance with the guidelines given below :
A. Responsibility:
i. It shall be the responsibility of the Assessing Officer and the TRO to collect every demand that has been raised, except the following : (a) Demand which has not fallen due;(b) Demand which has been stayed by a Court or ITAT or Settlement Commission;(c) Demand for which a proper proposal for write-off has been submitted;(d) Demand stayed in accordance with paras B & C below.
ii. Where demand in respect of which a recovery certificate has been issued or a statement has been drawn, the primary responsibility for the collection of tax shall rest with the TRO.
iii. It would be the responsibility of the supervisory authorities to ensure that the Assessing Officers and the TROs take all such measures as are necessary to collect the demand. It must be understood that mere issue of a show cause notice with no follow-up is not to be regarded as adequate effort to recover taxes.
B. Stay Petitions:
i. Stay petitions filed with the Assessing Officers must be disposed of within two weeks of the filing of petition by the tax- payer. The assessee must be intimated of the decision without delay.
ii. Where stay petitions are made to the authorities higher than the Assessing Officer (DC/CIT/ CC), it is the responsibility of the higher authorities to dispose of the petitions without any delay, and in any event within two weeks of the receipt of the petition. Such a decision should be communicated to the assessee and the Assessing Officer immediately.
iii. The decision in the matter of stay of demand should normally be taken by Assessing Officer/ TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances; e.g., where the assessment order appears to be unreasonably high-pitched or where genuine hardship is likely to be caused to the assessee. The higher authorities should discourage the assessee from filing review petitions before them as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.
C. Guidelines for staying demand:
i. A demand will be stayed only if there are valid reasons for doing so. Mere filing an appeal against the assessment order will not be a sufficient reason to stay the recovery of demand. A few illustrative situations where stay could be granted are:
It is clarified that in these situations also, stay may be granted only in respect of the amount attributable to such disputed points. Further where it is subsequently found that the assessee has not co-operated in the early disposal of appeal or where a subsequent pronouncement by a higher appellate authority or court alters the above situation, the stay order may be reviewed and modified. The above illustrations are, of course, not exhaustive.
ii. In granting stay, the Assessing Officer may impose such conditions as he may think fit. Thus he may —
a. require the assessee to offer suitable security to safeguard the interest of revenues,
b. require the assessee to pay towards the disputed taxes a reasonable amount in lump sum or in installments,
c. require an undertaking from the assessee that he will co-operate in the early disposal of appeal failing which the stay order will be cancelled.
d. reserve the right to review the order passed after expiry of a reasonable period, say up to 6 months, or if the assessee has not co-operated in the early disposal of appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the above situations;
e. reserve a right to adjust refunds arising, if any, against the demand.
iii. Payment by installments may be liberally allowed so as to collect the entire demand within a reasonable period not exceeding 18 months.
iv. Since the phrase “stay of demand” does not occur in section 220(6) of the Income-tax Act, the Assessing Officer should always use in any order passed under section 220(6) [or under section 220(3) or section 220(7)], the expression that occurs in the section viz., that he agrees to treat the assessee as not being default in respect of the amount specified, subject to such conditions as he deems fit to impose.
v. While considering an application under section 220(6), the Assessing Officer should consider all relevant factors having a bearing on the demand raised and communicate his decision in the form of a speaking order.
D. Miscellaneous:
i. Even where recovery of demand has been stayed, the Assessing Officer will continue to review the situation to ensure that the conditions imposed are fulfilled by the assessee failing which the stay order would need to be withdrawn.
ii. Where the assessee seeks stay of demand from the Tribunal, it should be strongly opposed. If the assessee presses his application, the CIT should direct the departmental representative to request that the appeal be posted within a month so that Tribunal’s order on the appeal can be known within two months.
iii. Appeal effects will have to be given within 2 weeks from the receipt of the appellate order. Similarly, rectification application should be decided within 2 weeks of the receipt t hereof. Instances where there is undue delay in giving effect to appellate orders, or in deciding rectification applications, should be dealt with very strictly by the CCITs/CITs.
3. The Board desires that appropriate action is taken in the matter of recovery in accordance with the above procedure. The Assessing Officer or the TRO, as the case may be, and his immediate superior officer shall be held responsible for ensuring compliance with these instructions.
4. This procedure would apply mutatis mutandis to demands created under other Direct Taxes enactments also.
Conclusion: It should be kept in mind that there is no default deemed to have occoured until disposal of stay petition therefore no penalty is imposable without disposal of stay petition. Demand remains automatically stayed during the period stay application is pending before AO.
Summary rejection of stay petition by non-speaking order is invalid.The refusal may be challenged in application u/s 264 before C.I.T.The refusal by CIT, if unreasonable and inconsiderable, is open to challenge in writ petition.
Stay petitions u/s 220(6) should not be dealt with in mechanical manner but the discretionary power to grant stay should be exercised judicialy and reasonably and a speaking order should be passed while disposing off the stay petitions.
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