Stay Of Recovery Of An Income Tax Demand Under Section 220(6) Of The Income-tax Act, 1961 – A Comprehensive Guide With Comments

Advocate Arjun Gupta has prepared a comprehensive guide in which the entire law relating to the grant of stay of demand has been explained. All possible scenarios have been visualized by the ld. author. He has referred to all the CBDT Circulars and judicial pronouncements and also provided valuable comments to explain the law clearly

Introduction

When the Assessing Officer (the “AO”) makes certain additions or disallowances by anorder of assessment and the total income returned by the assessee is enhanced, the assessee is subjected to tax on such total income and is liable to pay such tax pursuant to the notice of demand issued by the tax authorities. However, it is common knowledge that the assessee never pays this amount and instead, appeals to the Commissioner (Appeals) against such an order of assessment of the AO. If the assessee is unsuccessful before the Commissioner(Appeals) he may appeal to the Income Tax Appellate Tribunal (the “ITAT”) and then to the High Court and finally to the Supreme Court. A question arises as to whether the assessee can delay payment of the tax demanded by the AO till his appeal is finally decided by the appellate forums which in some cases may take several years? The answer seems obvious i.e the assessee cannot be expected to delay such payments. This is because otherwise every assessee would take advantage of appellate procedure and delay the payment of tax by filing appeal after appeal, especially in cases where it knows fully well that the demand is payable by it. The demand thus becomes as good as infructuous on account of inflation in prices. Also, if eventually the Revenue is successful in appeal, the demand of tax will be enforceable only after several years. This would be prejudicial to the Revenue and cannot possibly be countenanced. Atleast a percentage of the tax demanded must be deposited. Thus, provision is made under Section 220(6) of the Income Tax Act, 1961(the “Act”) for the AO to exercise discretion in not treating the assessee to be in default till its appeal is decided, i.e to stay the demand of income tax, till the appeal of the assessee is decided by the Commissioner(Appeals). The provision is invoked by the assessee by making an application for stay of demand till the disposal of its appeal. However, before stay of demand can be granted, the Revenue would have to comply with a host of conditions as laid down by the Courts and Appellate fora. In this Article, I will be focusing on the CBDT Circulars, and the various case-law on Section 220(6) of the Act and I have given my personal opinion/comments where I feel they are required.

Discussion

CBDT CIRCULARS

Note: It is advisable to read the circulars from appropriate references/books since the same have not been reproduced in this Article and only the important parts of the circulars are mentioned for the purpose of the authors views.

• Circular No. 530, dated 6.3.1989 ( 1989) 176 ITR 240 (St)  read with Circular No. 589 dated 16-1-1991 ( 1991) 187 ITR 79 (St)

A. The above circulars state that the assessee must first file an application before the AO for stay of demand and the AO must then exercise his discretion whether to treat the assessee as not being in default for the amount in dispute in appeal where:

1. The AO has adopted an interpretation of law for which there exist conflicting decisions of one or more High Courts or

2. The High Court of jurisdiction has taken a contrary view but the Department has not accepted that judgment.

3. The demand has been stayed by an earlier order by an appellate authority or Court in the assessee’s own case on the same issues.

B. The assessee will be treated as not in default only in respect to such disputed points. If the assessee does not co-operate in the early disposal of the appeal or if the order of the appellate authority referred to above is reversed by a higher forum, the AO will exercise his discretion independently and will not be bound by the above instructions.

C. In respect of other cases, the AO will consider all relevant factors having a bearing on the demand and communicate his decision to the assessee in the form of a speaking order.

Author’s views: The Circulars clearly specify that the AO must ‘exercise his discretion’ in adjudicating the application, and it is specified that the assessee will not be treated in default only in respect of such disputed points.  Therefore, the AO must exercise his discretion to treat the assessee as not in default after taking into account the three situations mentioned above and the assessee will be treated as not in default in the three situations mentioned above. Under no circumstances, do these circulars state that the assessee can be granted in its favour an unconditional stay of demand if the three situations mentioned above are applicable to the case of the assessee. Atleast it cannot be said that the CBDT instructions must be interpreted this way. What is meant by the assessee treated as not in default only means that a stay of demand must be granted but the same cannot be equated with an unconditional stay of demand. Even a partial stay of demand would amount to the assessee being treated as not in default due to the fact that a stay has been granted on the demand, and the assessee is then, after such partial stay, not in default any longer. Therefore, in my opinion the AO is under no obligation to grant a complete stay of demand in the three situations mentioned above since the CBDT Circulars have neither expressly nor impliedly obligated the AO to do so. The words ‘treated as not in default’ would mean that there is no default of payment of tax pursuant to the notice of demand on account of the assessee being granted either a complete stay of demand or a partial stay of demand pending the disposal of its appeal before the appellate authority. It does not mean that the assessee is not in default only when an unconditional stay of demand has been granted. Whether or not the assessee is entitled to an unconditional stay has to be evaluated by the AO keeping in mind all the relevant circumstances of the case in question. The above will become clearer as one reads the rest of the circulars below. The remainder of the instructions of the above Circularsare self-explanatory.

• Instruction No. 1914 dated 2-2-1993

A. The CBDT has clarified that the mere filing of an appeal against the assessment order will not be sufficient ground to stay the demand. Stay could be granted if:

1. If the demand relates to issues that have been decided in assessee’s favour by an appellate authority or court earlier.

2. If the AO has adopted an interpretation of law for which there exists conflicting decisions of one or more High Courts(not of the High Court under whose jurisdiction the AO is working).

3. If the jurisdictional high court has adopted a contrary interpretation but the department has not accepted that judgement.

B. In granting stay, the AO may impose such conditions as he thinks fit. Thus he may:

1. Require the assessee to offer suitable security

2. Require the assessee to pay the taxes demanded in lump sum or in instalments.

3. Require the assessee to furnish an undertaking that he will co-operate in the early dispoal of the appeal failing which the stay order will be cancelled.

4. Reserve the right to review the order passed after expiry of a reasonable period, eg. 6 months, or if the assessee has not co-operated in the early disposal of the appeal or a higher forum alters the above situations.

5. Reserve the right to adjust refunds, if any, against the demand.

C. Payment by instalments may be liberally allowed so as to collect the entire demand within a reasonable period not exceeding 18 months

D. Since the phrase stay of demand does not occur in section 220(6) of the Act, the AO must always use the words assessee treated as not being in default, subject to such conditions as he may think fit to impose.

E. The AO must consider all relevant factors while deciding a stay application and communicate his decision in the form of a speaking order.

F. Stay Petitions filed with the AO’s must be disposed off within two weeks of the filing of the petition. The assessee must be intimated of the decision without delay.

G. The stay petitions made to authorities must be disposed of without delay, and in any case within two weeks from the receipt of the petition.

H. A higher superior authority should interfere with the order of the AO/TRO only in exceptional circumstances, eg. Where the assessment order appears to be unreasonably high pitched or where genuine hardship is likely to be caused to the assessee. The assessee’s must be discouraged from filing review petitions as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.

Authors views: This circular makes it clear that the AO ‘could’ grant stay of demand if the three circumstances mentioned above are satisfied. This express statement makes it clear that the AO is not obligated to grant an unconditional stay of demand and it is as per his discretion. As regards point B5 above, it is clear that refunds cannot be adjusted unless the provisions of Section 245 are satisfied. And if the demand which is stayed is sought to be set off against the refund, that again is not permissible since section 245 is not satisfied. The remainder of the instruction is self-explanatory.

• Office Memorandum [F.No. 404/72/93-ITCC] dated 29-2-2016

A. This O.M states that AO shall grant stay of 15% of the demand unless:

1. The AO is of the view that payment of a sum higher than 15% is warranted eg. when the addition on same issue is confirmed by the appellate authorities for earlier years or the decision of the Supreme Court or jurisdictional High Court is in favour of the Revenue or addition is based on credible evidence collected during search or survey operation. or

The AO is of the view that payment of a sum lower than 15% is warranted eg. when addition on the same issue is deleted by appellate authorities for earlier years or the decision of the Supreme Court or jurisdictional High Court is in favour of the assessee, the AO shall refer the matter to the administrative PCIT/CIT, who after considering all relevant facts shall decide the application.

B. If the assessee is aggrieved on the decision of the AO to stay the demand but upon payment of 15% of the demand, he may approach the jurisdictional administrative Pr. CIT/CIT for a review of the decision of the Pr.CIT/CIT.

C. The AO shall dispose of the stay petition within a period of two weeks of filing the petition. If the reference or the review application is made to PCIT/CIT as above, the same shall also be disposed of within two weeks.

Author’s views: This O.M makes it amply clear that even if the jurisdictional High Court has passed an order in favour of an assessee on the same issue for an earlier year, there is no obligation on the AO to grant an unconditional stay of demand, and he may refer the matter to the Pr. CIT/CIT and he in turn may grant a partial stay of demand on the lower side being less than 15% of the demand. The words used are ‘sum lower than 15% is warranted’ making it amply clear that there is no need to grant an unconditional stay of demand.

• Office Memorandum F.No.404/72/93-lTCC dated 31.7.2017

This O.M states that the rate of 15% prescribed in O.M F.No. 404/72/93-ITCC dated 29.2.2016 shall be revised to 20% as the rate of 15% is found to be on the lower side. This is applicable to demands raised where the appeal is pending before the CIT(A).

CASE-LAW

• In the case of KEC International Ltd. vs. B.R. Balakrishnan and Ors.[2001] 25 1I TR 158 (Bom) (HC) , the assessee filed a stay application before the AO pursuant to the demand raised by the AO and pursuant to an appeal filed with the Commissioner(Appeals). The stay application was rejected by the AO without giving any reasons. The matter was carried on the administrative side before respondent no. 2 and the respondent no.2 also did not give any reasons for rejecting the stay application. The Court also noted that a garnishee notice under section 226(3) of the Act was issued to the petitioner’s bank. That about 500 employees had not been paid their salaries due to the garnishee notice. In the circumstances, the Court laid down guidelines to be followed by the AO while disposing off the stay application. The guidelines reproduced from the judgement read as follows:

‘Parameters :

(a) While considering the stay application, the authority concerned will at least briefly set out the case of the assessee.

(b) In cases where the assessed income under the impugned order far exceeds returned income, the authority will consider whether the assessee has made out a case for unconditional stay. If not, whether looking to the questions involved in appeal, a part of the amount should be ordered to be deposited for which purpose, some short prima facie reasons could be given by the authority in its order.

(c) In cases where the assessee relies upon financial difficulties, the authority concerned can briefly indicate whether the assessee is financially sound and viable to deposit the amount if the authority wants the assessee to so deposit.

(d) The authority concerned will also examine whether the time to prefer an appeal has expired. Generally, coercive measures may not be adopted during the period provided by the statute to go in appeal. However, if the authority concerned comes to the conclusion that the assessee is likely to defeat the demand, it may take recourse to coercive action for which brief reasons may be indicated in the order.

(e) We clarify that if the authority concerned complies with the above parameters while passing orders on the stay application, then the authorities on the administrative side of the Department like respondent No. 2 herein need not once again give reasoned order.’

The Court made it clear that the above parameters are not exhaustive but only recommendatory in nature. The Court set aside the orders of the authorities below and remanded the matter to the AO to dispose of the stay application in accordance with law. The garnishee notice was also set aside.

• In UTI Mutual Fund vs. ITO [2012] 345ITR71(Bom)(HC) , the assessee was a beneficiary of a Trust. The Trust securitised a loan and was assigned the loan on the same day as the constitution of the Trust. The Trust received Rs. 21.49 Crores as interest on account of the securitisation of the loan and distributed the same to its beneficiaries including the petitioner-assessee based on their respective shares. The AO did not pass any assessment order but invoked Section 177(3) of the Act and treated the petitioner assessee as an AOP. The AO addressed a letter to the Petitioner stating therein that it is called upon to make payment of a sum of Rs. 9.63 Crores on the ground that it is a member of the AOP(Trust) and is jointly and severally liable as a member of the AOP. The Petitioner moved an application for stay which was subsequently filed with the CIT but without deciding upon that application, the Revenue invoked Section 226(3) of the Act and served a garnishee notice to the bankers of the Petitioner calling upon them to pay the Revenue a sum of Rs. 26.70 crores on account of arrears claimed from the petitioner. Considering that a Division Bench of the Bombay High Court in CIT vs.  Marsons Beneficiary Trust(1991)188 ITR 224 already held that the beneficiary of a trust cannot be said to be a member of the trust, or an AOP, which was followed in L.R. Patel Family Trust v. Income Tax Officer (2003) 262 ITR 520, and that all income arising upon a recovable transfer of assets is taxable in the hands of the transferor only, the Court held that the assessee has a serious issue to urge before the appellate authorities and in the circumstances, till the disposal of the appeal and for a period of six weeks thereafter, the Revenue must not take coercive steps. The Court held that rejecting stay applications without hearing the assessee, considering submissions and indicating at least brief reasons is impermissible. The attachment on the bank account was also to be lifted. The Court also framed guidelines of its own as follows:

1.  No recovery of tax should be made pending:

(a) Expiry of the time limit for filing an appeal;

(b) Disposal of a stay application, if any, moved by the assessee and for a reasonable period thereafter to enable the assessee to move a higher forum, if so advised. Coercive steps may, however, be adopted where the authority has reason to believe that the assessee may defeat the demand, in which case brief reasons may be indicated.
 2. The stay application, if any, moved by the assessee should be disposed of after hearing the assessee and bearing in mind the guidelines in KEC International;

3. If the Assessing Officer has taken a view contrary to what has been held in the preceding previous years without there being a material change in facts or law, that is a relevant consideration in deciding the application for stay;

4. When a bank account has been attached, before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law;

5. In exercising the powers of stay, the Income Tax Officer should not act as a mere tax gatherer but as a quasi judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate hardship to the assessee. Though the assessing officer has made an assessment, he must objectively decide the application for stay considering that an appeal lies against his order: the matter must be considered from all its facets, balancing the interest of the assessee with the protection of the Revenue.

Thus, the matter was not remanded to the AO to reconsider the stay application and rightly so, since the matter was more or less covered in favour of the assessee indicating a strong prima facie case and the stay application was disposed of arbitrarily.

• In MMRDA vs. DDIT(2015)273 CTR  317 (Bom)(HC), the Petitioner-assessee was a statutory body engaged in development of the Mumbai Metropolitan Region. The facts can be stated in the words of the Court as follows:

The Petitioner has been claiming since Assessment Year 2003-04, exemption under Section 11 of the Act, from payment of Income taxes. The Assessing Officer has been consistently denying the claim for exemption. However, in appeal, the CIT(A) has consistently allowed the appeals holding that the Petitioner is entitled to the benefit of Section 11 of the Act in respect of Assessment Years 2003-04 to 2009-10. The appeals filed by the Revenue from the orders of the CIT(A) except for Assessment Year 2006-07, are pending with the Income Tax Appellate Tribunal(Tribunal). The Appeal for Assessment Year 2006-07 has been rejected by the Tribunal. Thus, upholding the petitioner’s claim for exemption under Section 11 of the Act. By the Finance (No. 2) Act, 2009, Section 2(15) of the Act was amended and a proviso was added thereto with effect from 1st April, 2009. Notwithstanding the above, the Petitioner was granted for Assessment Year 2009-10 the benefit of Section 11 of the Act by the CIT(A). However, for the Assessment Year 2010-11, the Assessing Officer disallowed the Petitioner’s claim for exemption under Section 11 of the Act and pending the disposal of its appeal by the CIT(A), the Petitioner applied for stay of the demand. In its application for stay the Petitioner raised an alternative plea of being an agent of the State in view of the MRTP Act and therefore not liable to pay tax. The Petitioner claimed that the issue stands covered by the decision of the Tribunal in CIDCO v/s. Assistant CIT 138 ITR 381. The stay application was rejected and the Petitioner filed a Writ Petition being W. P . (L) No. 2158 of 2013, challenging the rejection of stay application pending disposal of the appeal by CIT(A). This Court by order dated 18th November 2013 in W. P . (L) No. 2158 of 2013 was of the prima facie view that the Petitioner’s case is covered by the Tribunal’s decision in CIDCO (supra). However, as the issue was not raised during Assessment Proceedings, the Assessing Officer had no occasion to examine the claim of the Petitioner. In the above circumstances, it directed that a deposit 25% of the demand be made pending the disposal of appeal by CIT(A) for the purpose of stay.

For AY 2011-2012, the AO did not accept the contention of the Petitioner that it stands in the same shoes as CIDCO and is covered by the decision in CIDCO as it is an agent of the State, and raised a demand of Rs. 916.92 Cr. on the Petitioner. The Petitioner moved an application for stay under section 220(6) of the Act, but was rejected by the AO on the grounds,(i) that no financial hardship has been pleaded by the Petitioner; (ii) mere filing of an appeal to CIT(A) does not warrant a stay; and (iii) issues raised in the stay application are already considered while passing the assessment order dated 28th February, 2014. The Petitioner then approached the Director with the stay application but the Director held that the Petitioner is not covered under the case of CIDCO since in that case, CIDCO never applied for exemption under section 11 of the Act as claimed by the Petitioner. Thus, demanded 25% of the tax for stay of recovery of the balance amount. The Court held that for AY 2010-2011, the argument of being an agent of the state was not raised before the AO, thus it requires detailed examination although prima facie the case of the assessee seems to be covered by the decision in CIDCO, thus 25% of the deposit is warranted, but since the tax demanded for earlier years has already been set off against the refunds payable, this condition is also complied with. The Court held that in the instant case, the issue of being an agent of the state and hence covered by the case of CIDCO was raised before the AO and the same was considered by the AO and all that was stated in the assessment order was that CIDCO never claimed the benefit under Section 11 of the Act and thus the assessee was not entitled to the same. Also, that the AO’s order disposing of the stay application without reasons, as it was based upon reasons already provided in the assessment order was held to be contrary to law as the AO is expected to objectively determine the stay application considering that an appeal lies against his order. The Court also noted that the issue of addition of Rs. 1311 Cr. was dealt with by the AO on the ground that the same has to be dealt with by the CIT(A) completely ignoring that the CIT(A) had consistently been deleting the addition in earlier years. Thus, the Court held that the assessee will not be treated in default till the disposal of the stay application. Also, in case the order of the CIT(A) is adverse to the petitioner, no recovery will be made till the time limit for appeal has expired and if a stay application is preferred before the ITAT, till disposal of that application.

In my view, the central issue of the proceedings was the issue of exemption under Section 11 of the Act. That has not been dealt with in CIDCO. An alternative plea is raised by the assessee that it is an agent of the State and hence not obliged to pay taxes. I fail to understand that if the assessee is convinced that it not liable to pay tax as being an agent of the state, then there is no need to apply for exemption under Section 11 of the Act. In fact, if the assessee believes that it is not a ‘person’ under the Act, there was no need to file a return. But what the assessee has done is to claim exemption which is denied and then plead that it is an agent of the government to avoid tax altogether! In order to avoid such a situation in the future, a deposit for stay could have been considered by the Court. After all, it has applied for exemption under Section 11 of the Act and filed a return, to claim exemption under Article 289 of the Constitution after having filed the return would also invite estoppel, as the assessee has itself accepted that it is a person under the Act and has therefore filed the return. This is contrary to the argument then raised by the assessee and a question arises whether the assessee can even make such an argument. The AO as well as the Director have considered only the exemption under section 11 of the assessee. The argument subsequently raised by the assessee that it is an agent of the government can only be treated as an afterthought. Also, if this argument was raised and the Court yet decided in favour of the assessee, it would amount to giving an opportunity to the assessee to divert from its stand taken in the return and raise new averments completely inconsistent with the return filed by it. Also, the concept of filing a revised return would be rendered otiose if the assessee is allowed to change its stand subsequently, directly conflicting with the judgment in Goetze India.

However, in the case of Nirmala L. Mehta Vs. Respondent: A. Balasubramaniam and Ors. [2004] 269 ITR1(Bom)(HC) , the assessee sought to challenge the taxability of amounts declared in the return for which a revision petition under Section 264 of the Act was filed before the CIT. The Court held as follows:

The problem arose because the petitioner in her return for the assessment year  filed on June 30, 1988, offered the prize money of the lottery to tax rather a fundamental error of law on the part of the assessee, but that error of law once detected by the petitioner, it was urged before the Commissioner of Income Tax that the prize money earned by the petitioner could not be taxed under the Income Tax Act, 1961. It is true that it was at a later stage that such contention was raised by the petitioner, but the said contention was a pure question of law and the Commissioner of Income Tax ought to have considered the said contention on its merits and ought not to have declined to entertain it on the ground of delay. There cannot be any estoppel against the statute, Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. 

The above case makes it clear that if the assessee has committed an error in law by filing a return disclosing income although it need not do so, mere acquiescence cannot bind the assessee and the error can be rectified later on. That there is no estoppel against statute and the assessee may not be compelled to pay tax. The question arises as to how must this error be rectified? In the above case, a revision petition was filed. It is also open to the assessee to file a revised return. In MMRDA, the assessee brought it to the notice of the AO but that was rejected summarily. Was it open for the writ court to examine the issue? In my view, it certainly was since the assessee cannot be expected to pay tax without authority of law, and if indeed a strong prima facie case was made in its favour considering the decision of the Tribunal in CIDCO on the point of being an agent of the state, if not an unconditional stay, a partial stay on the lower side was justified considering the intricacies involved in the case and the assessee’s own lapse in filing the return of income that too under Section 11, when it contended that it was exempt from tax altogether under Article 289 of the Constitution of India.

As regards, the addition of Rs. 1311 Crores, the CIT(A) has been deleting the same but in my view, the issue must have been examined by the Court to see whether a prima facie case is made out for grant of stay. If the order of the CIT(A) is bad in law, then the decision is bad in law, and therefore, the question of prima facie case must have been delved into by the Court for the purposes of stay.

• In ITO vs. M.K. Mohammed Kunhi [1969] 71 ITR 815(SC), the Supreme Court was faced with the question whether the Tribunal has the power to grant stay of demand. After referring to important references and judgments, it came to the conclusion that it would be illogical to presume that the administrative authorities only have the power to grant a stay of demand. That the appeal before the Tribunal if successful might be rendered nugatory if stay of demand cannot be granted. That the powers of the Appellate Tribunal are of the widest possible amplitude and Section 254 carries implicitly all powers necessary to stay the demand pending appeal. Thus, the power of the Appellate Tribunal to stay the demand was upheld. However, as a word of caution the Court held that the stay of demand may prejudice the Revenue considering the time taken before the Tribunal to dispose the appeal. Thus, the power of stay is not to be exercised routinely by the Tribunal and only when a strong prima facie case is made out will stay be granted where the Tribunal feels that by not granting stay the appeal will be rendered nugatory.

• In the case of Milestone Real Estate Fund vs. ACIT [2019] 263 TAXMAN 523 (Bom) (HC) , the petitioner-assessee was a trust under the Indian Trusts Act, 1882. The relevant AY is 2016-2017. During the course of scrutiny assessment proceedings, the assessee was served with a notice under section 281B of the Act seeking to attach its bank accounts. Subsequently, a notice under section 226(3) of the Act was issued to the petitioner’s bankers which was also issued during the pendency of scrutiny assessment proceedings. When the petitioner was informed of the notices, it replied to the AO that no amount is due and even the notice under section 281B had not been served upon it. Thereafter, the assessment under section 143(3) was made denying the claim of exemption to the petitioner under section 10(23FB) of the Act. An appeal was filed before the CIT(A) and a stay application was filed before the AO. The petitioner averred that the issue of exemption under section 10(23FB) of the Act has been decided for AY 2013-2014 by the ITAT and by the CIT(A) for AY 2014-2015 in the petitioner’s own case. However, the stay application was rejected and the petitioner approached the Pr.CIT. In the meantime, the AO withdrew an amount of 29.25 crores from the petitioner’s bank account. Also, the AO proposed to adjust the refund for AY 2012-2013 and AY 2014-2015 with the demand for AY 2016-2017. The Pr.CIT disposed of the stay application by recording that the demand for AY 2015-2016 and AY 2016-2017 will be set off against the refund due for AY 2012-2013 – AY 2014-2015 and the balance demand will be stayed pending disposal of the appeal. The AO then issued a notice/intimation proposing adjustment of refunds.

The Court held that no brief reasons were provided as to why stay of demand was to be rejected. The fact that the issue as to the eligibility of exemption under section 10(23FB) has been concluded in the assessee’s own case would warrant an unconditional stay. Also, that the Section 281B attachment is to be lifted since the assessee was never informed of the attachment. That no notice/intimation was served on the assessee before withdrawing the amounts from bank accounts as mandated in UTI Mutual Funds vs. ITO. The adjustment of refund was also not legal since no prior intimation was issued to the assessee to adjust the refund. That the purpose for issuing the intimation is for the assessee to point out factual errors and other errors before the adjustment is made. Thus, the Court ordered the amount withdrawn to be redeposited with interest and the adjustment of refund was set aside. The Court also directed costs to be paid to the assessee of an amount of Rs.50,000 within four weeks. The assessee was indeed harassed and even the costs were rightly imposed.

– In Bhupendra Murji Shah vs. DCIT [W.P No. 2150 & W.P No. 2160 OF 2018 dated 11.9.2018 (Bom.)(HC)], the assessee’s stay application was dismissed without assigning any reasons. The Court was informed that the appeal before the Commissioner(Appeals) is pending and in fact has been heard in part. Therefore, in the circumstances, the Court held that the petitioner-assessee will be entitled to an unconditional stay of demand till the disposal of the appeal before the Commissioner(Appeals). The Court made it clear that the judgment is not to be treated as a precedent but its made in the unique facts and circumstances of the case.

– In ARCIL Retail Loan Portfolio 001-D-Trust vs. PCIT [2019] 264 TAXMAN 61 (Bom)(HC) , the assessee was a Trust. It was engaged in acquiring non-performing assets from Banks and recovering the dues from defaulters. The assessee made an application for stay pursuant to the assessment order which was rejected. Thereafter, the assessee approached the PCIT who accepted that the issues arising in the assessment order were identical to the issues in the case of another assessee where the CIT(A) had ordered in favour of the assessee therein. The Court held that there is no reason why the benefit of stay should not be given if the facts are similar in the case of this assessee also. Thus, the Court ordered that there will be an unconditional stay till disposal of the appeal before the CIT(A) and if the order of the CIT(A) is reversed by the Tribunal, it would be open for the PCIT to make a fresh demand after giving a reasonable opportunity of being heard. If the assessee is intentionally delaying the disposal of the appeals, it would be open for the Department to apply for recalling the order.

• In Grasim Industries Ltd. vs. DCIT [2019] 267 TAXMAN 524 (Bom)(HC), the assessee was faced with an enormous demand of Rs. 5872.13 Crores and the AO demanded the payment to be made forthwith. The assessee filed a writ petition challenging this demand. The AO had passed an order under sections 115-O and 115-Q of the Act. The assessee contended before the Court that in the notice of demand as well as the impugned order of the AO, it was provided that there is no statutory right of appeal and at the most a revision petition under Section 264 of the Act can be filed. The Court held that it was for the CIT(A) to determine whether the appeal before it was maintainable or not. Subsequently, the CIT(A) held the appeal was maintainable. In the circumstances, the Court ordered the assessee to approach the AO with a stay application since once the appeal is found to be maintainable, the petitioner has to act in accordance with law. The assessee had invited the attention of the Court to the case of Genpact India (P.) Ltd. v. Dy. CIT[2019] 108 taxmann.com 340 where under similar circumstances, stay had been granted. However, in that case stay was granted since the Revenue had itself stated that till disposal of the appeal the demand would not be enforced. The learned ASG however had no instructions to state that stay must be granted or that the demand should not be enforced. Therefore, Genpact was distinguished. The Court held that the stay application must be made within two weeks. If the order of the AO is adverse to the assessee then for a period of two weeks from the date of the order, no coercive measurers would be adopted in view of the exorbitant demand.

• In Mansukhlal Amritlal Modi vs. ITO [W.P(L) 873 of 2020 dated 19.3.20(Bom.) (HC) ], the petitioner-assessee was subjected to an order of assessment on the issue of disclosure of sale of agricultural land owned by the petitioner alongwith two co-owners and was subjected to tax under section 69-A of the Act. The two co-owners were assessed on a protective basis. The appeal of the co-owners before the CIT(A) had been allowed. The Petitioner appealed to the CIT(A) and filed an application of stay before the AO. The AO dismissed the application by order dated 31.1.20 and stated that if the petitioner does not pay 20% of the demand on or before 4.2.20, the bank account of the petitioner will be attached. The Petitioner-assessee claimed that the order was received by him on 7.2.20. The petitioner also stated that the entire amount has been withdrawn from the bank account. In the meantime, the petitioner had approached the PCIT who also dismissed the stay application and ordered 20% of the amount to be paid.

The Court quashed the orders of the AO and PCIT and lifted the attachment of the bank account. The Court held that there was complete non-application of mind by the AO and the PCIT’s order was also not justified. The AO was directed to re-consider the stay application.

Interestingly, the order notes that the amount from the Bank account had been withdrawn, but there is no mention of any refund of the amount withdrawn illegitimately from the bank account! In fact, the entire balance from the account is stated to have been withdrawn. All that is stated is that the account can be operated and that the attachment is lifted.

• In General Insurance Corporation of India vs. ACIT[W.P No. 2271 of 2019 dated 14.10.2019(Bom.)](HC) , the assessee was a Government of India undertaking. The relevant AY was 2017-2018. An order of assessment was passed against the petitioner on various issues raising a demand of Rs. 3,601 crores. The AO allowed the stay of demand pursuant to the petitioner making the stay application on the condition that it deposits 20% of the demand. The Petitioner approached the PCIT who made a chart showing the demand to be paid issue wise on as many as 7 items. The petitioner agreed that in so far as items 3,4,7 are concerned, the petitioner would deposit 20% of the demand.

On issue 1, the Court noted that the Mumbai and Kolkata benches of the Tribunal had decided in favour of the petitioner. However, the Chennai bench has taken an opposite view, and hence it is per-incuriam. Also, that the CBDT Circular No. 530dt. 6th March, 1989 [(1989) has held that if there are conflicting judgments of the High Courts stay must be granted. That this can be extended to the Tribunals also. Therefore, unconditional stay is warranted.

On issue 2, the Court noted that the issue was covered by the jurisdictional high court in New India Assurance and it makes no difference if the CIT(A) has decided against the petitioner for earlier years; the PCIT has not shown prima facie why the order of the CIT(A) is to be followed in preference to New India Assurance. Thus, an unconditional stay is warranted.

On issue 5, the Court notes that the PCIT in the impugned order itself notes that there is a decision of the Mumbai bench of the Tribunal in the assessee’s favour, however the order also notes that there is a decision of the Chennai bench of the tribunal against the assessee. That the PCIT has not shown why the Chennai bench’s decision is to be preferred. That conflicting decisions of the High Courts can be extended to conflicting decisions of the Tribunal also. Thus, an unconditional stay is warranted.

I have already explained under the head CBDT CIRCULARS as to how the Circular No. 530 or any other Circular does not in any way mandate that the AO is bound to order an unconditional stay of demand if there are conflicting decisions of one or more high courts, or if the jurisdictional high court has ordered in favour of the assessee. The Circular clearly allows the AO to exercise his discretion in the matter. Also, the other Circulars throw more light on the issue[Refer CBDT CIRCULARS under Discussion].Thus, it can never be said that by virtue of the existence of the circulars, the AO is bound to order an unconditional stay of demand. The matter has to be independently examined by the Court since the Circular does not say that the AO is bound to order an unconditional stay. In fact, the Circular can assist the Revenue as it does not prescribe an unconditional stay.

Even if it is deemed that the Circulars prescribe an unconditional stay, in my view the Court has erroneously held that the principle of the High Court decision in favour of assessee resulting in unconditional stay can be extended to the Tribunals. Now, if there is an order of the Tribunal in favour of the assessee, no matter howsoever erroneous, does it mean that stay of demand has to be granted as a matter of course? Or if there are conflicting decisions of one or more Tribunals, the one in favour of the assessee may be the correct decision and the one in favour of the Revenue may be the wrong one or vice-versa. Again, can stay be granted as a matter of course only because there are conflicting decisions of the Tribunals? When the CBDT has particularly stated that if there are conflicting decisions of High Courts or the decision of the jurisdictional high court in favour of the assessee would have to be kept in mind to stay the demand, it was conscious to keep the decision of conflicting decisions of a High Court as the criterion for staying the demand. After all, an appeal lies to the High Court only on a substantial question of law. The decision of the High Court in favour of the assessee, or conflicting decisions of one or more High Courts would surely pre-decide the case of the assessee and have a heavy impact on whether stay is to be granted since in the former, the issue is more or less entirely in favour of the assessee, or in the latter case, debatable. Thus warranting stay of demand. But to extend the principle to the Tribunal level would in my opinion be prejudicial to the Revenue. In such circumstances, and even otherwise, generally, the question of a prima facie case must always be examined based on the merits alongwith the other criteria as laid down in KEC International and UTI Mutual Funds.On the other hand, as rightly pointed in UTI Mutual Funds, if the AO(and not any appellate authority), has taken a contrary stand other than that in preceding years, that would be relevant in deciding the stay application as stay should then normally be granted.

• In Maharashtra Industrial Development Corporation[Writ Petition (L) No. 635 of 2016 dated 16.3.2016(Bom.)](HC) , the assessee was engaged in developing industrial infrastructure and allotted industrial plots on account of lease premium. This premium was taken to the assessee’s balance sheet as deposits. For the first time in AY 2011-2012 the AO subjected the deposits to tax. The ITAT restored the matter to the AO for de-novo consideration. An appeal was filed to the CIT(A) and a stay application was filed relying on the decision of the ITAT restoring the matter to the AO and the decision of CIDCO being in favour of the assessee. The application was rejected without adverting to the assessee’s submissions. The Court restored the matter to the AO for de-novo consideration of the stay application.

The judgment of the Court itself notes that the assessee was subjected to tax for the first time since 1962(inception). That the assessee had been carrying deposits to its balance sheet since inception.Therefore, the principle enunciated in UTI Mutual Funds would surely assist the assessee that if the AO adopts a contrary view than what is held in preceding previous years without there being a material change in facts or law, that would be relevant in deciding the application for stay. If the Court adverted to this principle, probably it would have granted stay of demand in the matter without restoring it for de-novo consideration.

• In ICICI Prudential Life Insurance Co. Ltd. vs. CIT[Writ Petn. No. 198 of 2014 dated 28.1.2014(Bom.)](HC) , the AO passed an assessment order and a stay application was filed by the assessee pending disposal of the appeal before the CIT(A), the assessee relied upon the Tribunal’s decision and the CIT(A)’s decision in its own case for earlier years. However, the AO proposed adjustment of tax payable being an amount of 50% of the demand for the assessment year against refund due to the assessee and the balance would be stayed. The CIT(A) also rejected the petitioner’s request for an early hearing.

The Court held that the order disposing off the stay application is without reasons, that the AO did not give effect to the order of the CIT(A) for an earlier year only because he sought to adjust the refund against the tax payable. Also, the AO completely ignored the binding decisions of the Tribunal and CIT(A) for earlier years. Also, that the CBDT Circular No. 530 prescribes stay of demand when the issue is covered by an appellate authority. The Court ordered the CIT(A) to expeditiously decide the petitioner’s appeal.

• In Hindustan Unilever Limited vs. DCIT [2015] 377 ITR 281(Bom.) (HC) , a refund was due to the assessee for AY 2006-2007 to the tune of Rs. 129 Crores. The AO proposed adjustment of the demands for AY’s 2004-2005, 2007-2008 and 2008-2009 aggregating to Rs. 43 Crores against the refund due to the assessee for AY 2006-2007. For AY’s 2007-2008 and 2008-2009 the CIT granted a partial stay. For these two years the demand was paid to the Revenue. The intimation under Section 245 was sent to the assessee which was replied to stating that the adjustment for AY 2004-2005 had already been made. For the other two AY’s stay of demand had already been granted to the assessee by the CIT. That the issue is pending before the CIT(A). The AO also demanded interest under Section 220(2) of the Act for the three years. The AO nevertheless adjusted the demand which had been stayed for the three years against the refund due to the assessee and even adjusted the interest against the refund due. The Revenue accepted that for AY 2004-2005 the adjustment had already been made.

The Court held that the purpose of providing an intimation is to correct factual errors and to point out to the AO other relevant information such as the issue is covered by a higher forum etc. It is then for the AO to exercise his discretion in the matter. That since the demands had been stayed for the two AY’s the set off cannot be permitted since the assessee cannot be said to be in default and no sum is remaining payable under the Act. That set off under Section 245 is also a mode of recovery of tax. That no sum is payable due to the stay and the position would continue till disposal of the appeal before the CIT(A). That the Revenue could have applied for expeditious hearing before the CIT(A) or vary the order of stay in order to carry out the adjustment. That the AO can exercise his discretion as used in Section 220(6) cannot be taken for granted to adjust the refund since no authority can exercise unfettered discretion and must submit to the rule of law. Therefore, the amounts adjusted from the refund were directed to be handed over to the assesseeand the orders imposing interest were quashed and set aside.

• In Rajasthani Sammelan Sarvoday Balika Vidyalaya vs. ADIT [2013] 350 ITR 349 (Bom) (HC)  the assessee was a public charitable trust registered under section 12A and section 80G of the Act. During F.Y 2008-2009, the Petitioner entered into four agreements for donations. The Petitioner had been granted exemption for over fifty years till AY 2008-2009. For AY 2009-2010, the Petitioner filed its return of income disclosing NIL income. The Petitioner received a notice to show cause why the benefit of section 11 should not be denied. An appeal was filed to the CIT(A) and a stay application was filed before the AO. Shortly afterwards, before the stay application could be disposed of, the assessee received a letter stating that the demand be paid within three days failing which coercive proceedings would be adopted. The Petitioner applied to the Director(exemptions) who stated that 50% of the demand be paid and the rest in instalments. The Petitioner submitted another letter highlighting its financial position.

The Court held that no reasons were given by the authorities disposing of the stay application in defiance of the settled parameters in KEC International and UTI Mutual Funds. Also, the authorities had no regard towards the petitioners financial position. Also, that the assessee has been continuously receiving the benefit of exemption till AY 2008-2009 and for the first time in AY 2009-2010 the authorities sought to tax the asessee. Therefore, this was a fit case for grant of unconditional stay till disposal of the appeal before the CIT(A).

• In Rent a Device Trust vs. ITO [Writ Petition No. 551 of 2019 dated 28.02.2019 (Bom.)]( HC) , the assessee was faced with a demand against which it filed an appeal before the CIT(A). The stay application filed before the AO was rejected and the bank accounts of the petitioner were attached and garnishee notices were sent to the creditors of the petitioner under Section 226(3). The Court held that the Petitioner could approach the superior authority on the administrative side being the CIT or Chief CIT and in the meantime the attachment of the bank account and garnishee orders ought to be lifted.

• In the case of Anjali A. Malpani vs. DCIT [Writ Petition Nos. 673, 674 and 676 of 2019 dated 8.3.2019 (Bom.)](HC) , search and seizure action was taken at the premises of a company and section 153C notes were issued to the directors of the company for the assessment year 2016-2017. There was a combined income tax demand of Rs. 50 Crores on three assessee’s by virtue of three assessment orders. Pursuant to the stay application filed by the assessee the AO held that the assessee must pay 20% of the disputed demand pending disposal of its appeal before the CIT(A) for stay of recovery. The PCIT concurred with the decision of the AO. The assessee argued in the writ petition that the matter is at an advance stage of hearing but there is a possibility of a remand report to be called for by the CIT(A) from the AO. The Court held that considering that the order of assessment is passed a year ago and the disposal of the appeal may take a few months more in view of the remand report, the assessee must deposit two crores failing which recoveries may be initiated by the Department.

• In Humuza Consultants vs. ACIT [WRIT PETITION (L) NO.845 OF 2020 dated 17.3.20 (Bom)](HC) , the assesse was a partnership firm involved in earning income from profit on sale of shares, interest on fixed deposits, and dividend. The order of assessment was completed under section 143(3) and the AO assessed the petitioner under section 68 for unexplained cash credits. The grievance of the petitioner was that without deciding upon the stay application, three bank accounts of the petitioner had been attached. The Court held that the AO must take a decision on the stay application, and the attachment of the bank accounts as well as the withdrawals would be subject to the decision of the AO on the stay application. If the order on the stay application is adverse to the Petitioner, no recoveries will be enforced for a period of two weeks. The Petitioner may also approachthe CIT(A) for early hearing of the appeal and with a stay application and the CIT(A) is to act in accordance with law.

There are many unusual directions given in this judgment. There are no reasons provided as to why the withdrawals are not to be refunded, why the bank account attachments are not to be lifted, and most interestingly, how is the CIT(A) expected to dispose of a stay application? The power is expressly conferred on the AO to dispose of a stay application. Also, with respect to the former, probably the Court thought that the assessee does not have a prima facie case, or that it does not have any financial constraints, but there are no findings anywhere in the judgment on these aspects.

• In the case of Jeans Knit Private Limited vs. DCIT[W.P 2508-2509/2013 dated 13.2.2013(Karn)](HC) , the assessee was an export oriented unit. For AY 2007-2008, an order of assessment was passed under Section 143(3) of the Act denying the relief under section 10B of the Act. The CIT(A) partly allowed the appeal of the assessee and consequentially, a refund was due to the assessee, which the AO said would be adjusted against the demand for AY 2008-2009. For AY 2008-2009, a demand was due and a stay application was filed which was disposed off permitting the assessee to pay the demand in instalments. The assessee failed to make payment of instalments after paying instalments for two months. The petitioner filed another stay application before the AO and urged before the AO that identical issue was involved in the petitioner’s own case for AY 2007-2008. The Court noted that the AO had dealt with this submission holding that the issue is pending before the ITAT for AY 2007-2008 and the Department has not accepted the judgment of the CIT(A). Therefore, the decision of the CIT(A) has not attained finality. Also, the issues involved in 2008-2009 are only party similar to the issues involved in AY 2007-2008.Also, since the petitioner made monthly instalments but did not honour its obligation, the Department held that the petitioner cannot invoke Circular no. 530. The Court found no need to interfere with the order of the AO. Thus, payment of balance instalments was upheld. The refund could not be adjusted against the demand for AY 2008-2009 since the provisions of Section 245 were not followed i.e no prior intimation was given to the assessee before adjusting the refund.

• In JIK Industries Ltd. vs. DCIT [Writ Petn. No. 59 of 2019 dated 8.2.2019 (Bom)] (HC) , the assessee was a company under the Companies Act. For AY 2001-2002 and AY 2002-2003 it had filed revision petitions under Section 264 against the orders of assessment. For AY 2009-2010, AY 2010-2011 and AY 2011-2012, the petitioner filed appeals with the CIT(A) and the demand made for these years was approximately Rs. 94 Crores. The Petitioner had not deposited any tax primarily because it was before BIFR and enjoyed stay of recovery until 31.12.17. Post 31.12.17, stay applications were filed which were rejected. In the writ petition, it was argued that the appeals are at an advance stage of hearing but a remand report has been called for. The Court held that considering the nature of materials, the arguments of the assessee and the nature of additions, 5% of the demand may be deposited.

The Court has not weighed any of the considerations and directed the petitioner to deposit 5% of the demand. Whether reasons were provided in the order disposing of the stay application for demanding 20% by the authorities or the financial constraints of the assessee were not looked into. Nor any reasons were provided in the judgment as to why 5% of the demand must be payable. The judgment is in my view, wholly unsustainable in law.

• In Keva Fragrances Private Limited vs. ACIT [Writ Petition No. 554 of 2019 dated 15.3.2019(Bom)] (HC) , though the assessee had a prima facie case on merits, and though it had deposited Rs. 1 Crore with the government, it was made to deposit another 3 crores which would amount to roughly 15% of the demand. The fact that the petitioner has a prima facie case on merits was acknowledged by the Court on more than two occasions in the judgment. It seems that the Court has relied on the CBDT Circulars. There seems to be no justifiable reason why the assessee was made to pay tax of 15% to stay the demand. No reasons have been provided by the Court why the deposit was warranted.

• In PCIT vs. M/s LG Electronics India Pvt. Ltd. [Civil Appeal No. 6850 of 2018 dated 20.7.18](SC), the Supreme Court has clarified that the CIT may grant deposit of an amount lesser than 20% pending appeal giving credence to the fact that it is a quasi-judicial authority and the administrative circular will not operate as a fetter on its powers.
Miscellaneous

• Whether the newly inserted provisions/provisos(Section 254(2A)) by the Finance Act, 2020 obligate the Tribunal to consider deposit of 20% of the tax demanded and whether this provision is constitutionally valid?

Section 254 now reads as follows:

254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
…………….
(2A) In every appeal, the Appellate Tribunal, where it is possible, may hear and decide such appeal within a period of four years from the end of the financial year in which such appeal is filed under sub-section (1) or sub-section (2) of section 253:
Provided that the Appellate Tribunal may, after considering the merits of the application made by the assessee, pass an order of stay in any proceedings relating to an appeal filed under sub-section (1) of section 253, for a period not exceeding one hundred and eighty days from the date of such order subject to the condition that the assessee deposits not less than twenty per cent. of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act, or furnishes security of equal amount in respect thereof and the Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order

Provided further that no extension of stay shall be granted by the Appellate Tribunal, where such appeal is not so disposed of within the said period of stay as specified in the order of stay, unless the assessee makes an application and has complied with the condition referred to in the first proviso and the Appellate Tribunal is satisfied that the delay in disposing of the appeal is not attributable to the assessee, so however, that the aggregate of the period of stay originally allowed and the period of stay so extended shall not exceed three hundred and sixty-five days and the Appellate Tribunal shall dispose of the appeal within the period or periods of stay so extended or allowed:

Provided also that if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee.

The Section as it now stands is clearly against well settled principles propounded by the upper judiciary in India. The condition of 20% deposit of tax demanded in order to get a stay of demand is purported to apply even if the assessee has a strong prima facie case on merits, and even without consideration of the basic requirements for considering a stay of demand such as balance of convenience and whether the assessed income far exceeds the returned income. Therefore, on this ground, it is difficult for the Courts to uphold the constitutional validity of the amendment pursuant to a challenge made to such amendment, it being clearly in the face of dictum well considered by the judiciary.

Also, interestingly, even if no fault is attributable to the assessee, the period of stay cannot exceed 365 days. The legislature has consciously disregarded the judgments of the Delhi High Court and the Bombay High Court in Pepsi Foods vs. ACIT [2015] 376 ITR 87 (Delhi) and Narang Overseas vs. ITAT [2007] 295 ITR 22 (Bom)(HC) .

What must the assessee do in situations where it has a strong prima facie case on merits and has deposited 20% of the tax demanded and the period of 365 days has elapsed? Can it be expected to deposit 100% even if the assessed tax is far greater than the retuned income? Surely, if it is responsible in any manner towards the delay in the disposal of the appeal, it must be made to bear the consequences. But what if it has complied with the law? It surely cannot then be made to pay 100% of the tax as then the appeal will be rendered nugatory. In other words, the stay cannot be fully/wholly lifted. There has to be some examination of the issue of granting stay. Thus, the provision for deposit of 20% of the tax is arbitrary and seriously prejudicial to the assessee. The principles have been settled in the case of Mohd. Kunhi of the Supreme Court which warranted no interference. Therefore, this amendment is clearly in the face of well settled judicial principles and deserves to be quashed.

If one reads the second proviso and third proviso in conjunction with one another, on the one hand the proviso reads that the Tribunal shall dispose of the appeal within 365 days and the third proviso makes room for non-disposal of the appeal after 365 days. Thus the proviso’s are in clear contradistinction with one another and it renders the latter part of proviso 2 nugatory since proviso 3 provides that the appeal may be disposed after a period of 365 days. This is also impractical considering that the Tribunal in most cases does not dispose of the appeal within a period of 365 days. Thus only making the third proviso workable.

The Revenue may make out a case that there is always a presumption as to the constitutional validity of a statute. That, considering the appeal has reached the Tribunal stage and there is no issue of low tax effect, stay ought not normally be granted unless the assessee has deposited 20% of the tax demanded considering that the Tribunal may take a long period of time to dispose of the appeal. That a harmonious construction of the statute is required to the effect that if the assessee has a strong prima facie case on merits, then the stay ought to normally be granted even beyond a period of 365 days without disturbing the various findings in Mohd. Kunhi.These issues are settled in Mohd. Kunhi(supra) and it seems that the legislature has ignored the importance of this judgment.

• When the ITAT dismisses the appeal of the assessee, does the assessee have to pay the taxes in dispute pursuant to filing an appeal before the High Court?

To answer the above question, it would be important to understand under what circumstances, a stay application is filed before the ITAT. Usually, when an appeal is filed before the CIT(A), the assessee moves a stay application before the AO under section 220(6) of the Act. The AO may or may not demand payment of taxes by passing a speaking order. However, if tax is demanded by the order, the order is challenged by writ petition to the High Court. The High Court then either orders an unconditional stay, a partial stay, or no stay of demand. Thus, the High Court disposes of the stay proceedings in accordance with law which is binding upon all other authorities. However, if the assessment order is passed and no stay application is filed pending disposal by the CIT(A), and the CIT(A) disposes of the appeal, the AO may raise the demand along with penalty and interest under Section 220, and even adopt coercive measures when an appeal is filed before the ITAT and this usually prompts the assessee to file a stay petition before the ITAT. This is only one of the ways in which a stay petition is brought before the ITAT, and there can be other situations/cases where a stay petition is brought before the ITAT. Now, if the ITAT grants a stay of demand pending disposal of the appeal before it, and then orders against the assessee, the assessee usually files an appeal before the High Court. If the demand is subsequently raised after the order of the ITAT, the assessee can file an application for stay before the High Court. This view is endorsed by the Gujrat High Court in the case of Nima Specific Family Trust vs. ACIT [R/Special Civil Application No. 7073 of 2018 dated 03.10.2018], which was decided in the context of refunds. In this case, the AO passed an order under Section 143(3) of the Act, and demanded a sum of Rs. 97 lacs from the assessee. Pending disposal by the CIT(A) the Department recovered the amount. However, the CIT(A) afforded substantial relief to the assessee and therefore a refund was due to the assessee. The Department did not accept this order and filed an appeal to the ITAT. No stay petition was filed for staying the refund. The ITAT upheld the order of the CIT(A) and against the ITAT order the department filed an appeal to the High Court. No stay application was filed before the High Court for staying the refund. It is in this context that the Court observed as follows:

We would first address the petitioner’s grievance of undue delay in granting the refund. We may recall that after the Assessing Officer passing order of assessment on 29th December 2006 making substantial additions, raising tax demands, a sum of Rs. 97.41 lakhs [rounded off] was recovered through adjustment of refund for earlier assessment year. Subsequently, the petitioner’s appeal was substantially allowed by the Appellate Commissioner on 5th March 2009. This gave rise to the petitioner’s claim for refund of excess tax collected. Though the Department had filed appeal against the order of Commissioner [Appeals], there was no stay granted by the Tribunal. Thereafter, the Tribunal also dismissed the Department’s appeal on 30th June 2011. Again, the Department filed appeal before the High Court. Such appeal is pending without any stay.

The Court then observed:

It is well settled legal proposition that an order passed by the judicial or quasi judicial authority should be implemented within a reasonable period; if no specific time frame is provided in such order. The aggrieved person may reasonably pursue the appeal options but not wait indefinitely to implement the adverse order. Mere pendency of the appeal would not prevent implementation of the order under challenge. Unless the order is stayed, the same must be given effect to within a reasonable period.

The Department therefore cannot take shelter of pendency of the appeal before the Tribunal and thereafter before the High Court, since in both cases, the appellate fora had not granted any stay against the order of the Appellate Commissioner. In the present case, even after the Tribunal dismissed the Department’s appeal on 30th June 2011, no steps were taken by the Department to refund the excess tax.

Thus is can be seen that the High Court may grant a stay against refunds, which can also equally be applied against demand of tax pursuant to an order of the ITAT dismissing the assessee’s appeal. Also, if the ITAT dismisses the assesse’s appeal, some action would be taken by the authorities either by raising a fresh notice of demand or adopting recovery proceedings against which a writ petition may also be filed to quash the orders of the authorities.

Recently, in the case of Harshad S. Mehta, a huge refund was due to the Harshad S. Mehta group consequent to the order of the ITAT against which the Department has filed an appeal to the Bombay High Court along with an interim application for staying the refund of taxes due to Harshad Mehta group which is pending adjudication.

• When the disputed taxes are not paid, can prosecution be inititated?

If an assessee is subjected to tax, and has been served with a notice of demand, and does not appeal to the appellate authority and does not pay the disputed taxes as mentioned in the notice of demand, a notice under Section 276C of the Act dealing with ‘Wilful attempt to evade tax etc.’ may be served upon such assessee. The assessee may then produce such evidence and offer some explanation which may be admissible and taken into consideration by the authorities under Section 279(3) of the Act.The offence may also be compounded either before or after the institution of the proceedings under sub-section 2 to section 279 of the Act. Therefore, if the assessee does not wish to pay the demand of tax and avoid prosecution, it must either file an appeal to the appellate authority, or pay the amount of tax specified in the notice of demand and if it does neither, it must have some explanation for not doing so.

• Whether the CIT(A) has the power to stay the demand of tax when the appeal is pending before him?

In Gera Realty Estates vs. CIT [2014] 368 ITR 366 (Bom)(HC), the issue was considered where the Court held that the issue of staying the order can be exercised by the CIT(A), it being an appeallte authority, and for staying the demand, the AO as well as the CIT are vested with the powers of such stay and they are on different considerations. That the AO and CIT do not stay the order but only stay the demand consequent to the order in appeal. That the power of the CIT(A) is not to be confused with the power of the AO or CIT in staying the demand. In my view, as rightly pointed out by the CIT(A) and noted in the judgment, the CIT(A) must not entertain an application for stay since it might give rise to multiplicity of proceedings on account of different applications for stay. This view has been endorsed in the judgment though on different grounds. 

Conclusion

The importance of a recovery of demand is already highlighted under the chapter ‘Introduction’. However, equally important is the principle that the assessee must not be made to pay any tax if the AO has not provided reasons why the assessee is liable to pay the amounts demanded either on the point of a strong prima facie case, or if considerations such as balance of convenience, i.e. the assessee has financial constraints or the assessed income is much higher than the returned income is taken into account, pursuant to a stay application filed by the assessee. On the other hand, if the issue is covered by a decision of an appellate authority, it would not warrant an unconditional stay of demand per se. The appellate authority’s decision would certainly weigh with the courts but an examination on the merits must be made to see if the assessee has a prima facie case and all the other attendant circumstances must also be taken into account. Otherwise, the Court will be passing a judgment of staying the demand based on a wrong principle of law if the decision of the appellate authority is erroneous, then no stay of demand per se ought to be granted. If the appellate authority’s judgment is indeed found to be erroneous, then the Revenue cannot be faulted and the deposit of tax cannot be delayed upto the Tribunal stage simply because the CIT(A) who is hearing the appeal, would be bound by the Tribunal’s decision. More so when there are conflicting decisions of one or more Tribunals on the issue, or the Department has not accepted the decision of the appellate authority by filing an appeal, unconditional stay ought not to be granted unless the assessee has a prima facie case. On the question whether the CIT(A) is bound by the Tribunal’s decision and hence stay ought to be granted till disposal by the CIT(A), as held by the Supreme Court, the power of the CIT(A) is coterminous with that of the Assessing Officer, and so anything is possible, the CIT(A) may pass a wholly different order expanding upon the issue in question raised by the AO and covered by the Tribunal and raise new points on the issue which the Tribunal has not dealt with. Can it still be said that the CIT(A) is bound by the decision of the Tribunal when it has expanded and passed an order over and above the issues in question? So the CIT(A) can never be said to be bound by the Tribunal’s decision for the purpose of granting stay of demand. Whether the assessee has made a prima facie case must always be examined. Even the CBDT has mandated deposit on the lower side of 15% if the issue is covered by the jurisdictional high court.

The subject assumes even more significance considering that very rarely are appeals filed to the Supreme Court and everything rests on the High Court due to the urgency involved. Therefore, the Courts are seriously required to discharge their duties with circumspection while adjudicating petitions against orders disposing of stay applications.

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