Stay of Income Tax Demand - The Legal Position

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Margery Arnold
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1 Stay of Income Tax Demand - The Legal Position With the off late enhanced collection drive launched by the Income tax authorities for recovery of tax demands, it has become crucial for the taxpayers to know their rights and remedies available under the law to prevent unjustified demand payments raised by tax department. Now a days it is becoming common practice to raise high-pitched income-tax demands and reject the assesses requests for stay until the disposal of first appeals against the assessments made. Applications seeking stay of demand during pendency of appeal before Commissioner (Appeals) are generally rejected in a routine manner causing considerable hardships to the assesses, ignoring the fact that the AO is not the final arbiter of the disputes involved but only the first amongst the statutory authorities. Questions of fact and of law are open for decision before the first and second appellate authorities both of whom possess plenary powers. In exercising his power, AO cannot act as a mere tax-gatherer but a quasi-judicial authority vested with the power of mitigating hardship to the assessee. Judicial view clearly is that Commissioners (Appeals) have the power to grant stay of demand in cases where appeals are pending before them, yet such senior first appellate authorities invariably do not exercise this power. The Supreme Court, in the case of Asst CCE v. Dunlop (154 ITR 172) has held that the discretionary power granted to the AO to stay the demand, are required to be exercised judiciously and reasonably, on relevant grounds such as: prima facie case; balance of convenience; possibility of irreparable injury; and safeguarding public interest. This article portrays the present legal position and calls for CBDT s intervention by issuing suitable clarifications on certain points raised herein. Assessing Officer (AO) who may be while passing assessment order under Income Tax Act 1961 may disallow/add back certain items of expenses or reduce deduction claimed in the returned Income on one reason or the other. The net result is increased taxable income and consequently enhanced tax demand. The assessing officer may be ACIT, for assessing cases under scrutiny or may be CIT (A) hearing cases of ACIT. In other words, a tax demand can be stayed at two different stages: First, where an appeal against the Assessing Officer's (AO's) order is pending before the Commissioner (Appeals); and subsequently where an appeal against the order of the Commissioner (Appeals) is pending before the Tribunal.

2 The assessee has following options upon receipt of a tax demand order:- 1. Either accept the additions as contemplated by the AO in the order and pay the demanded tax (if such demand seems lawfully correct); Or 2. File a stay application u/s 220(6) of the I Tax Act, saying that the captioned tax demand may be kept in abeyance until disposal of an appeal being preferred to the first appellate authority i.e. Commissioner Income Tax (Appeal)u/s 246A of the Act or file stay of tax demand petition before Income Tax Appellate Tribunal (ITAT), when an appeal is pending u/s 254 of the Income-Tax Act, 1961 relates to appeals before the Income Tax Appellate Tribunal (ITAT) by assessee and the tax department. However, this is practically done once Commissioner rejects the stay application. Section 220(6) of the Act gives discretionary power to the AO to stay the demand and reads as under: Where an assessee has presented an appeal under section 246A of the Income Tax Act,, the 94 (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 indisposed of. 94 Inserted by the Finance Act, 2000, w.e.f A petition can be filed for this purpose within 30 days of the receipt of demand notice, setting out the grounds for staying the demand. AO will be able to treat the assessee as assessee in default only after the expiry of 30 days. Further, the AO can consider an Application for Stay of demand even if it is filed beyond 30 days from the date of receipt of the notice, as there is no time limit within which Stay Application is to be made u/s 220(6). Furthermore, a request for the exercise of the power under section 220(6) cannot be merely summarily rejected on the basis that power is there with the officer but that he is not bound to exercise it. Once a Stay Application is filed before an AO, then he has a power to grant Stay or has a power to Stay the demand by asking the assessee to make certain payments within such time as he deems fit. He has an obligation to give an opportunity to the assessee and has to consider the facts judiciously submitted before him. He cannot summarily reject the Stay Application without giving reasons. The AO has power to stipulate such conditions as he deems fit which is reasonable for Stay of demand or for permitting the assessee to make the payments in installments Under Income-tax Act, 1961 there are no specific powers given to the CIT (Adm) for Stay of demand. The Stay Application u/s 220(6) can be made only before the AO and the AO only has a right to stay the demand. However, the CIT (Administration) being the administrative head of the particular charge where the jurisdiction of the assessee lies, the CIT (Administration) can consider the Stay Application. In fact, the CIT (Administration) exercises the power and considers the Stay Application where the AO rejects the Stay Application of the assessee. The Income Tax Appellate Tribunal also insists (though not rightly) for the rejection of the Stay of demand by CIT (Administration) before considering the Stay Application in cases where appeal is pending before ITAT.

3 Further, Section 254 of the Income-Tax Act, 1961 relates to appeals before the Income Tax Appellate Tribunal (ITAT) by assessees and the tax department. It also deals with the law relating to grant of stay of demand on assessees petitions. This section was amended w.e.f. June 1, 2001, to provide that where in an appeal filed by the assessee, the Tribunal passes an order granting stay of demand, it shall hear and decide such appeal within 180 days from the date of passing of stay order, failing which, the stay granted shall stand vacated on the expiry of this period. Finance Act, 2007 modified this provision from June 1, 2007, providing that if the appeal is not disposed of within 180 days, as prescribed earlier, the stay may be extended. However, the extended period/periods cannot be more than 365 days. The extension can be given only if the delay is not attributable to the assessee and the appeal shall be disposed of by the Tribunal within the extended time. If the appeal remains un-disposed even during the extended period, the stay shall stand vacated. Then the correct course of action for assessee is to file another stay application with ITAT to safeguard his/her interest. There are also various Instructions and Circulars issued by CBDT which must be considered by these tax authorities before passing/adjudicating any stay application: 1. Instruction No. 96 dated ; 2. Instruction No dt ; 3. Circular 530 dt ; 4. Circular 589 dt Instruction No. 96 dated August 21, 1969 It takes care of 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 in spite of the specific provision in the matter in section 220(6) of the IT Act, 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, up to the stage of first appeal, may be exercised by the IAC/CIT.

4 Instruction No dt It may be mentioned in this context that Instruction No is not an instruction which has been publically issued as full text of it is not available in any published literature. Obviously, such an unpublished instruction for departmental use cannot take precedence over public instruction No. 96 (supra) and cannot supersede it. Para No. 2(A) of this instruction speaks of responsibility specifically indicates that it shall be the responsibility of the AO and the TRO to collect every demand that has been raised except the following, which includes (d) demand stayed in accordance with the paras B and C below. Para B relates to stay petitions. As extracted above, sub-cl. (iii) of Para B clearly indicates that a higher/superior authority could interfere with the decision of the AO/TRO only in exceptional circumstances. The exceptional circumstances have been indicated as where the assessment order appears to be unreasonably high pitched or where genuine hardship is likely to be caused to the assessee. The very question as to what would constitute the assessment order as being unreasonably high pitched in consideration under the said Instruction No. 96 and, there, it has been noted by way of illustration that assessment at twice the amount of the returned income could amount to being substantially higher or high pitched. These observations show that despite instruction No saying that it is being issued in supersession of all previous instructions, Instruction No. 96 is still valid in the matter of grant of stay of disputed demands. That Instruction No. 96 has not been superseded by Instruction No has again been reiterated by the Delhi High Court in the case of Taneja Developers (Supra). The CBDT has not come out with any declaration that FM s approval has been taken by it for superseding this Instruction No. 96. Without saying so, it is wrong to say that this Instruction gets superseded merely by saying in Instruction No that it is issued in supersession of all previous Circulars/Instructions. Thus the AOs in rejecting the requests for stay of demand are unjustifiably refusing to follow Instruction No. 96 which cannot be said to have been superseded by Instruction No (supra). 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, The stipulations of these circulars are: -

5 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. (c) 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. But applications are being rejected on the basis that the financial condition of the assessees is sound! Circular No.589 This circular clarifies some aspect mentioned in Circular No 530 and the contents of this circular are not relevant in the context of the issue, being considered. Summarization on circulars The foregoing discussion concerning stay of demands clearly shows that the two circulars are only in addition to Instruction No 96 and not in supercession of what has been approved by the Informal Consultative Committee of Parliament and the then deputy Prime Minister/finance minister. That instruction is still valid and has not been withdrawn so far. Hence, where income assessed is twice the income returned or more, the demand attributable to such high-pitched assessments, on applications made by the assessees, has to be stayed until the disposal of appeals by the CIT(A). There is no escape from this situation and the AOs, who are not adhering to this Instruction and are compelling the assessees to pay the demand, which is more than the income returned, on the basis of criterion in Instruction No 96, could be held to be guilty of not following the decision of a Committee of Parliament and could said to be committing contempt of Parliament. The two Circulars of the CBDT cannot be said to change this situation, as the CBDT cannot unilaterally issue Circulars, which are contrary to Instruction No 96 (supra) issued with the approval of Informal Consultative Committee of Parliament.

6 HIGH COURTS CASES REGARDING STAY OF DEMANDS In Soul v. Dy. CIT (2008) 220 CTR (Del) 211, the court found that the assessment was high-pitched 74 times of returned income. The Court therefore observed that demand raised needs to be stayed in view of the CBDT s circular no. 96 dated 21st August, 1961 and Instruction No dated 2nd December, Hence garnishee order passed under Section 226(3) was ordered to be kept in abeyance by the HIGH COURT. In the case of Valvoline Cummins Ltd. v. CIT and Ors. (2008) 217 CTR (Del) 292 had granted an absolute stay of demand because the assessment made was eight times of the returned income saying that a perusal of Para 2 of the CBDT instruction No. 96, dated 21st Aug., 1969 would show that where the income determined is substantially higher than the returned income, that is, twice the latter amount or more, then the collection of tax in dispute should be held in abeyance till the decision on the appeal is taken. In this case, the assessment is almost 8 times the returned income. Clearly, Instruction No. 96, dt. 21st Aug., 1969 would be applicable to the facts of the case.under the circumstances, the assessee would, in normal course, be entitled to an absolute stay of the demand on the basis of the above instruction. The Delhi High Court has considered the issue relating to stay of disputed demands once again in Taneja Developers and Infrastructure Ltd. v. Asstt. CIT (Del) (2009) 222 CTR (Del) 521 (judgment pronounced on ) and has decided that assessment at a figure 350 times the returned income is unreasonably high-pitched. Hence recovery needs to be stayed in view of CBDT Instruction No. 96 dated 21st August, The Courts have held that it is wrong to assume that the exercise of discretion is only a naked arbitrary power to reject the application for stay of recovery of disputed amount of tax pending the appeal. The statute has conferred upon the Assessing Officer the power to grant stay, and it is his duty to examine and scrutinize the grounds on which the stay is asked for. The foregoing discussion clearly brings out the gravity of the situation and the chaos and the confusion that is prevailing in the matter of decision making on stay applications. A consolidated view should be taken of the existing Instructions/Circulars on the subject of stay of demand and a master circular on the subject should be issued by the CBDT covering all relevant aspects indicating the actions to be taken where deviation is made from such guidelines without justification. Best Regards, CA. Pushpendra Kr Dixit Pushpendra.Dixit@aricent.com

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SH. G.C. GUPTA, VICE PRESIDENT AND SH. INTURI RAMA RAO, ACCOUNTANT MEMBER.

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SH. G.C. GUPTA, VICE PRESIDENT AND SH. INTURI RAMA RAO, ACCOUNTANT MEMBER. I.T.A Nos. 1766 to 1768/Del/2015 Assessment Years-2011-12