Whether The Condition Of Pre-Deposit Of 20% Tax Is A Mandate For Entertaining Stay Application Per Se?

In terms of modified instruction No. 1914 dated 21.03.1996 issued by CBDT, payment required to be made by the assessee as a precondition for a stay of demand disputed before CIT(A) is 20%.

Many confuse this to be a precondition of absolute nature for obtaining a stay under any circumstance, which is incorrect. Instruction simply talks about the powers of the assessing officer to grant a stay till the disposal of the first appeal before CIT(A). It could not have and it does not talk about what conditions CIT(A) could grant a stay. In practice, on various occasions, it is seen that even CIT(A) refers to Office Memorandum / Instruction No. 1914 as modified lastly to prescribe a deposit of 20% for a grant of stay.

This clearly is misconceived. CIT(A) powers are granted under statute u/s.251 of the Income Tax Act, 1961¹("IT Act"), which empowers him to confirm, reduce, enhance or annual the assessment and also to pass such orders (including stay orders) in appeal as he thinks fit. CBDT administrative circular no way binds CIT(A) not to grant a stay unless 20% amount is deposited.

Power of AO

The assessing officer derives powers from s.220(6) of the IT Act² that provides that the AO may, in his discretion, during pendency of appeal 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 amount in dispute in the appeal even though the time for payment may have expired.

It is these powers that are guided by modified instruction No. 1914 dated 21.03.1996 issued by CBDT. These instructions provide that:-

1. In a case where the outstanding demand is disputed before CIT(A). the assessing officer shall grant a stay of demand till disposal of the first appeal on payment of 20% of the disputed demand unless the case falls in the Categories described in par B of the instructions. (Which relates to AO finding the nature of addition resulting in disputed demand being such where AO deems a sum lower or higher than 20% appropriate)
2. The AO shall dispose of a stay application within 2 weeks of filing.
3. He may impose such conditions as he may deem fit inter alia prescribed in Para E of said In fact. (e.g. obtaining the undertaking from the assessee and reviewing the order in 6 months etc.)

The Courts have held that even the AO is not completely bound by modified instruction No. 1914. In the case of Flipkart(P) Ltd. v ACIT³, the Karnataka High Court has held that even an assessing officer could grant a stay with a deposit of an amount that is less than 15% (as it then was). There are similar decisions from other High Courts as well.

Furthermore, in the case of KEC International v. B.R. Balakrishnan & Ors.⁴, the Bombay High Court held that: -

1. While considering the stay application, the authority concerned will at least briefly set out the case of the assessee.
2. 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 the 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.
3. 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.
4. 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 into appeal.

Thus, even AO is empowered to grant a stay with the condition of a deposit of amount of less than 20% of the disputed sum.

Powers of CIT(Appeals) to grant a stay

Powers of AO thus are limited and parameters that could be considered by AO are narrow and do not definitely allow the AO to examine the merits of the demand; AO considers whether addition on the same issue has been deleted by appellate authorities or superior courts etc. and other factors as highlighted above.

Powers of CIT(A) on the other hand are not restricted by any circulars and he could consider all factors that may be relevant for a grant of stay e.g. merits of appeal, strong and prima facie case, whether in law or facts, irreparable injury, any special circumstances and any other relevant factors. It is possible to highlight the arguments on substantive merits of the appeal in a stay application before CIT(A) and CIT(A) has powers to grant a stay of demand even without a deposit of even a single per cent of disputed demand.

The author suggests that appeals before CIT(A) may be filed along with detailed stay applications putting forth relevant reasons for the grant of stay and in case of pendency of stay applications without any delay from the side of the appellant or in case of mechanical rejection of stay applications, the remedy of filing a writ petition before the jurisdictional high court could be availed. The author does not seek to discuss grounds of challenge of any order of CIT(A) rejecting stay applications in this article but suffice it is to say that there are many possibilities of having stay on demand by paying less than 20%.

Footnotes

1. Section 251 in The Income Tax Act, 1961

2. Section 220(6) in The Income Tax Act, 1961

3. Flipkart India Private Limited vs The Assistant Commissioner Of Income Tax on 25 April 2018. ITA No.202 /Bang/2018

4. Kec International Ltd. vs B.R. Balakrishnan And Ors. on 29 March, 2001 [2001]251ITR158(BOM)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.