Stay of disputed demand of income-tax while the first appeal is pending
CA Prakash Hegde and CA Raghavendra N.
It is common to see Assessing Officers (‘AO’s) making adjustments by way of addition to income or disallowance of expenses, resulting in income-tax demands beyond the paying capacities of the taxpayers. Under the provisions of the Income-tax Act (‘the Act’), where a notice of demand under section 156 is issued, the taxpayer is obligated to pay the amount within 30 days. Even where the taxpayer has preferred an appeal before the Commissioner of Income-tax (Appeals) [‘CIT(A)’], being the first appeal, the AOs insist for the payment of the disputed tax demand as filing of an appeal does not give a taxpayer any right to defer the payment of the disputed tax demand. Section 220 of the Act has vested the AO with discretionary powers to treat the taxpayer as not an ‘assessee in default’ (i.e. grant stay of demand) subject to his satisfaction of the facts and circumstances of the case and subject to conditions that may be specified.
Guidelines from the Central Board of Direct Taxes (‘CBDT’)
The CBDT has been issuing instructions from time to time on the conditions and circumstances under which an AO has to use his discretionary powers not to consider a taxpayer as an ‘assessee in default’ (i.e. by stay of demand). In this context, it is pertinent to note that, unfortunately, many of these instructions are very subjective and considered to be ambiguous by the taxpayers. Added to this, in most of the cases, the AOs tend to interpret the instructions in not so favorable manner to the taxpayer and do not grant stay or grant stay only subject to payment of a major portion of the amount of tax demand.
One of the important instructions issued by the CBDT in this regard is Instruction no. 1914 dated 02 February 1993. The Instruction clarifies that, mere filing of an appeal by the tax payer cannot be the basis for grant of stay. Certain illustrations have been provided in the said Instruction specifying the kind of cases to which stay may be granted by the AO. However, the illustrations given therein are not exhaustive and the Instruction leaves enough room for the AO to use his discretion in accordance with the guidelines provided therein.
On 29 February 2016, the CBDT has issued an Office Memorandum (‘OM’) modifying Instruction no. 1914 discussed above. As per this OM, where a taxpayer has preferred an appeal before the CIT(A), the AO shall grant stay of demand till the disposal of the same on payment of 15% of the disputed tax demand. The OM also clarifies that the AO may increase this percentage in circumstances that warrant the same. It also provides that if the AO is of the view that payment should be lesser than 15% in the given circumstances, he should refer the matter to the Principal CIT or CIT who will then decide the matter.
In each of the cases, as a principle of natural justice, a ‘speaking order’ by the AO / Principal CIT / CIT, as the case may be, is a basic necessity, as such order should be able to justify the reasons for the conclusion arrived at.
Disputes on stay of demand
The matter of grant of stay subject to payment of a part of the disputed demand has been an issue of dispute in many of the cases, particularly when the assessment is ‘high-pitched’ i.e. the income assessed is substantially more than (exceeding two times) the income declared by the taxpayer. In many instances, the AOs tend to mechanically stick to the payment of a certain specified percentage of disputed demand by the tax payer before they consider an application for stay of demand. Even when the taxpayer is unable to pay even a fraction of the amount of demand due to genuine reasons like erosion of resources due to recurring losses or even when there are decisions of the Income-tax Appellate Tribunal or High Courts on a similar or identical issue which are favorable to the tax payer, the AOs compel the tax payer to pay / attempt to pay huge amount of disputed demand resulting in financial hardship.
Karnataka High Court (‘HC’) on stay of demand
Recently, the Honorable HC of Karnataka had an occasion to examine the approach followed by the income-tax authorities in respect of grant of stay of demand in the matter of Flipkart India (P.) Ltd. Vs ACIT  79 taxmann.com 159. The HC observed that, the income-tax authorities were required to examine whether the assessment is ‘unreasonably high-pitched’ or whether the demand for depositing 15% of the disputed demand amount ‘would lead to a genuine hardship being caused to the assessee or not’. The HC also observed that the OM dated 29 February 2016 partially modified the Instruction no. 1914 and had not totally super ceded it and hence, the income-tax authorities were required to apply these two important factors mentioned in Instruction no. 1914 before rejecting an application for stay of tax demand filed by the assessee.
The above decision of the HC makes it abundantly clear that a stay of demand by the AO subject to payment of 15% of the disputed demand by the taxpayer while the appeal is pending before the CIT(A) is just a rule of thumb and not a mandatory requirement. The AO has to carefully consider and analyze the facts and circumstances of each case for grant of stay of demand in line with the CBDT instructions and a speaking order has to be passed by the AO providing the reasons for granting / not granting the stay of demand.
 A ‘speaking order’ means an order that speaks for itself. To put it simply, every order must contain reasons in support of it.