Interest us 220(6) of Income Tax Act, 1961

In scrutiny assessments it is sometimes seen that huge demands are created against the assessee by framing high pitched assessments due to difference in opinion on interpretation of law or interpretation of facts or due to the fact that AO is not satisfied with the explanations offered by the assessee in regard to loan creditors or cash credits or gifts etc.

After the assessment a notice u/s 156 for recovery of tax demand created in concluded assessment proceedings, is issued. If a person fails to pay such tax demand then section 220 of Income Tax Act provides for treating such assessee as assessee-in-default as a result of which not only interest @ 1% u/s 220(2) on the tax demand is charged but penalty proceedings u/s 221 may also be initiated.

The assessee may file an appeal against such huge assessment and can also consequently apply for stay of such disputed tax demand since right to request for stay of demand in question is incidental to the right of appeal.

Petition for Stay of Demand: Section 220(6) provides that Where an assessee has presented an appeal under section 246 or section 246A the Assessing Officer may, in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the assessee as not being in default in respect of the amount in dispute in the appeal, even though the time for payment has expired, as long as such appeal remains undisposed off.

Thus assessee may apply for stay of tax demand u/s 220(6) and may request that he may not be treated as assessee in default. It should be noted here that accepting the request of an assessee u/s 220(6) is within the discretionary power of the AO. But such discretionary power cannot be exercised arbitrarily but has to be exercised judicialy and reasonably as the AO while exercising such discretionary power is always treated as quasi-judicial authority.

Time limit for deposit of tax demand u/s 156: Section 220(1) provides that demand raised u/s 156 shall be paid within 30 days from the date of service of notice, however such period may also reduced to less than 30 days with the prior approval of Joint Commissioner if AO has any reason to believe that allowing full pertiod of 30 days would be detrimental to the interests of revenue.

The assessee may also apply for extension of time before the due date for the payment of demand or he may also apply for payment of demand in installments.

The assessee will be treated as assessee in default only after the end of such period as mentioned in notice u/s 156. If the installments have been allowed and installment is not paid within time fixed for payment of installment then the assessee will be treated as assessee-in-default after the end of such period fixed.

What should be done for stay of disputed demand: If the assessee has filed an appeal against any order and consequent demand, he should write to the AO for stay of such demand and request him as not to treat him as assessee in default. The petition u/s 220(6) should be formulated keeping the following points in mind:

-The petition should state the prima facie merits of the appeal. The test of merit of appeal lies mush upon the grounds of appeal, which should be strong enough.

-The hardship involved in the recovery of the disputed demand should be clearly and precisely stated. The petition should state why and how the balance of convenience is in favour of the stay, e.g. bad effect on the liquidity position of the business, jeopardy of the employment of workmen through possible closure of business and possibility dead lock in wage payment etc. as the case may be.

-Copy of grounds of appeal as well as statement of facts should accompany the petition to show the prima facie merits of the appeal.

-The petition should be submitted within 30 days of receipt of demand notice.

Stay of realization cannot be granted simply because an appeal has been preferred– Gouri Shankar Awasthi v. ITO 78 ITR 784 (Cal.)

Discretionary power has to be exercised judicially: The discretion vested in the ITO u/s 220(6) is not merely a naked and arbitrary power but a power coupled with a responsibility and the concerned officer should take all the circumstances into account and all the considerations that could be urged or are urged by the assessee as to why he should not be treated as not being in default and then make such order as is appropriate to the facts of case. In other words, a request for the exercise of the power u/s 220(6) cannot be merely summarily rejected on the basis that the power is there with the officer but that he is not bound to exercise it- M.L.M Mahalingam Chettiar v. Third ITO [1967] 66 ITR 287 (Mad.).

AO should give reasons for dismissing an application for stay: The AO cannot simply reject the stay application without giving any reason for the same., AO must pass a speaking order while dismissing stay application.

As the exercise of discretion by AO u/s 220(6) is quasi-judicial function and he has to exercise his power fairly and reasonably and not arbitrarily or capriciously, the AO should give reasons for dismissing an application made by an assessee for involving his discretion and should also hear the assessee- Cf. Seth Gopaldas Paliwal v. WTO [1983] 139 ITR 900 (MP). Teletube Electronics Ltd. V CIT [1998] 230 ITR 705, 707 (Del.); Chesebrough Pond’s Inc v A.A.C. (C.T.), [1973] 32 STC 464 (Mad.).

Assessee cannot be treated in default until stay application is disposed off: It should be noted also that until application for stay of demand is disposed off by a speaking order assessee cannot be considered as assessee in default. Moreover demand remains stayed until the disposal of the application for stay. “Where an application for stay of demand in pending for disposal u/s 220(6), the demand should be stayed until the application is considered and an order is passed”-Sat Pal v ITAT 317 (P&H); Bongaigaon Refinery and Petro Chemicals Ltd. V. CIT 256 ITR 698 (Gau.); Debasish Moulik v. DCIT 231 ITR 737 (Cal.).

Stay should be granted if grounds of appeal are not frivolous: Normally, once the officer is satisfied that an appeal has been filed (and the grounds are not frivolous), he has to treat the assessee as not in default to the extent of the portion of tax disputed in the appeal. Though section 220(6) doesnot indicate in what cases denial of discretion shall be justified, the fact that the assessee is financially sound and is in a position to pay is not in itself a ground for refusing to exercise the discretion in granting the stay- R.P. David v. Ag. ITO [1972] 86 ITR 699 (Mad.).

Penalty u/s 221 cannot be imposed before disposing off of the stay petition: As noted earlier till the time stay application is disposed off by the AO, the demand remains stayed and hence assessee is not considered in default. Thus until the time stay application is being disposed off, no penalty u/s 221 can be imposed for non-payment of demand because assessee will not be considered as assessee in default till the disposing off of stay application.

In CIT v. DLF Universal Ltd. [2008] 297 ITR 342 (Del.), the Delhi High Court held that Assessing Officer should have decided the stay applications filed by the assessee before levy of penalty u/s 221. In this case High Court held that the assessing officer should have decided the stay applications filed by the assessee before taking any steps prejudicial to the interests of the assessee.

CBDT’s guidelines on stay of demand: CBDT in its instruction No. 96 dated 21-08-1969 has also stated that where the income assessed is huge in nature say twice the amount of income returned then the collection of tax should be held in abeyance till the final disposal of appeals, provided there was no lapse on the part of assessee:

For ready reference, this Instruction is reproduced below: –

“Stay in cases of harsh assessment: – One of the points that came up for consideration at the 8th meeting of the informal consultative committee was that income-tax assessments were arbitrarily pitched at high figures and that the collection of disputed demands, as a result of these, was also not stayed inspite of the specific provision in the matter in section 220(6) of the IT Act, 1961.

The then deputy Prime Minister (who was also the finance minister at the relevant time) had observed as under: –

“(w)here the income determined on assessment was substantially higher than the returned income, say twice the later amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals, provided there were no lapses on the part of the assessee. The board desires that the above observations may be brought to the notice of all the ITOs, working under you, and the powers of stay of recovery in such cases, upto the stage of first appeal, may be exercised by the IAC/CIT.” 

Subsequent Instructions

After the issue of the Instruction No 96 (supra), the CBDT has issued two more Circulars on the subject of stay of demands namely Circular No 530 dated March 6, 1989, and Circular No 589 dated. January 16, 1991. The stipulations of these circulars are: –

Circular No 530

This Circular provides that the AO may exercise his discretion u/s 220(6) and treat the assessee as not being in default in regard to demand payable in the following circumstances: –

(a) The demand in dispute has arisen because the AO has adopted an interpretation of law on which there are conflicting decisions from the High Courts or the jurisdictional High Court has adopted an interpretation, which has not been accepted by the I-T department.

(b) The demand in dispute relates to issues that have been decided in favour of the assessee in the past.
In respect of cases, which are not covered by (a) and (b), the AO has been advised to take into account all the relevant factors and communicate his decision to the assessee by a speaking order. It was said in this circular that while exercising discretion under this provision, the financial capacity of the assessee to pay the demand would not be relevant.

Circular No.589 was also issued afterwards clarifying contents of circular No 530.

 Conclusion: It should be kept in mind that there is no default deemed to have occoured until disposal of stay petition therefore no penalty is imposable without disposal of stay petition.  Demand remains automatically stayed during the period stay application is pending before AO.

Summary rejection of stay petition by non-speaking order is invalid.The refusal may be challenged in application u/s 264 before C.I.T.The refusal by CIT, if unreasonable and inconsiderable, is open to challenge in writ petition.

Stay petitions u/s 220(6) should not be dealt with in mechanical manner but the discretionary power to grant stay should be exercised judicialy and reasonably and a speaking order should be passed while disposing off the stay petitions.