Tax authorities must exercise discretion in determining pre-deposit percentage for stay applications, not rigidly apply 20% rule

Delhi HC held that the 20% pre-deposit requirement for stay of tax demand is not an inflexible rule. The court ruled that authorities erred in refusing to consider the petitioner's application for stay without the mandatory 20% deposit. The HC emphasized that the pre-deposit percentage should be determined based on factors like prima facie case, financial hardship, and likelihood of success, requiring sound discretion by authorities rather than rigid application of the 20% threshold.

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Issues Involved:

1. Legality of the ITAT's order dated 05 April 2024.
2. Prima facie case and financial stringency of the petitioner.
3. Applicability of Section 68 of the Income Tax Act.
4. Requirement of pre-deposit for stay of demand.

Summary:

1. Legality of the ITAT's order dated 05 April 2024:
The writ petition challenges the ITAT's order dated 05 April 2024, which dealt with an application for stay of demand. The ITAT concluded that the provisions of Section 68 of the Income Tax Act were correctly invoked and found no prima facie case in favor of the petitioner. The ITAT's decision was based on concurrent findings of two quasi-judicial authorities against the petitioner, questioning the genuineness of the transaction.

2. Prima facie case and financial stringency of the petitioner:
An earlier writ petition (W.P.(C) 15337/2023) had been dismissed by the Court, which observed that the petitioner had not made out a prima facie case and had "a lot to answer" in the appeal. The Court also found the petitioner's plea of financial stringency unconvincing, as the accounts were not properly maintained. The ITAT reaffirmed this, stating that the petitioner had no prima facie case and the financials did not inspire confidence.

3. Applicability of Section 68 of the Income Tax Act:
The ITAT noted that the provisions of Section 68 of the Act place the initial burden on the assessee to explain the genuineness of the transaction. The ITAT found that the petitioner had not discharged this burden, and the tax authorities had valid concerns about the genuineness of the transaction. The ITAT observed that the same arguments and explanations raised by the petitioner lacked strength.

4. Requirement of pre-deposit for stay of demand:
The Court noted that the 20% pre-deposit requirement is not an inviolable condition. The discretion to grant stay subject to a deposit higher or lower than 20% depends on the facts of each case. The Court cited several precedents, including the Supreme Court's judgment in Principal Commissioner of Income Tax & Ors. vs LG Electronics India Pvt. Ltd., which clarified that administrative circulars do not fetter the quasi-judicial authority's discretion. The Court emphasized that the extent of the deposit should be examined based on factors like prima facie case, undue hardship, and likelihood of success.

Conclusion:
The Court found no merit in the challenge raised by the petitioner and dismissed the writ petition, upholding the ITAT's order and the requirement for the petitioner to approach the Assessing Officer with a plan to liquidate the disputed tax demand or seek securitization of the same.

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