Comprehensive Analysis of the Judgement on Stay of Tax Demand u/s 220(6) of the Income Tax Act

Reported as:

2024 (3) TMI 773 - DELHI HIGH COURT

Introduction

This article provides a detailed analysis of a recent judgment delivered by the High Court concerning the grant of stay of tax demand u/s 220(6) of the Income Tax Act, 1961. The case revolves around the interpretation and application of the Central Board of Direct Taxes (CBDT) Office Memorandums (OMs) dated February 29, 2016, and July 31, 2017, which provide guidelines for granting stay of demand at the first appeal stage.

Arguments Presented

The petitioner, an assessee, challenged the actions of the respondents (tax authorities) who had adjusted the available refunds against the outstanding tax demand for the Assessment Year (AY) 2018-19 without considering the petitioner's application for stay of demand u/s 220(6) of the Income Tax Act.

The respondents relied on the CBDT's OM dated July 31, 2017, which stated that a stay of demand could be granted subject to the deposit of 20% of the disputed demand as a "standard rate." The respondents contended that the petitioner was obliged to tender or place evidence of having deposited 20% of the disputed demand before their application for stay could be considered.

Discussions and Findings of the Court

Interpretation of the CBDT Office Memorandums

The Court observed that the CBDT OMs neither prescribed nor mandated the deposit of 15% or 20% of the outstanding demand as a pre-condition for granting stay. The OM dated February 29, 2016, specifically spoke of the Assessing Officer's (AO) discretion to grant stay subject to a deposit at a rate higher or lower than 15%, depending on the facts of a particular case.

The Court relied on the Supreme Court's decision in Principal Commissioner Of Income Tax 5 & Ors. Versus M/s. LG Electronics India Pvt. Ltd. - 2018 (7) TMI 1905 - SC Order, which emphasized that the administrative circular (OM) would not operate as a fetter upon the power conferred on a quasi-judicial authority. The Court held that it would be wholly incorrect to view the OM as mandating the deposit of 20%, irrespective of the facts of an individual case.

Discretion of the Assessing Officer u/s 220(6)

The Court observed that the discretion vested in the hands of the AO u/s 220(6) of the Income Tax Act cannot possibly be viewed as being cabined by the terms of the OM. The Court relied on its previous decisions in AVANTHA REALTY LIMITED Versus THE PRINCIPAL COMMISSIONER OF INCOME TAX CENTRAL DELHI 2 & ANR. - 2024 (4) TMI 162 - DELHI HIGH COURT and Indian National Congress Versus Deputy Commissioner of Income Tax Central-19 and Ors. - 2024 (3) TMI 669 - DELHI HIGH COURT, which reiterated that the 20% deposit mentioned in the OM is not liable to be viewed as an inviolate or inflexible condition.

Principles for Granting Stay

The Court discussed the principles governing the grant of stay pending appellate remedies, as laid down by the Supreme Court in BENARA VALVES LTD. & ORS. Versus CCE & ANR. - 2006 (11) TMI 6 - Supreme Court and Monotosh Saha Versus Special Director, Enforcement Directorate And Anr. - 2008 (8) TMI 9 - Supreme Court. The Court emphasized that while exercising discretion, factors such as prima facie case, undue hardship, and the likelihood of success must be considered.

The Court also referred to the decision of the Allahabad High Court in ITC. LTD. Versus COMMISSIONER (APPEALS) , CUS. & C. EX., MEERUT-I - 2003 (10) TMI 70 - ALLAHABAD HIGH COURT, which provided a lucid explanation of the legal position concerning pre-deposit and the grant of stay.

Analysis and Decision by the Court

The Court held that the respondents had clearly erred in proceeding on the assumption that the application for consideration of outstanding demands being placed in abeyance could not have been entertained without a 20% pre-deposit. The Court found this stand to be thoroughly misconceived and wholly untenable in law.

The Court observed that the respondents had acted arbitrarily in adjusting the demand for AY 2018-19 against available refunds without attending to the petitioner's application u/s 220(6) of the Income Tax Act, which was pending consideration.

Consequently, the Court allowed the writ petition and remitted the matter to the respondents for considering the petitioner's application u/s 220(6) in accordance with the observations made in the judgment. The issue of the amount of refund liable to be released was directed to abide by the decision that the respondents would take pursuant to the Court's directions.

Doctrine or Legal Principle Discussed

The judgment primarily dealt with the interpretation and application of the CBDT Office Memorandums concerning the grant of stay of tax demand u/s 220(6) of the Income Tax Act, 1961. The Court emphasized the discretionary power vested in the Assessing Officer and the need to consider factors such as prima facie case, undue hardship, and the likelihood of success while exercising this discretion.

Comprehensive Summary of the Judgment

The High Court, in this judgment, clarified the interpretation and application of the CBDT Office Memorandums concerning the grant of stay of tax demand u/s 220(6) of the Income Tax Act, 1961. The Court held that the Assessing Officer's discretion to grant stay cannot be fettered by the terms of the OM, which merely provide guidelines.

The Court emphasized that the Assessing Officer must consider factors such as prima facie case, undue hardship, and the likelihood of success while exercising discretion u/s 220(6). The Court found that the respondents had erred in assuming that the petitioner's application for stay could not be entertained without a pre-deposit of 20% of the disputed demand, as per the OM.

The Court relied on various judgments of the Supreme Court and High Courts to elucidate the principles governing the grant of stay and the interpretation of the term "undue hardship." The Court remitted the matter to the respondents for considering the petitioner's application u/s 220(6) in accordance with the observations made in the judgment.

 

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Full Text:

2024 (3) TMI 773 - DELHI HIGH COURT

Assessing Officer discretion in granting stay of tax demand cannot be rigidly constrained by administrative OMs, requiring case specific consideration. The Assessing Officer's discretionary power under section 220(6) to grant stay of tax demand is not fettered by CBDT Office Memorandums; those OMs are administrative guidelines and do not mandate a uniform pre deposit. The AO must consider prima facie case, likelihood of success, and undue hardship and may require a higher, lower or no deposit depending on case specific facts. Administrative adjustment of refunds without considering a pending stay application was held arbitrary and the matter was remitted for reconsideration applying these principles.