Income-tax Assessments : Stay of Demand during Pendency of Appeal

 

Income-tax Assessments – Stay of Demand during Pendency of Appeal before the Commissioner (Appeals) T.N. Pandey*, Advocate, Noida. Applications seeking stay ofdemand during pendency of appeal before Commissioner (Appeals) are generally rejected in a routine manner causing considerable hardships to the assessees.

This article portrays the present legal position and calls for CBDT’s intervention by issuing suitable clarifications on certain points raised herein.

*Former Chairman, CBDT and Special Secretary, Ministry of Finance.

1. Ladhuram Tapuria v. B. M. Bagchi (1951) 20 ITR 51 (Cal.)One area where the Income-tax authorities up to the level of Commissioners of Income tax have been found unsympathetic to the genuine difficulties faced by the taxpayers relates to stay of demands when applications for stay are made in cases where high additions and high pitched assessments are made vis-a-vis returned incomes even in matters where the issues are quite arguable and the views canvassed by the taxpayers are equally or more plausible. The demands in such situations, in all fairness, need to be stayed, till the Assessing Officer’s (AO) order is tested in at least first appeal. The AOs and their senior officers like Commissioners of Income-tax; reject petitions for stay ignoring the fact that the AO is not the final arbiter of the disputes involved but only the first amongst the statutory authorities. Questions of fact and of law are open for decision before the first and second appellate authorities both of whom possess plenary powers. In exercising his power, The AO cannot act as a mere tax-gatherer but a quasi-judicial authority vested with the power of mitigating hardship to the assessee [N. RajanNair v. ITO, (1987) 165 ITR 650, 652(Ker). Also see Hallacarry Estate v. AgITO, (1985) 155 ITR 411(Mad.)] Despite this position, requests for stay are invariably rejected by the AOs treating their assessment orders as final words on law and facts. This is done also under a wrong impression that if the demands are stayed, the AOs would be raising a question mark about their own decision! Such an attitude on the part of a quasi-judicial authority like the AO can only be considered as unfortunate.

Petitions for stay also get rejected by the next higher authority i.e, the Commissioner ofIncome-tax because he exercises his jurisdiction on the receipt of a report from the AO which is invariably against the taxpayers! A catch 22 situation thus arises in the matter of stay of demands which needs serious consideration by the CBDT for ensuring a right and just approach in such matters by a coordinated view on its own instructions. An arbitrary approach by the AO not only creates hardships for the taxpayers but also exposes tax

department as an unsympathetic organization forgetting the avowed principle enunciated years back that the tax department is “to collect not a pie more or a pie less”. As to when decisions can be considered arbitrary has been explained in the case of Velcha Sreerama murthy v. ITO (1956) 30 ITR 252 by Shri Subarao, the then CJ of the AP High Court,after referring to various authorities, in the following way:“To illustrate, if an assessee pays the admitted amounts and files an appeal raising substantial questions and gives security for the disputed amount, it would be a capricious exercise of discretion if the Income-tax Officer refuses to treat him as not a defaulter. If, as in the Calcutta case, appeals were filed raising substantial and serious questions and if protective assessments were made against the other firms and if large amounts were asked to be paid in ridiculously brief period with the certain result of ruining the business, it may also be an arbitrary exercise of power. If an assessee pays the admitted amounts and files an appeal raising substantial questions and gives reasonable security for the payment of the balance, but the Income-tax Office refuses to stay on the ground that the financial condition of the State requires recovery of arrears, it would be an order taking into consideration extraneous and irrelevant circumstances.The aforesaid cases are only illustrative and there may be many other cases where the Income-tax Officer would not be exercising his discretion honestly and fairly.”

RELUCTANCE OF THE CIT(APPEALS) TO EXERCISE THE POWER OF STAY

Another strange aspect noted in the context of stay of demand is the attitude of the Commissioners of Income-tax (Appeals). Judicial view clearly is that Commissioners (Appeals) have the power to grant stay of demand in cases where appeals are pendingbefore them, yet such senior first appellate authorities invariably do not exercise this power. In Prem Prakash Tripathi v. CIT (1994) 208 ITR 461, the Allahabad High Court has said that the Commissioner (Appeals) is vested with the powers of granting stay, which is not only necessary but expedient for effective adjudication of appeal. In Paulsons Litho Works v. ITO (1994) 208 ITR 678 (Mad.), the Madras High Court has expressed the view that wherever the appellate authority has been vested with powersto render justice and prevent injustice, it impliedly empowers such authorities also to stay the proceedings in order to avoid causing further mischief during the pendency of the appeal. In a number of cases, similar views have been expressed by the Courts.[V. N. Purshothaman v. Agrl. ITO (1984) 149 ITR 120 (Ker.); Debasish Moulik v. DCIT (1998) 231 ITR 737 (Cal.) ; Keshav Cashew Co. v.DCIT (1994) 210 ITR 1010 (Ker.) ; Bongaigaon Refindery and Petrochemicals Ltd. v. CIT (1994) 239 ITR 871 (Gau.) ; Tin Mfg. Co. of India v. CIT (supra) and Punjab Kashmir Finance (P.) Ltd. v. ITAT (1999) 104 Taxman 584 (P&H)].The legal position, being clear, yet the Commissioner (Appeals) are quite reluctant to exercise this power. Rather, they are not exercising this power at all. Such is the luke warm attitude on the part of Commissioners (Appeals) to stay the demand during the pendency of an appeal that an assessee had to move the Allahabad High Court for directing the CIT(A) to dispose of the applications for stay of demand for 2 years and the appellate authority passed orders on such applications only when the High Court vide its order dated 20.2.1996 in Civil Misc. WP No. 142 of 1996 directed that the stay applications shall be decided by the CIT(A) concerned within a week of production of the certified copy of the High Court ’s order before him. Why the first appellate

authorities should be so conservative in exercising this power is difficult to understand and need to be researched! Such cartelization on the part of the Commissioners (Appeals) is extremely perplexing. Much relief would be felt by the taxpayers if they exercise the power of stay of demand in deserving cases which they are lawfully authorized to do. Their apathy in this regard needs to be shred away.

INCOME-TAX PROVISIONS REGARDING STAYOF DEMAND

Section 220(6) of the Act gives discretionary power to the AO to stay the demand and reads as under:“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 un disposed of.”Thus a petition lies with the AO to keep the demand stayed during the pendency of the appeal of the assessee. The discretion given is to be exercised judiciously and not arbitrarily. A petition can be filed for this purpose within 30 days of the receipt of demand notice, setting out the grounds for staying the demand.In M.L.M. Mahalingam Chettiar v. Third ITO (1967) 66 ITR 287 (Mad.), it was held that the discretion vested in the ITO under section 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 argued by the assessee as to why he should not be treated ‘as not being in default’, andthen make such order as it appropriate to the facts of the case. In other words, a request for the exercise of the power under section 220(6) cannot be merely summarily rejected on the basis that power is there with the officer but that he is not bound to exercise it!

VARIOUS HIGH COURTS OBSERVATIONS REGARDING STAY OF DEMANDS.

Allahabad Decision : In Mrs. Mani Goyal v. CIT and Anr. (1996) 217 ITR 641 (All.). The facts were that the petitioner had submitted a return declaring a total income of Rs. 11,710. The DCIT did not accept the return and enhanced the income by making severaladditions and determined the tax at Rs. 33,04,450 i.e. several times more than the tax on the income returned. The petitioner filed first appeal before the CIT(A) in respect of the assessment made, determining huge income-tax liability. Before disposal of the appeal, the assessing authority initiated recovery proceedings for the said amount. The stay application against recovery proceedings filed by the appellant-petitioner before the CIT(A) was rejected. Till the matter came up before the High Court by a writ petition, the appeal had not been fixed for hearing by the CIT(A). On these facts the Court was constrained to make the following observations: “…..it is opposed to the principles of good conscience and fair play that the disputed amount of tax is sought to be recovered even though the appeal is pending. It adds to the hardship of the appellant in such circumstances….”

Karnataka decision

The Karnataka High Court in the case of M. Shivanna and Anr. v. DCIT (2008) 218 CTR (Kar.) 279, referring to CBDT’s Circular No. 530 and other circulars has observed that the respondent [i.e., DCIT], being a statutory authority, has to pass an order exercising the power as envisaged under the statute [i.e. under IT Assessment section 220(6)] and in strict compliance with relevant provisions of the Act and the Rules and after affording reasonable opportunity to the assessee. The Court has also observed that quasi- judicial authorities, discharging their duties under the statute, have to proceed strictly in compliance with the principles of natural justice and to pass speaking order.

Delhi decisions

In Soul v. Dy. CIT (2008) 220 CTR (Del) 211, the court found that the assessment was ‘high-pitched’ – 74 times of returned income. The Court therefore observed that demand raised needs to be stayed in view of the CBDT’s circular no. 96 dated 21st August, 1961 and Instruction No. 1914 dated 2nd December, 1993. Hence garnishee order passed under Section 226(3) was ordered to be kept in abeyance by the HIGH COURT .

Earlier, the same High Court in the case of Valvoline Cummins Ltd.v. CIT and Ors. (2008) 217 CTR (Del) 292 had granted an absolute stay of demand because the assessment made was eight times of the returned income saying that a perusal of para 2 of the CBDT instruction No. 96, dated 21st Aug., 1969 would show that where the income determined is substantially higher than the returned income, that is, twice the latter amount or more, then the collection of tax in dispute should be held in abeyance till thedecision on the appeal is taken. In this case, the assessment is almost 8 times the returned income. Clearly, Instruction No. 96, dt. 21st Aug., 1969 would be applicable to the facts of the case. Under the circumstances, the assessee would, in normal course, be entitled to an absolute stay of the demand on the basis of the above instruction. [N. Rajan Nair v. ITO and Anr. (1987) 63 ITR (Ker) 33 ; (1987) 165 ITR 650 (Ker.), Mrs. R. Mani Goyal v. CIT (1996) 131 CTR (all) 274 : (1996) 217 ITR 641 (All) and I.V.R. ConstructionsLtd. v. Asstt. CIT (1988) 150 CTR (AP) 252 : (1998) 231 ITR 519 (AP) Relied on].

The Delhi High Court has considered the issue relating to stay of disputed demands once again in Taneja Developers and Infrastructure Ltd. v. Asstt. CIT (Del) (2009) 222 CTR (Del) 521 (judgment pronounced on 22.2.2009) and has decided that assessment at afigure 350 times the returned income is unreasonably high pitched. Hence recovery needs to be stayed in view of CBDT Instruction No. 96 dated 21st August, 1969.

Gujarat decision

In the case of Gujarat Maritime Board v. Asstt. Commissioner of Income-tax (2008) 220 ITR (Guj.) 390, the stay related to a situation where the appeal was pending with the ITAT. In this case, stay was granted to the assessee till the disposal of appeal by theTribunal on the condition of furnishing of adequate security by the assessee. The foregoing discussions clearly indicate the judicial views on the issue of stay of demands.

Yet, these have failed to make the IT Department take a reasonable and considerate view and invariably decisions are taken against the taxpayers rejecting requests for stay of demands which are highly disputed raising arguable issues.

CBDT’S INSTRUCTIONS/CIRCULARS CONCERNING STAY OF DEMAND PETITIONSConsiderable confusion exists in the matter of instructions issued by the CBDT in regard to stay of demand and the CBDT has not bothered to clarify the issues. There is no inter-connection between different instructions and circulars issued by the CBDT as could be seen from the following discussion.

Instruction No. 96 dated 21.08.1969.

In this instruction, which has been made public, the CBDT has stated that the demand has to be stayed till the decision of the first appeal. Such assurance was given by the then Deputy Prime Minister and Finance Minister to the Informal Consultative Committee of Parliament and therefore has to be followed in the matter of grant of request for stay – the decision of the F.M., conveyed through an instruction, being binding on the field officers.

For ready reference, the above mentioned instruction is reproduced below-“1. One of the points that came up for consideration in the 8th meeting of the Informal Consultative Committee was that income-tax assessment were arbitrarily pitched at high figures and that the collection of disputed demands as a result thereof was also not stayed in spite of the specific provision in the matter in section 220(6).2. The then Deputy Prime Minister had observed as under:-“….where the income determined an assessment was substantially higher than the returned income, say, twice the latter 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 lapse on the part of the assessee.”3. 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.”The instruction has not been overruled or withdrawn specifically by any instruction or circular from the CBDT. The Counsel for the IT Department in the case of Soul v. Dy. CIT (supra) mentioned before the Court that this instruction has been superseded byInstruction No. 1914 of 1993. This statement does not seem to be correct. Circular No. 96 has been relied upon by the Courts for granting stay of demand on writ petitions coming up before Courts even after the issue of this instruction No. 1914. Few instances are:(a) The Allahabad High Court in its decision in the case of Mrs. R. Mani Goyal has said that the instruction No. 96 is in consonance with the spirit of the provisions contained insection 220(6).(b) Instruction No.96 bas been held to be binding on the IT Assessments – Stay of Demand during Pendency of Appeal before the Commissioner (Appeals) [See, Maharana Shri Bhagwat Singhji of Mewar v. ITAT, (1997) 223 ITR 192, 199, 200-01(Raj.)].(c) Valvoline Cummins Ltd.’s case (supra)

(d) In the case of N. Rajan Nair v. ITO (1987) 165 ITR 650(Ker.), the Kerala High Court referred to Instruction No. 96 and stated “The instructions indicate the departmental thinking on the subject which is also relevant in the context of exercising the discretion under section 220(6).”(e) Obviously, this Instruction cannot be superseded by the CBDT by itself as the same is based on the statement made by the then Dy. PM and FM before the ConsultativeCommittee of the Parliament and before it is rescinded, it will have to have the approval of the FM and the said Committee. Yet, the Income-tax Department is claiming that this instruction has been superseded by Instruction No. 1914 dated 2.12.1993.Departmental Counsel – claimed so first before the Delhi High Court in case of Soul v. Dy. CIT (supra) and again in Taneja Developers’ case (Supra).It may be mentioned in this context that Instruction No. 1914 is not an instruction which has been publically issued as full text of it is not available in any published literature. Obviously, such an unpublished instruction for departmental use cannot take precedence over public instruction No. 96 (supra) and can not supersede it. Circular No. 1914 was made available by the Counsel for the IT Department to the Delhi High Court in the case of ‘Soul’, and the court observed thus:“Having considered the arguments advanced by the learned counsel for the parties, we are of the view that although Instruction No. 1914 of 1993 specifically stated that it is in supersession of all earlier instructions, the position obtaining after the decision of this Court in Valvoline Cummins Ltd. (supra ) is not altered at all. This is so because para No. 2(A) which speaks of responsibility specifically indicates that it shall be the responsibility of the AO and the TRO to collect every demand that has been raised “except the following”,which includes “(d) demand stayed in accordance with the paras B and C below”. Para B relates to stay petitions. As extracted above, sub-cl. (iii) of para B clearly indicates that a higher/superior authority could interfere with the decision of the AO/TRO only in exceptional circumstances. The exceptional circumstances have been indicated as – “where the assessment order appears to be unreasonably high pitched or where genuine hardship is likely to be caused to the assessee”. The very question as to what would constitute the assessment order as being unreasonably high pitched in considerationunder the said Instruction No. 96 and, there, it has been noted by way of illustration that assessment at twice the amount of returned income could amount to being substantially higher or high pitched. In the case before this Court in Valvoline Cummins Ltd. (supra) the assessee’s income was about eight (8) times the returned income. This Court was of the view that was high pitched. In the present case, the assessed income is approximately 74 times the returned income and obviously, this would fall within the expression “unreasonably high pitched”.”These observations show that despite instruction No. 1914 saying that it is being issued in supersession of all previous instructions, Instruction No. 96 is still valid in the matter of grant of stay of disputed demands. That Instruction No. 96 has not been superseded by Instruction No. 1914 has again been reiterated by the Delhi High Court in the case of Taneja Developers (Supra). For ready reference, the relevant observations of the High Court are reproduced hereinafter:

“Learned counsel for the respondent seeks to plead that the aforesaid circular does not reflect the current procedure being followed by respondent in view of a subsequent Instruction No. 1914. However, this very instruction, as pointed out by learned senior counsel for the petitioner, has once again been considered by the Division bench ofthis Court in Soul v. Dy. CIT (2008) 220 CTR (Del) 211 : (2008) 173 Taxman 468(Del).The judgement in Soul (supra) has considered the impact of Circular No. 1914 of 1993 vis-a-vis a judgement in Valvoline Cummins Ltd. (Supra) and thus a similar submission as is sought to be advanced by the learned counsel for the respondent before us was advanced before that Court. The Division Bench dealt with it in the following manner:‘6. The issue that has been raised for the present, by the petitioner is with regard to the de-sealing of the bank accounts on account of the fact that returned income was approximately Rs. 10.16 lacs whereas the assessed income is very high pitched in the sense that it is approximately 74 times of the returned income. The learned counsel for the petitioner submitted that in view of this fact alone, the petitioner would be entitled to a stay and, therefore, the impugned notices ought to be quashed. The learned counsel for the petitioner placed reliance on a decision of this Court in case of ValvolineCummins Ltd. v. Dy. CIT (2008) 217 CTR (Del) 292. This Court, in that case, considered Instruction No. 96 dt. 21st Aug., 1969 issued by the CBDT. The said instruction dealt with the framing of an assessment which is substantially higher than the returnedincome. In the said instruction it was noticed that one of the points that came up for consideration in the eighth meeting of the Informal Consultative Committee was that the income assessments were arbitrarily pitched at high figures and that the collection of disputed demands as a result thereof was also not stayed in spite of the specific provision in the matter in Section 220(6) of the said Act. The observations of the then Dy. Prime Minister were noted. The observations were to the effect that where the income determined on assessment was substantially higher than the returned income, say, twice the latter 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 lapse on the part of the assessee. The CBDT, by virtue of the said Instruction No. 96, desired that the above observations of the then Dy. Prime Minister be brought to the notice of all the ITOs and that the power of stay on recovery in such IT Assessments cases be exercised, up to the stage of first appeal, by the IAC/CIT. Noting the above instruction, this court observed as under:

’41. A perusal of para 2 of the aforesaid extract would show that where the income determined is substantially higher than the returned income, that is, twice the latter amount or more, then the collection of tax in dispute should be held in abeyance till thedecision of the appeal is taken. In this case, as we have noted above, the assessment is almost 8 times the returned income. Clearly, the above extract from instruction No. 96 dt. 21st Aug., 1969 would be applicable to the facts of the case…

43. Under the circumstances, we are of the view that the assessee would, in normal course, be entitled to an absolute stay of the demand on the basis of the above instruction.Mr. Jolly, who appeared on behalf of the respondent, submits that Instruction No. 96 which formed the basis of the decision of this Court in Valvoline Cummins Ltd’s case now stands superseded by Instruction No. 1914 of 1993 dt. 2nd Dec., 1993. Mr.

Jolly handed over a copy of the said instruction. The relevant portion of the said instruction reads as under:

A. Responsibility

(i) It shall be the responsibility of the AOs and the TRO to collect every demand that has been raised, except the following:- Demand which has not fallen due;- Demand which has been stayed by a Court or Tribunal or Settlement Commission;- Demand for which a proper proposal for write off has been submitted;- Demand stayed in accordance with paras B and C below.(ii) Where demand in respect of which a recovery certificate has been issued or a statement has been drawn, the primary responsibility for the collection of tax shall rest with the TRO.(iii) It would be the responsibility of the supervisory authorities to ensure that the AOs and the TROs take all such measures, as are necessary to collect the demand. It must be understood that mere issue of a show-cause notice with no follow up is not to be regardedas adequate effort to recover taxes.

B. Stay petitions

(i) Stay petitions filed with the AOs must be disposed of within two weeks of the filing of petition by the taxpayer. The assessee must be intimated of the decision without delay.(ii) Where stay petitions are made to the authorities higher than the AO (Dy. CIT/ CIT/ Chief CIT), it is the responsibility of the higher authorities to dispose of the petitions without any delay, and in any event within two weeks of the receipt of the petition. Such a decision should be communicated to the assessee and the AO immediately.(iii) The decision in the matter of stay of demand should normally be taken by AO/TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances e.g. where the assessment orderappears to be unreasonably high-pitched or where genuine hardship is likely to be caused to the assessee. The higher authorities should discourage the assessee from filing review petitions before them as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.

C. Guidelines for staying demand

(i) A demand will be stayed only if there are valid reasons for doing so. Mere filing an appeal against the assessment order will not be a sufficient reason to stay the recovery of demand. A few illustrative situations where stay could be granted are….Relying upon the said Instruction No. 1914 of 1993, Mr. Jolly submitted that all previous instructions stood superseded which included the supercession of said Instruction No. 96. He further submitted that para No. 2(C), which deals with guidelines for staying demand, specifically requires that a demand be stayed only if there are valid reasons for doing so and that a mere filing of an appeal against the assessment order will not be a sufficient reason for staying recovery of a demand. Having considered the arguments advanced by

the learned counsel for the parties, we are of the view that although Instruction No. 1914 of 1993 specifically states that it is in supersession of all earlier instructions, the position obtaining after the decision of this Court in Valvoline Cummins Ltd. (supra) is not altered at all. This is so because para No. 2(A) which speaks of responsibility specifically indicates that it shall be the responsibility of the AO & the TRO to collect every demand that has been raised ‘except the following’, which includes (d) demand stayed in accordance with the paras B and C herein above’. Para B relates to stay petitions.As extracted above, sub-cl.(iii) of para B clearly indicates that a higher/superior authority could interfere with the decision of the AO/TRO only in exceptional circumstances. The exceptional circumstances have been indicated as ‘where the assessment order appears to be unreasonably high pitched or where genuine hardship is likely to be caused to the assessee’. The very question as to what would constitute the assessment order as being reasonably high pitched in consideration under the said Instruction No. 96 and, there it has been noted by way of illustration that assessment at twice the amount of the returned income would amount to being substantially higher or high pitched. In the case before this Court in Valvoline Cummins Ltd. (supra) the assessee’s income was about eight (8) times the returned income. This Court was of the view that was high pitched. In the present case, the assessed income is approximately 74 times the returned income andobviously, this would fall within the expression ‘unreasonably high pitched.The aforesaid issue is thus no more res integra and thus the impugned order is not sustainable. A figure of 8 times and 74 times has been classified as ‘unreasonably high pitched”. In the present case it is 350 times and so falls under the same nomenclature.Consequently, the operation of the impugned order is stayed till the disposal of the writ petition. Natural consequence would be that any attachment order issued in pursuance of the impugned order would not have any effect.”

There is one more aspect concerning Instruction No. 96. This was issued on the orders of the Dy. P.M. and PM on the basis of statement made by the Dy. PM and FM before the Informal Consultative Committee. The CBDT has not come out with any declaration that FM’s approval has been taken by it for superseding this Instruction No. 96. Without saying so, it is wrong to say that this Instruction gets superseded merely by saying inInstruction No. 1914 that it is issued in supersession of all previous Circulars /Instructions. Thus the AOs in rejecting the requests for stay of demand are unjustifiably refusing to follow Instruction No. 96 which cannot be said to have been superseded by Instruction No. 1914 (supra).It is regrettable that their stand is being supported by the Standing Counsel of the IT Department at the Delhi High Court. The CBDT’s instructions are quite specific regarding the stay of demand concerning disputed additions. The disputed demand needs to be stayed till the disposal of first appeal where the demand is much more than on the income returned i.e. on twice on the returned income. The case is stronger as per the Court’s decision when the assessed income is 8 times, 74 times – anything up to double or more. But unfortunately, the CBDT’s instructions are being ignored blatantly with no accountability and the assessee are made to run from one authority to the other without any success because of rigid attitudes. The CBDT has to ponder whether such situation should continue when there is emphasis on good taxpayer-tax collector relationship?

OTHER CIRCULARS OF THE CBDT ON STAY OF DEMAND

CBDT’s Circular No. 530 Dated 06.03.1989 This circular directs that the AO may exercise his discretion under section 220(6) and treat the assessee 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 IT Department.(b) The demand in dispute relates to issues that have been decided in favour of the assessee in the past.(c) In respect of cases, which are not covered by (a) and (b) above, the AO has been advised to take into account all the relevant facts and communicate his decision to theassessee by a speaking order. It has been said in this Circular also that while exercising discretion under this provision, the financial capacity of the assessee to pay the demand will not be relevant. But applications are being rejected on the basis that the financial condition of the assessee is sound!

EXERCISE OF DISCRETION BY THE AOs IN DECIDING STAY OF DEMANDAPPLICATION

Section 220(6) gives discretionary power to the AO in the matter of grant of stay of demand. But such a discretion cannot be exercised in an autocratic manner as is being done. Courts have held that discretion is to be exercised in a just and fairway. InShivnarayana Laduram v. Assistant Commissioner of Commercial Taxes, (1967) 19 STC 50, the AP High Court has said that the discretion has to be exercised properly and with judicious care and not arbitrarily or capriciously. The officer is bound to consider all the circumstances of the case and come to a conclusion whether it is a fit case where in exercise of his discretion he would stay the payment of the disputed tax pending the appeal. It is his duty to apply his mind to the facts and circumstances alleged in comingto a conclusion. In L. Hirday Narain v. ITO (1970) 78 ITR 26 (SC), the apex court hassaid that if a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative on him to exercise his authority in a manner appropriate to the case when a party interested and having a right to apply moves in that behalf and the circumstances for exercise of authority are shown to exist. Even if the words in the statute be prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of right- public or private- of a citizen. Similar view has been expressed by the Gujarat High Court in Madhukar Manilal Modi v. CWT (1978) 113 ITR 318 (Guj.). The Courts have held that it is wrong to assume that the exerciseof discretion is only a naked arbitrary power to reject the application for stay of recovery of disputed amount of tax pending the appeal. The statute has conferred upon the Assessing Officer the power to grant stay, and it is his duty to examine and scrutinize the grounds on which the stay is asked for [See E. Krishnappa Naicker v. Dy. CTO, (1963) 14 STC 162 (Mad.) ; B. B. Moidin Kunhi v. State of Mysore, (1971) 27 STC 154 (Mys)].

In Chesebrough Pond’s Inc. v. AAC (1973) 32 STC 464 (Mad.), the Madras High Court has observed that a discretion having been by law vested in the authority concerned, the power is for exercise and not for a laconic refusal to exercise it. If the authority refusedto grant stay, the order should ex facie disclose why he declined to grant stay. Experience shows that such avowed principles laid down by the judiciary are violated with impunity by tax authorities in dealing with stay petitions without any accountability of any kind at any level and the assessees are made to run from one authority to the other seeking relief without success of any nature – their petitions getting rejected by cryptic non-speaking orders many a times leading to severe jolts and losses to their businesses! It is thus nowonder that Courts are getting flooded with writ petitions in such matters. The Delhi High Court in a period of one year (supra) has passed three orders on such matters giving relief to the assessees! The CBDT needs to ponder whether such a state of affairs should continue?

SOME OTHER ASPECTS CONCERNING STAY OF DEMAND PETITIONS

Financial capacity consideration

Many applications for stay of demand are being rejected on the ground that the financial condition of the assessee is sound. In one case nearly Rs. 2.50 crores demand has been collected by coercive measures with the approval of CIT and CIT(A) (who had to deal with stay application on Allahabad High Court’s directions) on the ground that the assessee’s financial position is very sound despite the fact that the demand raised is highly disputable. This is being done in a blatant manner disregarding CBDT’s instructions and the Court decisions as could be seen from the latter discussion.(a) In CBDT’s Circular No. 530 (supra), it has been clearly said that while exercising discretion under section 220(6), “the financial capacity of the assessee to pay the demand will not be relevant”.(b) In Court decisions also, similar observations have been made. In R. P. David v. Ag. ITO (1972) 86 ITR 699 (Mad.), the Court has observed that though section 220(6) does not indicate in what cases denial of discretion shall be justified, the fact that the assessee is financially sound and in a position to pay is not in itself a ground for refusing toexercise the discretion in granting the stay. However, the field authorities are least bothered by the CBDT’s instruction (which are binding on them) and Court decisions which deserve respect in terms of Constitutional Scheme.

NO HEARING IS BEING GIVEN BEFORE REJECTING APPLICATION FOR STAY

As the exercise of discretion by the AO under section 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)]. Moreover, the order should be a speaking order –[Teletube Electronics Ltd. v. CIT [1998] 230 ITR 705, 7-7 (Del) ;Chesebrough Pond’s Inv. v. A.A.C. (C.T.), [1973] 32 STC 464 (Mad.)]. Yet stay applications are being

rejected unilaterally without giving any opportunity to the assessees contrary to the principle of natural justice.

VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE

Where an assessee files an application under section 220(6), it is necessary that he or it should be given an opportunity of being heard. But in most cases, this is not done. Judicial notice of such situations has been taken in a number of cases e.g. Aggarwal Rice and General Mills. v. CIT (1993) 204 ITR 480 (Pand H). In Security and Detective Bureau Ltd. v. CIT (1993) 44 ITD 452(Mad-Trib.), it was held that when an application is made to the Commissioner for instructions to the ITO or the TRO, it is expected that the Commissioner would follow the rules of natural justice, give an adequate opportunity of being heard to the assessee & make a speaking order particularly when his application is rejected so that he knows why his request has not been acceded to. Revenue’s contention that since the Commissioner was exercising only an administrative power,he was not bound to follow the rules of natural justice or to make a speaking order could not be accepted. Even though the Commissioner may be exercising an administrative function, as long as he is interfering with the judicial discretion of the ITO or TRO, he is bound to follow the principles of natural justice.

Coercive steps for recovery of demand are started even when the application for stay is pending. Judicial propriety demands that where an application for stay of demand for disposal under section 220(6) is pending, the demand should be stayed until the application is considered and an order is passed – [Sat Pal v. ITAT 217 ITR 317 (Pand H); Bongaigaon Refinery and Petro Chemicals Ltd.v. CIT 256 ITR 698 (Gau.); Debasish Moulik v. DCIT 231 ITR 737 (Cal)].Passing of speaking order is necessary in cases of rejection. This aspect is generally neglected and cryptic orders, sometimes even with one word ‘Rejected’ are being passed ignoring the CBDT’s circular No. 530 where it has been clearly said that ‘speakingorders’ should be passed on stay of demand applications. In the case of KEC International Ltd. v. B.R. Balakrishnan and Others [2001] 251 ITR 158 (Bom.), on an application for stay of demand of Rs. 12.93 crores for the asst. year 1988-89, pending disposal of an appeal against the assessment, the AO and the CIT on the administrative side rejected the stay application without giving any reasons. Thereupon the AO issued a garnishee notice to the assessee’s banker. On a writ petition by the assessee, the Court set aside the order and the garnishee notice and laid down the following parameters, to be complied with by the authorities while passing orders on stay applications filed, pending appeals to the first appellate authority:- The authority has to at least set out the case of assessee briefly.- If the assessed income is higher than the returned income the authority has to consider whether the assessee has made out a case for unconditional stay. If not whether looking tothe questions involved in appeal, a part of the amount should be ordered to be deposited, for which reasons should be given by the authority.- If the authority wants the assessee to deposit the amount he can briefly indicate in his order whether the assessee is financially sound and viable to deposit the amount.

- 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 providedby the statute to go in appeal. However, if the authority concerned comes to the conclusion, that the assessee is likely to defeat the demand, it may have recourse tocoercive action for which brief reasons may be indicated in the order.The Court clarified that the above parameters were only recommendatory and not exhaustive. Courts have gone to the extent of stating that if the AO has given no reasons at all for rejection of an application for stay, he can be directed by the Court to take up the application and dispose of the same by giving reasons for his discretion [See Hardeo Das Jagnath v. ITO (1961) 43 ITR 562 (Assam) and Esthuri Aswathaiah v. ITO (1959) 37 ITR 518 (Mys.)]. But, unfortunately, summary orders are being passed in such matters with impunity without any fear of accountability.

STAY OF DEMAND WHEN THE APPEAL IS PENDING IN OTHER COURTS DECISIONS

Courts have also held that where the assessee has gone in appeal and the appeal is not frivolous, it may in the circumstances of a case, be the duty of the AO to refrain from enforcing payment of the tax under the notice of demand and to grant extension of time till the appeal is disposed of. If the AO fails to discharge this duty, he may be compelled by a writ under Article 226 of the Constitution to stay his hands [Ladhuram Taparia v. Bagchi (B.K.) 20 ITR 51 (Cal.), Vetcha Sreeramamurthy (supra), Hardeodas Jagnnath v. ITO 43 ITR 562 (Assam), Dwadesh Shreni (P.C.) and Co.P. Ltd. v. ITO 50 ITR 622(All), Hindustan Rubber Works Ltd. (supra);David (R.P.) v. Ag. ITO (supra), Aluminium Corporation of India Ltd.v. Balakrishnan (C ), 37 ITR 267 (Cal.) ; Yusuf Jan Sahiv v. Addl. ITO 42 ITR 637(Ker.) ; Seth Gopaldas Paliwal v. WTO (Supra), Rajan Nair(NCAER) v. ITO 165 ITR 650 (Ker.)]

ORDER FOR PAYMENT OF DEMAND IN INSTALMENTS

The Kerala High Court has held in the case of Gajanana Agencies v. ITO (1994) 210 ITR 865 (Ker.) that section 220(6) confers power of the assessing authority to keep the recovery proceedings in abeyance till the disposal of the first appeal with or withoutconditions. An order allowing the petitioner to pay the demand in a number of instalments is not an order contemplated under section 220(6). Such an order is another mode of enforcing the recovery of tax. On the facts of that case, the Court directed theauthorities concerned to keep the revenue recovery proceedings pending till the disposal of the first appeal and directed expeditious disposal of such appeal.

DEMAND OF SECURITY FOR STAYING THE DEMAND

Sometimes when AOs agree to stay the demand, they put onerous conditions regarding the same in the matter of making available the security as safeguard against the demands raised howsoever unreasonable the same may be. Mostly, bank guarantees are demanded which cause considerable financial loss which is avoidable. More pragmatic approach in this regard is necessary. Personal guarantees, deposit of title deeds of immovable

properties can be better substitutes to bank guarantees. Sympathetic attitude needs to be taken where taking of securities is inevitable.

STAY OF DEMAND DURING THE COURSE OF RECOVERY PROCEEDINGS

The AO has power to stay the demand even in cases where recovery proceedings are initiated. But this is rarely or never done. In the case of Mrs. Goyal (supra) the Allahabad High Court has considered this issue. It has observed that there cannot be a question of directing the assessee to deposit any such security or bank guarantee. As regards the other form of security, the judge felt that the capital assets comprising land, building, plant andmachinery installed at the factory of the appellant are sufficient to cover the likely amount of income-tax, if any, payable by the appellant.Invariably, the Admn. Commissioners insist that the assessee must first approach the AO for stay of demand and only when he rejects the prayers, the higher echelons can be approached. This invariably delays matters as the applications for stay keep on lying with the AOs, there being no time limit for their disposal. It has been decided by the Allahabad High Court in Tin. Mfg. Co. of India v. CIT (1995) 212 ITR 451 (All.) that it is not necessary that before invoking the powers of the first appellate authority to stay recovery of demand, an assessee should approach the AO, under section 220(6) or that the AO must reject the assessee’s prayer for the stay of demand. This requirement unnecessarily prolongs taxpayers’ agonies. Hence, this procedure need not be insisted upon. The Commissioners can call for the report on such applications from the AOs, where they consider it necessary if applications made to him directly. This can be ensured by appropriate instruction under section 119 of the Act by the CBDT.

SUMMING UP

The foregoing discussion shows an alarming state of affairs concerning stay of disputed demands which matter affects the taxpayers most vitally. Tax authorities at different levels are deciding such applications in the way, in the manner and within the time limit they like without any accountability at any level. The taxpayers are left aghast with no alternative but to approach the High Court by writ petitions. All taxpayers cannot afford to do so. Hence majority of them have to suffer because of unjustified attitudes of the tax authorities in many cases. As mentioned in the earlier discussion, it is forgotten that the power conferred on a tax authority under section 220(6) is coupled with duty and if he does not exercise it when the occasion called for it or if he exercises it in such a manner that it is no exercise of discretion at all, he can be compelled to discharge his duties. This was so ruled in Ladhuram Taparia v. B. K. Bagchi (1951) 20 ITR 51 (Cal.), and in many cases thereafter. Further, in M.L.M.Mahalingam Chettiar v. ITO (supra), the decision is that a request for the exercise of the power under section 220(6) cannot be merely summarily rejected on the basis that the power is there with the officer but that he isnot bound to exercise it. Unfortunately, these judicial verdicts have not brought any relief to the harassed taxpayers because of lack of judicial and administrative activism in this area. For example, even the Allahabad High Court in Mrs. Goyal’s case (supra) has not said firmly that the IT Department should strictly follow the CBDT’s instructions i.e Instruction No. 96 of 21.08.69.

Observations like “…. If the assessing authorities or the appellate authorities are not in a mood to stay recovery proceedings, even contrary to the circular of the CBDT”, give a tool to the lower authorities to act arbitrarily in such matters. The CBDT’s instructions are binding on the field officers under section 119 and the question of their ‘mood’ in such matters is hardly relevant. The solution to the problem lies in the firm implementation of the legal provisions and administrative decisions. More important in the existing situation is the vigilance of the taxpayers and their legal advisors in insisting on getting their legal rights on this matter implemented. The taxpayers have right to get their demands in disputed cases stayed till the disposal of first appeal and they get it only if they exercise such a right forcefully. Unfortunately spineless advocacy is one factor that it is responsible for the existing state of affairs. In one case, where the CIT did not mention the forceful arguments favouring stay of demand in the order rejecting stay application and the matter was taken to the High Court by a writ petition, the Counsel for the assessee expressed his inability to say on affidavit that the arguments written and oral justifying stay before the CIT have not even been referred by the CIT and hence order is one sided on the ground that he cannot afford to annoy the CIT by filing such an affidavit before the High Court as he has to appear before him quite often in connection with his practice! What a fall in standards of a noble profession!!

The CBDT needs to consider that many decisions of the AOs are reversed by the appellate forums. Therefore, to press for the demands, presuming that the assessments made by the AOs are infallible, when the assessees may have strong grounds in theirfavour, would be highly unfair. It can lead to ruination of taxpayers’ business. Questions of fact and of law are open for decision before the two appellate authorities both of whompossess plenary powers. In exercising his power, the Assessing Officer has not to act as a mere tax-gatherer but as a quasi judicial authority vested with the power of mitigating hardship to the assessee [N. Rajan Nair v. ITO (supra)]. Also see, Hallacarry Estate v. AGITO, (1985) 155 ITR 411 (Mad.). It is also to be remembered that the exercise of discretion is not a naked arbitrary power to reject the application for stay of recovery ofdisputed amount of tax pending the appeal. The statute has conferred upon the Assessing Officer the power to grant stay, and it is his duty to examine and scrutinize the grounds on which the stay is asked for [E. Krishappa Naicker v. Dy. CTO (1963) 14 STC 162 (Mad) ; B.B. Moidin Kunhi v. State of Mysore (1971) 27 STC 154 (Mys).

WHAT NEEDS TO BE DONE

The foregoing discussion clearly brings out the gravity of the situation and the chaos and the confusion that is prevailing in the matter of decision making on stay applications. The free for all situations with confusing instructions and without any accountability existing presently needs to be regulated by some considered guidelines on the subject. Some suggestions for improving the situations are mentioned hereinafter:

- The AOs generally do not grant stay against their own orders. Hence, section 220(6) can be amended to provide that petitions for stay need to be filed only before the Administrative Commissioners with a copy to the AO. Through administration instructions, it can be provided that the AOs will give their comments to CIT, suo-motu

on such petitions within 8 days of the receipt of the same. Those, who fail to do so, should be made administratively accountable.- The administrative CIT will dispose of such petitions within 15 days of its receipt after giving an opportunity of being heard to the assessees. If such an order is not passed within this time limit, then the stay could be deemed to have been allowed. The practice of disposal within the prescribed time limit has been accepted by the IT Act in section 12AA (2).-In granting stay, bank guarantee should be insisted upon only in cases, where, for reasons to be recorded in writing, it is considered inevitable – not as a routine condition.-A consolidated view should be taken of the existing Instructions/Circulars on the subject of stay of demand and a master circular on the subject should be issued by the CBDT covering all relevant aspects indicating the actions to be taken where deviation is made from such guidelines without justification.-The CBDT needs to examine the situation as to why the Commissioners (Appeals), as a prevalent practice are not exercising power to stay the demand in cases where appeals are pending before them. It would look most inappropriate if they are doing so on the basis of some instructions from the CBDT. If there are any such instructions the same needs to be withdrawn.