Is 20% Pre-deposit for disputed amount always mandatory? Discussion between CA. Mickey & CA. Mini
Let’s understand how income tax works especially when it come to dispute which is confusing. When taxpayer disagrees with assessment & files appeal before higher Authorities as like CIT(A) they might have to 20% pf disputed tax. However as per recent court cases this requirement can sometimes be reduced or waived.
Illustration: –
XYZ Company Ltd engaged in business of electronics manufacturing industry and recently income tax assessment for F Y 23-24 was concluded and various issues were raised by AO
Ld. AO disallowed certain deductions claimed by the company, citing lack of adequate documentation and evidence.
On which company disagrees & filed appeal with the CIT(A) and AO demanded immediate payment of 20% of the disputed amount, amounting to ₹2 crore, as a prerequisite to staying the recovery proceedings.
This generates burden for a company which was already managing cash flow challenges due to its expansion
CA Mickey:- Hey Mini my one of client is facing difficulties and facing financial crunch in payment of 20% of demand raised in assessment can you explain me and is there any way to guide them, please explain.
Is there any discretionary power granted to A.O. u/s. 220(6) of I.T. Act? How does it affect stay of demand during appeal?
CA Mini: Section 220(6) of I.T act gives power to A.O to treat assessee not assessee in default regarding disputed amount during pendency of appeal. Here, primary consideration is whether appeal presents strong prima facie case which are in favour of assessee and potential for irreparable harm if the stay is not granted. Ld. AO can impose conditions for granting stay, such as requiring a pre-deposit however it is crucial that this discretion is exercised judiciously.
For example, in case of K.M. Rahmath Bibi v. ITO (1969) 72 ITR 73 (Mad), the Madras High Court held that treating assessee as not being in default effectively amounts to stay of collection of disputed amount.
CA Mickey: I have seen that as per CBDT guidelines which require 20% of pre-deposit of demand for granting stay. Is this requirement be relaxed by any way if yes then under what circumstances?
CA Mini: Yes, 20% of pre-deposit requirement is not thumb rule. Guidelines are generally meant to normalize the process however flexibility are allowed based on merits of case to case.
Here I give u certain cases where relaxation was given in past.
- Delhi High Court, in Dabur India Ltd. v. CIT (TDS) (Del-HC), analyzed that pre-requisite can be waived in certain cases for example if there are past appellate decisions in favor of assessee or if there’s credible evidence that supports taxpayer’s position then requirement of payment for pre-deposit can be relaxed.
- Karnataka High Court, in Flipkart India (P) Ltd. v. Asstt. CIT 2017 TaxPub (DT) 0826 (Karn-HC) has also relaxed for high-pitched assessments and said that 20% deposit may not be reasonable and court recognized that nature of assessment should guide Ld. AO’s decision.
CA Mickey : What are importance of “speaking orders” and what can be expectations for AOs when issuing orders related to stay of demand?.
CA Mini: It is very much crucial for officer to issue speaking orders that clearly mentioning reasoning behind decision for stay. Orders should also detail factors considered while passing order as the prima facie merits of the case & any kind of hardship faced by the assessee.
In One of case Madras High Court, Queen Agencies v. Asstt. CIT 2021 TaxPub(DT) 2155 (Mad-HC) given judgment that non-speaking orders are inadequate because they are fail to provide transparency & legal responsibility and for this the court set aside Ld. AO’s order due to its lack of reasoning & remitted matter for reconsideration.
Speaking orders are essential for ensuring that assessee understands basis of decision & for keeping the principles of natural justice.
CA Mickey: Can you share some recent judicial pronouncement where the courts have intervened in AO’s decision regarding pre-deposit requirements?
CA Mini: Certainly here are some of judicial interventions that have played significant role in shaping approach towards pre-deposit requirements.
Court found that the Principal Commissioner failed to assess merits of the case before imposing a 40% pre-deposit requirement and held that both AO & Principal Commissioner did not adequately consider the prima facie merits & undue hardship, leading to revoking of the orders.
- Telugupalayam Primary Agricultural Cooperative Bank v. Pr. CIT 2024 TaxPub(DT) 729 (Mad-HC),
Court criticized appellate authority for not providing reasons for demanding 20% deposit & directed authority to reassess the situation, considering the financial condition of assessee.
These cases highlights importance of fair and reasoned approach in handling stay applications, ensuring that taxpayer’s rights are protected.
CA Mickey: How Office Memorandums & CBDT guidelines influence decisions on stay applications? Is there specific scenario where they have been essential?
CA Mini: Office Memorandums & CBDT guidelines provide agenda for officers which they can promoting consistency & fairness in handling stay applications.
They outline situations where pre-deposit requirement can be relaxed or waived specifically when there are certain decisions in favor of the assessee or when the addition has been reversed in previous years.
For example, Office Memorandum dated 29-2-2016 is frequently referenced in cases like Tata Teleservices Ltd. v. CIT 2023 TaxPub(DT) 1450 (Del-HC), where the Delhi High Court repeated that these guidelines are not rigid & should be applied with discretion power of AO and their own understanding on the same. The memorandum specifically mentions cases where the SC or HC has ruled in favor of assessee, allowing for relaxation of the pre-deposit.
These guidelines ensure that officers exercise their discretion kindly, considering specific circumstances & legal decisions that may affect the case.
What can be taken home from this Discussion
- Discretionary Power: AOs have significant discretion U/s. 220(6) However, it must be exercised with consideration of each case to case base.
- Pre-deposit Flexibility: The 20% pre-deposit guideline is not absolute & can be adjusted based on past rulings, nature of the assessment along with other relevant factors.
- Speaking Orders: Clear & reasoned speaking orders are essential for transparency, accountability & adherence to natural justice principles.
- Judicial Oversight: Courts play crucial role in ensuring fair treatment of taxpayers by scrutinizing AO decisions & enforcing a balanced approach.
- Guidelines & Memorandums: These documents provide essential guidance but allow for flexibility and carefulness, emphasize the need.
To summarize all above tax disputes does not have to be over powering and 20% pre-deposit is not always mandatory. There are options available with AO for adjustment, waiver based on facts of every case. It is very much crucial for officers to use their discretion wisely & provide clear explanations for their decisions.
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