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Month of February is the Valentine month and everyone in this world must grapple with their respective valentine. Taxman will also be busy with their valentine i.e. Recovery of the tax arrears whereas tax practisoners will also be busy with their valentine i.e. Protection of assesse and how to prevent unjust recovery of such exorbitant demand of the assesse from the wrath of the taxman.

RECOVERY of tax demand is the buzz word which thrilled to the taxman on one hand but simultaneously frightened to the assesse and tax practisoners on other hand as well especially in case of high pitched assessment. Now a days Recovery of tax demand becomes an adventurous task for the department due to flux of information flowing to them thanks to the advancement of technology coupled with pressure from higher Authorities. Taxman used to resort various coercive actions like attachment of bank accounts, Debtors, Immovable properties etc through garnishee orders despite the fact that moto of the Income tax department i.e. कोष मुलो दण्ड: (KOSH MULO DANDA is taken from the Arthsastra of Kotilya who himself was of the opinion that taxman should collect tax in such a way like honeybee suck honey from flower but It is also of common knowledge that assesses often shut down their business operations due to exorbitant tax demand and equivalent exorbitant way of recovery.

Recovery of Outstaning Tax Demand

Recovery of tax demand in high pitched assessments assumes more importance when ultimate tax collector i.e. Government is in dire need of funds. When recovery of tax demand in general is painful than it will add more pain to the wounds of the assesse in this distressed state of economy. As per rough estimate, around 10 Lac Crore of Income Tax demand is pending in litigation and major portion of outstanding tax demand is determined in last 3-5 years’ time span.

Generally, 30 days’ time period is allowed to the assesse for payment of demand. It is a settled law that department can-not shortened grace period of 30 days except specific cases. Recovery of tax demand can be started only after time period given in the demand notice is expired.

AVAILABILITY OF RECOURCES WITH THE ASSESSE: There are various ways in which severity of punitive action taken by taxman for recovery of demand can be minimised. Income tax Act provides various remedies which are listed as under:

1. Stay Application followed by Appeal with C.I.T. before the A.O./Higher Authorities

2. Application for payment of demand in instalments

3. Writ Petition in High Court against rejection of stay application by A.O./ Higher Authorities

4. File application with local committee on high pitched assessment.

out of above recourses first three options are generally exercised by the assesse but application to the local committee for the high pitched assessment is seldom exercised.

It is interesting to note here that the word stay of demand is nowhere find place in the entire income tax Act. The correct word as per Income Tax Act is “Assesse in Default.” All these above mentioned recourses is in line to untagged the assesse as tag of “Assessee in default.”


Section 220 of the Income Tax Act contains the provisions related to time when tax becomes payable and when assesse is considered deemed to be in default. As per section 220 of the Act, the assesse shall be deemed to be an assesse in default if the tax is not paid within the time allowed under the notice of demand. It is pertinent to note here that it is deemed provision and assessing officer has no power to deviate from the deeming fiction.

It is of common knowledge that assesse is treated as assesse in default with respect to demand in his own case only but he may also be treated as assessee in default when notice is not complied in Garnishee order u/s 226(3) for recovery of demand in other’s case. This is a neglected area of compliance and any garnishee order received u/s 226(3) should be replied without fail within stipulated time to escape from the ill effect of being assesse in default. If the assesse owe dues to the party and later on paid to the party instead of Income Tax department despite garnishee order than such default is sufficient to classify that assesse as assesse in default.

CONSEQUENCES OF ASSESSE IN DEFAULT: When the assesse becomes assesse in default then fowling action can be taken against the assesse:

1. Interest u/s 220: Simple interest @ 1% per month is payable on the amount remaining unpaid. The interest shall be charged for the period beginning from the day immediately following the 30 days as mentioned in demand notice and ending on the date on which payment is made. Interest under section 220 can be reduced or waived by the Chief CIT or CIT subject to certain conditions.

2. Penalty u/s 221: If the assessee is deemed as an Assessee in Default then, in addition to interest under section 220, he shall be liable to pay a penalty which the Assessing Officer may levy. However, such penalty shall not exceed the amount in arrears. The penalty under section 221 shall not be levied if the assessee proves that the default was for good and sufficient reasons.

3. Recovery from directors of Pvt Ltd Companies u/s 179:- If assesse is a private limited company and becomes an assesse in default then recovery proceeding can be initiated u/s 179 on the directors. Though department has to prove gross negligence and misfeasance of the concerned directors.

4. Apart from above consequences, Assessee in default may also be liable for prosecution etc in certain situation.

When assesse is not treated as assesse in default: – In following situations, the assesse is not treated as assesse in default:

1. If tax is paid within the time allowed in notice of demand.

2. An application is made by the assessee before expiry of time allowed for extension of time.

Assesse is allowed of tax payment in installments subject to condition as may be think proper by the Assessing officer or higher authorities.

From the language of section, It is transpired that if demand is high and it is not possible for the assesse to pay upfront of disputed demand as a whole then one has to make application before expiry of time allowed in notice of demand.

But option is still not over to the assesse if one has not made application before expiry of 30 days. Section 220(6) further give relaxation to the assesse.

3. As per section 220(6), If an assesse had filed appeal then assessing officer may in his discretion and subject to such condition as he may think proper treat the assesse as assesse not in default even though the time for payment has been expired as long as appeal remains undisposed of.

As per understanding of language, Section 220(3) is applicable when the assesse has either filed appeal or not but want to pay tax in installments then one can file application to AO u/s 220(3) before expiry of time but application u/s 220(6) can be filed only when the appeal has been filed and time limit has been expired. In other words, AO is bound to give installments subject to conditions if application is made u/s 220(3) but no such compulsion of allowance of instalments is found in section 220(6) of the Act. As per instruction no 1914, such instalments can be liberally allowed up to 18 months.

The CBDT has issued so far following circular or instructions with regard to stay of demand so far:

1. Instruction no 95 dated 21/08/1969

2. Instruction number 635 was issued on 12/11/1973

3. Instruction number 1067 dated 21/06/1977

4. Instruction number 1158 dated 27th March 1978

5. Instruction number 1282 dated 4th October 1979

6. Instruction number 1362 was issued on 15/10/1980

7. Instruction no 1914 dated 02/12/1993

8. Office Memorandum no 404/72/93-ITCC dated 29/02/2016

9. Office Memorandum dated 31/07/2017 which is partial modification to O.M. 404

Out of above, Instruction no 1914 issued on 02/12/1993 is in suppression of all earlier instructions and is detailed guideline with respect to RECOVERY OF OUTSTANDING TAX DEMAND. The said guidelines are still valid despite issuance of succeeding instructions because office memorandum no 404 is substitute of only part C of the said guidelines and specific emphasis is with respect to streamline of stay application on uniform ground which was varied before issuance of said O. M. Other parts of the said guideline are still in vogue.

Whether lower or higher amount can be decided by AO/Higher Authority instead of 20% threshold amount:

Generally, it is heard that Assessing officer take a plea in genuine cases also that they can-not reduce threshold limit 20% fixed by CBDT for granting stay of demand and assesse has to pay minimum 20% if they want to seek stay of demand.

Para 4(B) of O.M. 404/72/93 dated 29/02/2016 clarified this matter to a great extent. In this para it is specifically written that if the A.O. is of the view that nature of addition is such that payment of lump sum amount lower than 20% is warranted than AO shall refer the matter to the administrative PCIT, who after considering all relevant factors shall decide the portion of demand to be paid by the assesse. Likewise, A.O. may increase the portion of demand to be paid if he is of the opinion that higher amount is warranted looking to the facts of the case. Ironically for this purpose they need not to take permission from higher authority.

Power of Higher Authorities:  It is of general rule that higher authority may direct their subordinate on any matter but apart from generality higher authority is empowered in the guideline itself, in part B of circular no 1914, It is specifically stated that higher authority may interfere the decision of AO where the assessment order appears to be high pitched or where the genuine hardship is likely to be caused to the assesse. Both the situation is separate and not cumulative one. When either of the condition is satisfied then higher authority may direct the A.O. to grant concession as he may deem fit.

High Pitched assessment: Though the word high pitched assessment is no-where defined in the Act but reference can be taken from various judicial pronouncements and language of instruction no 95, Which categorically states 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 appeal provided there were no lapses on the part of the assesses “ Thus high pitched assessment are those assessment in which assessed income is substantially higher than returned income.

Genuine Hardship:- Genuine hardship may be financial, Mental, Physical etc and assesse has to prove that payment of disputed tax may genuinely affect him in anyway but financial hardship and illiquidity is the best way of claiming genuine hardship.

Judicial Pronouncements: There are plethora of judgements which have decided various times that threshold amount given in the instruction is not final one and Assessing officer may grant absolute stay of demand or fix lower amount of deposit for stay of demand. We can find various judgments which are delivered even after issuance of O.M. dated 29/02/2016 in which first time threshold amount is fixed. Important judicial pronouncements delivered by various courts on the matter as under:

In the case of Mrs. Kannammal v. ITO,W.P. No. 3849 of 2019, judgement dated 13.02.2019  The honourable Madras High Court has held that the Circulars and Instructions as extracted above are in the nature of guidelines issued to assist the assessing authorities in the matter of grant of stay and cannot substitute or override the basic tenets to be followed in the consideration and disposal of stay petitions. The existence of a prima facie case for which some illustrations have been provided in the circular financial stringency faced by the assesse and the balance of convenience in the matter constitute the ‘trinity’, so to say, and are indispensable in consideration of a stay petition by the authority. The Board has, while stating generally that the assessee shall be called upon to remit 20% of the disputed demand, granted ample discretion to the authority to either increase or decrease the quantum demanded based on the three vital factors to be taken into consideration.

in the case of Turner General Entertainment Networks India Pvt. Ltd. v. ITO, New Delhi, W.P.(C) 682/2019, judgement dated 22.01.2019.the Ld. Delhi High Court has held that this Court is of the opinion that the AO had to necessarily apply his/her mind to the application for stay of demand and pass appropriate orders having regard to the extant directions and circulars including the memorandum of 29.02.2016.”

Hon’ble Delhi High Court in the case of “Taneja Developers and Infrastracture Ltd., Vs. Assistant Commissioner of Income Tax, Delhi and Ors in W.P.(C).No.6956 of 2009, (2009) 222 CTR (Del) 521 dated 24.02.2009, wherein the Hon’ble Delhi High Court, relying upon its earlier judgment in the case of Valvoline Cummins Ltd. v. CIT and Ors. (2008) 217 CTR (Del) 292, had categorically held as under,

 “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 paragraph No.2(A) which speaks of responsibility specifically indicates that it shall be the responsibility of the Assessing Officer 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-clause (iii) of para B clearly indicates that a higher/superior authority could interfere with the decision of the Assessing Officer/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) that 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. (Emphasis supplied)…

A reading of the above dictum would show that if assessment order is unreasonably high pitched or genuine hardship is likely to be caused to the assessee, then the assessee is entitled to be treated as not being in default in respect of the amount in dispute in the appeal.”

The Hon’ble Karnataka High Court, in the case of M/s Flipkart India Pvt Ltd vs ACIT, Circle 3(1)(1), vide Writ Petition Nos. 1339-1342/2017 (T-IT), 23.2.2017, the Hon’ble High Court has categorically held that It is true that Instruction No.4 (B)(b) of the Circular dated 29.2.2016, gives two instances where less than 15% can be asked to be deposited. However, it is equally true that the factors, which were directed to be kept in mind both by the Assessing Officer, and by the higher superior authority, contained in Instruction No.2-B(iii) of Circular No.1914, still continue to exist. For, as noted above, the said part of Circular No.1914 has been left untouched by the Circular dated 29.2.2016. Therefore, while dealing with an application filed by an assessee, both the Assessing Officer, and the Prl. CIT, are required to see if the assessee’s case would fall under Instruction No.2-B(iii) of Circular No.1914, or not? Both the Assessing Officer, and the Prl. CIT, are required to examine whether the assessment is “unreasonably high pitched”, or whether the demand for depositing 15% of the disputed demand amount “would lead to a genuine hardship being caused to the assessee” or not?

In the case of Maheshwari Agro Industries 346 ITR 375 the Ld Rajasthan High Court has held that despite issue of circular no 1914, Instruction no 96 still hold good. Para 53 of the judgement is reproduced herewith.” The tendency of making high-pitched assessments by the Assessing Officers is not unknown and it may result in serious prejudice to the assessee and miscarriage of justice and sometimes may even result into insolvency or closure of the business if such power was to be exercised only in a pro revenue manner. It may be like execution of death sentence, whereas the accused may get even acquittal from higher appellate forums or courts. Therefore, this Court is of the opinion that such powers under sub-Section (6) of Section 220 of the Act also have to be exercised in accordance with the letter and spirit of Instruction No. 96 dated 21.08.1969, which even now holds the field and its spirit survives in all subsequent CBDT Circulars quoted above, and undoubtedly the same is binding on all the assessing authorities created under the Act.”

Application to the committee for high pitched scrutiny assessment:

What is Local Committee for High pitched assessment: The CBDT has order to constitute a local committee to deal with the situation of high pitched assessment under the jurisdiction of each principal CCIT region vide instruction no 17/2015 dated 09th November 2015. In the instruction itself, CBDT has categorically said that “ Board has consistently been advising the field authorities to be fair, objective and rational while framing scrutiny assessment orders. Role of supervisory authorities in this regard, has also been highlighted by the Board from time to time. It has, however, been brought to the notice of Board that the tendency to frame high-pitched and unreasonable assessment orders is still persisting due to which grievances are being raised by the taxpayers. Such grievances not only reflect harassment of taxpayers but also lead to generation of unproductive work for Department.

In view of the above, a need has been felt to lay down an institutional mechanism to quickly resolve the taxpayers’ grievances arising on account of high-pitched and unreasonable additions made by the Assessing Officers..”

Constitution of the Committee: The Local Committee may consist of three members of Pr. CIT/CIT rank. The members can be selected from the pool of officers posted as Pr. CsIT, CIT (Judicial) and CsIT (DR), ITAT at the station where the Headquarters of the respective Pr. CCIT is located. The Add!.CIT (Headquarters), to such Pr. CCIT would act as a Member- Secretary to the Local Committee. The senior most Member would be designated as the Chairman of the Committee.

Jurisdiction of the Committee: The Local Committees so constituted would deal with the grievance petitions related to high-pitched scrutiny assessments completed within the Jurisdiction of the respective Pr . CCIT. These Committees would also handle the grievances pertaining to Central Charges located under the territorial jurisdiction of the Pr. CCIT concerned.

Similar committees would also be setup in the charges of Pr. CCIT (Inti. Tax.) and CCIT (Exemptions). In these committees, the Officers working as CsIT (International Taxation/ Transfer Pricing) and CsIT (Exemptions) respectively could be selected as Members . The Addl. CIT (Headquarters) to Pr. CCIT (Intl Tax.)/CCIT (Exemptions) would act as a Member- Secretary to these Local Committees. Every PCCIT region has to send quarterly report about functioning of the committee to CBDT in a fixed format.

Functioning of the Committee: A grievance petition received by the Local Committee would be immediately acknowledged and separate record would be maintained for dealing with such petitions.

It shall be the endeavour of the Local Committee to dispose of each grievance petition within two months from the end of the month in which such Grievance Petition is received by it.

The grievance petition received by the Local Committee would be examined by it to ascertain whether there is a prima-facie case of high-pitched assessment, non-observance of principles of natural justice, non-application of mind, gross negligence or lack of involvement of assessing officer. The Committee would ascertain whether the addition made in assessment order are not backed by any sound reason or logic, the provisions of law have grossly been misinterpreted or obvious and well established facts on records have out rightly been ignored. The Committee would also take into consideration whether the principles of natural justice have been followed by the assessing officer.

Outcome of Observation of the committee: If it is established that unreasonable and high-pitched additions have been made by the assessing officer, a report would be sent to the Pr . CCIT/Pr. CCIT (Intl Tax.)/CCIT (Exemptions) , as the case may be, by the Local Committee.

The Pr. CCIT/CCIT, after considering the views of the committee, would take suitable administrative action, wherever required. Wherever Local Committee has taken a view that addition made in the assessment order is high-pitched, explanation of the Assessing Officer must invariably be called for. Wherever required, administrative action such as inter-city transfer of the concerned Assessing Officer to non-sensitive post is also taken in such cases without any delay. Further, appropriate disciplinary action is also required be taken/initiated in these cases; Apart from above action, It is also instructed by the CDBT through instruction that following relaxation should also be extended in these cases:

1. No coercive action should be taken for recovery of demand in cases which have been identified as high-pitched by the Local Committee;

2. The concerned Commissioner (Appeals) should be requested to expedite hearing in such cases.

Looking to the above discussion, It is desirable to the assesse that in routine cases, It should follow the routine instructions and avail the concessional payment facility and if it is not allowed by the AO than approach the court of law but in case of high pitched assessment, One should also choose the option of application with Committee for high pitched assessment so that tendency of making high pitched assessment can be curtailed to a great extent.

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April 2024