Month: May

At a time when dinner table debates revolve around Trump Tariffs 2.0 and WhatsApp forwards are more obsessed with global geopolitics than GST, the Union Budget 2025 feels like last season’s fashion—forgotten, folded away, and faintly nostalgic. But leave it to a tax consultant to bring the spotlight back. Through this article, we proudly wave the India-first (and Budget-first) flag, reviving what should still be the nation’s favourite fiscal performance.

And what a curious performance it was. No frantic tinkering. No budgetary plot twists. No midnight notifications capable of inducing mild heart attacks in CFOs. Instead, we got a whisper of a Budget – a minimalist, polite fiscal note that gives rather than grabs. A ₹1 lakh crore tax cut that, depending on whom you ask, is either a bold growth push or a national stimulus for iPhone sales and premium coffee chains.

What we’ve done, true to tradition, is dive deep into the fine print—dissecting every explanation memo and every comma like it was Shakespeare. Because, in taxation, what is left unsaid often carries the heaviest implications.

Beneath this seemingly serene surface lies a quiet shake-up: tweaks in transfer pricing, restrictions on carrying forward losses in business reorganisations and—you guessed it—our beloved TDS and TCS amendments.

So, pour yourself a tax-free chai (while it lasts) and join us on this annual pilgrimage. The Budget may not have roared, but we’re here to make sure its whispers are heard loud and clear.

THE NEW 3-YEAR BLOCK TRANSFER PRICING SCHEME: CERTAINTY WITH A TWIST

Transfer pricing feels like an endless cricket series — you pad up every year, play the same shots, the department appeals every ball, and the final verdict rests with the third umpire at the appellate stage. Enter the Finance Act 2025’s new Block Assessment Scheme for transfer pricing, a provision that promises to break this cycle. Think of it as an “APA-lite” for the masses: a chance to lock in your TP dealings for three years without the Advanced Pricing Agreement (APA) saga typically reserved for large multinationals. As the Finance Minister noted, this aligns with global best practices in easing TP compliance.

KEY FEATURES OF THE BLOCK TP ASSESSMENT SCHEME

•  Three-Year Block Option: Taxpayers can opt to have certain international transactions (and specified domestic transactions) assessed on a multi-year basis. If the Transfer Pricing Officer (TPO) determines an ALP for a particular year (the “lead year”), that same ALP can apply to the two subsequent years for similar transactions, as long as conditions are met. In effect, one TPO review can cover three assessment years in a row.
•  Optional and Taxpayer-Initiated: The scheme isn’t automatic; taxpayers must elect to use it. An application has to be made to the TPO in the prescribed form and within a prescribed time limit (to be specified by CBDT).
• Simultaneous ALP Determination: Once the taxpayer opts in and the TPO accepts the request (the TPO has a month to decide if the option is valid), the TPO will determine the ALP for the two subsequent years, together with the lead year’s assessment. Essentially, the TPO conducts a multi-year analysis: the same pricing methodology (and potentially the same comparables/ benchmark) is applied across the three-year span. This means the ALP for year 1 is “rolled forward” for years 2 and 3, providing continuity (but notably, there’s no backwards-looking benefit – it’s a roll-forward, not a rollback like in some APA cases).
•  Fast-Tracked Litigation and Certainty: Perhaps one of the biggest draws is the promise of certainty and quicker dispute resolution. If there’s a dispute over the ALP, it effectively covers all three years, which means any appeal can address the block in one go. For instance, the Income Tax Appellate Tribunal (ITAT) could hear multiple years together, consolidating proceedings.
•  Section References: The legal architecture for this scheme is set out via new provisions: Section 92CA(3B) (allowing the multi-year option and TPO’s validation of it); Section 92CA(4A) (requiring the TPO to determine ALPs for the subsequent years once the option is accepted); amendments to Section 92CA(1) (to prevent duplicate references to TPO); and Section 155(21) (enabling the AO to adjust/recompute income for the later years based on the block ALP). Additionally, the scheme is effective from Assessment Year 2026-27 (i.e., FY 2025-26) onwards as per the Finance Act 2025, and it won’t apply in search cases.

The block assessment scheme has been greeted as a positive development, almost a mini-revolution in Indian transfer pricing. Of course, as tax professionals, we know every silver lining may have a cloud – so next, we turn to the fine print and potential challenges lurking behind the optimism.

THE FINE PRINT: TECHNICAL ISSUES AND POTENTIAL CHALLENGES

As exciting as the new framework is, it comes with its share of technical complexities and unanswered questions. Seasoned practitioners will want to consider the following issues before jumping on the block assessment bandwagon:

1. Roll-Forward Only – No Retro Relief

The block scheme only works prospectively for future years. It’s explicitly a roll-forward, not a rollback. So, if you had disputes or open issues in prior years,  this scheme won’t magically resolve those – you’re  still on your own for past years. If issues are recurring, this mechanism is speed forward to consolidate litigation and get yourself heard together at the appellate level.

2. Timing of Exercising the Option

A critical practical question is when and how to opt in for the block assessment. The law says the assessee can exercise the option after the TPO has determined an ALP for an assessment year via an application in the prescribed form. But does this mean one must apply after the TPO’s order for year 1 or even earlier? Initial interpretations (and even a CBDT FAQ – Question 5) have caused confusion – suggesting the option might need to be exercised before the TPO determines the ALP for the first year. That would be counter-intuitive since taxpayers would be unlikely to commit to a three-year deal without knowing year one’s result. A fair position should be that the option should be available after the finalisation of the first year’s TP assessment. In such a case, the TPO will have to again start the proceeding for the next two years. The rules should clarify – when to pull the trigger. This clarification will, in turn, decide the success of the novel initiative.

3.Withdrawal and Flexibility (All-or-Nothing?)

Once you opt in, are you locked in for the full three-year block? The law, as written, doesn’t spell out any withdrawal mechanism or mid-course exit. It’s unclear if a taxpayer, having been elected for the block, can later change its mind (say, if year 2’s business circumstances change drastically). There is also an open question of whether the taxpayer must continue the option for both subsequent years or could selectively opt for just one additional year if conditions in the third year diverge. Until guidelines clarify this, opting in is a bit of a leap of faith – taxpayers should be confident that the next couple of years will broadly resemble the first. And if economic conditions or TP dynamics do shift, we may find ourselves testing uncharted waters (with possibly no easy way to unwind the block choice).

4. Defining “Similar Transactions”

The scheme hinges on the concept of “similar” transactions across the years. But how similar is similar enough? The Finance Act memorandum hints at criteria like the same associated enterprise (party), proportional volume, and geographic alignment (location of the AE) over the years. In essence, the transactions should be of the same nature with comparable functional profiles each year (think Rule 10B(2) comparability factors). For example, if you’re providing software development services to your US subsidiary at cost plus 10% in year 1, doing essentially the same in years 2 and 3 with the same subsidiary would qualify. However, this area is ripe for interpretation issues. What if, say, the volume doubles in year 2 – is that still “similar”, or does a scale change knock you out? What if the pricing model is the same, but the contract terms have minor tweaks? The law doesn’t define it, so we anticipate CBDT rules to lay down clear benchmarks for similarity. Ambiguities here could allow the TPO to reject the option if they believe transactions aren’t sufficiently alike. Bottom line: ensure your year 2 and 3 transactions truly mirror year 1 in nature – and watch for a formal definition of “similar” in the upcoming rules.

5. Impact on Comparables and TP Analysis Updates

A multi-year scheme raises the question of how to handle comparable data and analysis for the later years. One interpretation (and arguably the intent) is that the same ALP result or range determined for year 1 would simply carry over to years 2 and 3, giving the taxpayer certainty even if market benchmarks shift. For instance, if, in year 1, the TPO settles that an operating margin of 10-12% is arm’s length for your transaction, then as long as you’re in that range in years 2 and 3, you’d be fine – even if fresh comparables for those years might suggest a different range. This “lock-in” would indeed ease burdens. However, the TPO might choose to only lock in the methodology and comparable set, but still update the comparable companies’ financials for each year. In that case, year 2 and 3 ALPs could be adjusted if the comparables’ performance changes. The safer assumption is that the ALP (price or margin) is intended to be fixed for the block, because anything less wouldn’t truly reduce disputes. But consider practical hitches: databases get updated over time – what if one of your comparables from year 1 drops out in year 3 because it ceased operations or no longer qualifies? Or new comparables emerge? These scenarios could create confusion in applying the year-1 benchmark to later years. Similarly, financial metrics can fluctuate; for example, your working capital or receivables cycle might lengthen in year 2, affecting profitability. Would the TPO allow adjustments or stick to the original benchmark? All these issues underscore the importance of forthcoming guidance. Until then, taxpayers should do their own sanity check: if you are locked in year 1’s analysis for the next two years, would it still be reasonable? If your business is stable, likely yes. If not, tread carefully.

The real challenge lies not in the scheme, but in the very foundation of transfer pricing — a system built on constant external comparisons. As the Bhagavad Gita teaches, true measure lies not in competing with others, but in surpassing your own past self. Perhaps it’s time for transfer pricing too, to reflect inward rather than outward.

6. Handling Multi-Year Transactions (Loans, Guarantees, etc.)

Some related-party dealings naturally span multiple years – inter-company loans, credit lines, intellectual property licenses, long-term service contracts, and corporate guarantees for debt, to name a few. The block scheme seems tailor-made for such continuous transactions, but there are quirks. Take an inter-company loan: you may draw additional amounts in year 2 under the same loan agreement (increasing the outstanding principal). Or a corporate guarantee originally given for a $5 million loan might be upsized to $10 million next year. Are these considered the “same” transactions? Intuitively, yes (same loan or guarantee, just higher quantum), so they should fall under the block’s umbrella of similar transactions. The ALP principle (interest rate or guarantee fee) would remain the same even though the absolute interest or exposure grows. The key point is that such variations in volume under an ongoing arrangement shouldn’t invalidate the option, provided the nature of the service/asset (loan, guarantee) is unchanged. However, taxpayers should be ready to demonstrate that these are continuations of the original deal, not new transactions altogether. If conditions like credit rating or market interest rates shift materially, the TPO might scrutinise whether the pricing still holds arm’s length for later years. Again, clear guidance from CBDT would help confirm that normal ups and downs in volume don’t derail the block agreement for these financing transactions.

7. New or Additional Transactions in the Block Period

A practical challenge arises if a new type of related-party transaction crops up in year 2 or 3 that was not present in year 1. The law allows the block option to be exercised for “all or any” of the transactions in those years, implying you could cover some and exclude others. So, if you introduce, say, a brand new transaction (e.g., start selling machinery to your foreign affiliate in year 2 while year 1 only had service fees), that new transaction is obviously not “similar” to the ones covered by the block. In such cases, that new transaction would fall outside the block scheme and be subject to regular TP assessment for that year. But this bifurcation can get messy. Normally, if any international transaction exists, the AO can refer the case to TPO. Under the block scheme, the AO is barred from referring matters covered by a valid block option. Does the AO then refer only the new transaction to the TPO for that year? The legislation isn’t crystal clear, but presumably, yes – the AO could still trigger a limited scope TPO audit for the uncovered transaction. Moreover, what if the taxpayer simply didn’t report a transaction in year 1, but it comes to light in year 2? The TPO’s block order might have omitted it, and the AO, due to the block, might be handcuffed from referring it. These are procedural grey areas.

8. Adjustment of Income via Section 155(21)

Once a block option is approved and the TPO determines the ALPs for the subsequent two years, how exactly do those later-year assessments get finalised? The answer lies in Section 155(21) (newly inserted), which allows the AO to amend the assessment orders of the subsequent years to align with the TPO’s multi-year order. In practice, the TPO might issue a consolidated TP order covering years 1, 2, and 3 (or separate orders simultaneously). The AO will then recompute the total income for the years 2 and 3 on the basis of that order by passing amendment orders for those years. This mechanism is akin to how APAs are given effect (though APAs use section 92CD). It ensures the block ALP is implemented without needing fresh scrutiny in those years. However, this process raises a few sub-questions: Will the recomputation under 155(21) account for all consequential impacts like interest on shortfall (Sections 234B/C) or MAT calculations for each year? It should, as the law mandates the AO to consider all aspects while recomputing. Also, if those years were originally assessed and closed (say, in case the block option is exercised after assessments are done), the 155(21) route will reopen and amend them – one hopes in a timely manner to avoid any statute limitations issues.

9. Appeal Process and DRP vs Block Adjustments

The introduction of Section 155(21) brings an interesting twist to the appeals procedure. Normally, when a TPO proposes an adjustment, the AO issues a draft assessment order under Section 144C, and the taxpayer can go to the DRP for a quicker resolution before finalising the assessment. But an order under Section 155(21) – which is essentially a rectification/amendment order for the block years – does not have a draft stage; it’s a final order when issued. So, if the taxpayer disagrees with the ALP applied for the year 2 or 3, do they get to approach the DRP for those years? It appears not, since DRP is only for variations proposed in a draft order. The likely scenario is that any dispute on the block ALP will be funnelled through the year 1 draft order’s appeal. In other words, you contest year one’s draft order at the DRP (covering the proposed TP adjustment that will also govern years 2 and 3). The DRP’s directions would then have to be applied to all three years when the AO passes final orders. If one goes to the ITAT, the appeals for all three years could be clubbed (as noted earlier). What if the taxpayer misses the DRP route and goes to the Commissioner (Appeals) for year 1? Then, years 2 and 3, which were amended without draft orders, might each need separate appeals (likely directly to the Commissioner (Appeals) since there is no draft/DRP there). This is somewhat uncharted territory – procedural gaps exist. Additionally, if a TPO rejects the block option (says the transactions aren’t similar or conditions are not met), there’s no immediate way to appeal that decision alone– it would presumably become part of challenging the eventual assessment order.

10. Other Procedural and Administrative Gaps

Beyond the major points above, there are some miscellaneous uncertainties. For one, the law doesn’t specify the timeframe for the TPO to complete the assessments for the two subsequent years once an option is validated – will it be within the same timeline as the lead year’s assessment or some extension? Clarification on this is needed to ensure the benefit isn’t lost to delays. Another subtle point: the block scheme streamlines TP assessments, but regular corporate tax assessments for each year will still occur separately. There’s no mechanism to sync those up, meaning a company could still face scrutiny on other tax issues on an annual basis. So, it’s not a full consolidation of all tax matters, only the TP piece. This could lead to parallel proceedings in a given year – one dealing with block TP adjustment via amendment and another dealing with, say, domestic tax disallowances – which the tax authorities should coordinate to avoid confusion. Finally, consider the strategic angle: how the appeal mechanism will work as each year may have corporate and TP issues. Forms have a special place in appeal proceedings – which form to file, especially when an appeal is governed by a statutory limitation period.

Given the many moving parts in this scheme, the role of the Central Board of Direct Taxes (CBDT) in issuing detailed rules and guidelines cannot be overstated. Guidelines will determine the fate of the scheme.

SECTION 72A – LOSSES AREN’T IMMORTAL

A cat might boast nine lives, but under the new Finance Act 2025 amendment, tax losses barely get eight. Under the Income-tax Act, Section 72A traditionally lets a successor company “inherit” the accumulated losses and unabsorbed depreciation of a predecessor (in amalgamations, demergers, etc.) as if they were its own. In practice, this meant that when two companies merged, the merged (amalgamated) company treated the past losses as losses of the year of amalgamation – essentially giving the business a fresh eight-year run to utilise those losses.

Old Law: “Fresh” Eight-Year Clock

Before the Finance Act 2025, Section 72A worked in tandem with Section 72: no business loss could be carried forward for more than eight years from the year it arose. But an amalgamation effectively reset that eight-year clock. All accumulated losses of the merging entities became losses of the amalgamated entity in the year of amalgamation, allowing the merged company a brand-new eight-year window to set them off. In other words, legacy losses got a second lease of life every time there was a qualifying reorganisation.

Finance Act 2025 – New Section 72A(6B)

The Finance Act 2025 inserts a new sub-section 72A(6B), drastically curtailing this evergreen carry forward. From April 1, 2025 (effectively AY 2026 27) onward, losses must be carried only within the original eight-year span from the year they first arose. The provision states that for any amalgamation or other reorganisation on/after 1-Apr-2025, a loss that is carried to the successor company can only be used in the remaining assessment years of the original eight-year period. Put simply, amalgamation no longer resets the loss-clock: it merely transfers the remaining life of the loss to the new entity. The Finance Bill even introduces the concept of the “original predecessor entity” – the very first company in the chain of amalgamations – to anchor the clock. This prevents successive mergers from indefinitely extending the loss of life (“evergreening” of losses).

Scope and Effective Date

The new rule applies prospectively. By law, the amendment applies only to any amalgamation or reorganisation effected on or after 1^st April, 2025. (In turn, the amendment itself takes effect from 1^st April, 2026.) Thus, any merger where the appointed date is before 1-Apr-2025 is governed by the old Section 72A. For deals on/after that date, however, the loss must be traced back to its original computation year.

ILLUSTRATIVE EXAMPLES

To crystallise the change, consider:

1. Example 1 – Pre-Amendment Amalgamation: If Company X had losses and merged into Y on 1-Mar-2025 (before the 1-Apr-2025 cutoff), the pre-amendment rules apply. The losses (say, incurred in AY 2018-19) would be deemed Y’s losses in AY 2024-25, and Y would then have a fresh eight-year window (through AY 2031-32) to set them off. In effect, the merger “rebooted” the clock.

2. Example 2 – Post-Amendment Amalgamation: Suppose Company A incurred a loss in FY 2018-19 (AY 2019-20), and it amalgamates into B on 1-Apr-2026. Under the new rule, B treats that loss as its own, but can carry it forward only within eight years from AY 2019-20. That means the loss must be absorbed by AY 2027-28 (eight years after AY 2019-20). No new eight-year term is granted by the 2026 merger. B can only use whatever remaining years were left on A’s original timeline.

3. Example 3 – Chain Amalgamations: Consider a chain: A Ltd (with losses incurred in 2019-20) merges into B Ltd on 1-Apr-2026, and then B merges into C Ltd on 1-Apr-2028. Under 72A(6B), the “original predecessor entity” for C’s losses is still A Ltd. All of A’s losses must be set off within eight years of 2019-20 (i.e. by AY 2027-28). Neither merger (2026 or 2028) extends beyond that horizon. In practice, C inherits only the residual carry forward years from A’s original loss – the clock keeps ticking from the date of the first loss.

Only Losses (Not Depreciation) Affected

It is crucial to note that Section 72A(6B) speaks only of “loss forming part of the accumulated loss”. Unabsorbed depreciation allowances (also carried under Section 72A) are not curtailed by the new sub-section. It can be continued for an infinite period.

Other Conditions still apply.

All the existing safeguards in Section 72A(2)–(6A) remain intact. In particular, the successor company must still meet continuity conditions (e.g. carrying on the business, achieving the threshold of installed manufacturing capacity. maintaining requisite shareholding by the transferors, etc.) for the inherited losses to be allowable. The amendment simply shortens how long a loss can live; it does not relax the usual reorganisation conditions.

TDS/TCS PROVISIONS

The latest finance proposals have modestly raised a bunch of TDS/TCS thresholds, aiming to reduce compliance pain for small payments. For example, the annual rent threshold under Section 194-I jumps from ₹2.4 lakh annually to ₹50,000 per month (i.e. ₹6 lakh annually), and other sections saw smaller increment (e.g. commission and professional-fee limits rose from ₹15K–30K to ₹20K–50K). Threshold increase should be seen in the light of the overall increase in slab rates, and no tax till you earn ₹12 lakh. It puts more money in the hands of people.

FAREWELL TO SECTION 206AB (NON-FILER SURCHARGE)

Starting 1 April 2025, Section 206AB – which forced higher TDS on “non-filers” – will be repealed. In plain English, if the recipient didn’t file a tax return, payers no longer have to immediately apply a higher TDS rate on payments to him. This change was explicitly made to cut compliance headaches: under the old law, deductors had to check their filing status on the spot and withhold tax. Instances were seen where demands were raised on deductors for non-withholding at 20%. This, in effect, penalised payers for the fault of the recipient. The law has omitted this provision with effect from 1 April 2025. This is significant as the legal effect of the omission is that the provision never existed in law. Thus, the entire demand cannot be enforced. Consider the following observations of the Supreme Court in Kolhapur Cane Sugar Works Ltd. vs. Union of India AIR 2000 SC 811

“The position is well known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute –book as completely as if it had never been passed, and the statute must be considered as a law that never existed.”

194Q VS 206C(1H): ENDING DOUBLE TAXING OF LARGE PURCHASES

There’s often confusion when buying and selling large value of goods: should the buyer deduct TDS under Section 194Q, or should the seller collect TCS under Section 206C(1H)? Under prior rules, 206C(1H) already said no TCS if the buyer had to do some TDS. But in practice, sellers found it hard to know if buyers had actually done their TDS, so sometimes both got applied. To clear this up, the budget proposes that from 1^st April, 2025, Section 206C(1H) simply “will no longer be applicable”. In effect, the onus shifts entirely to buyers (via 194Q), and sellers can drop the TCS on those ₹50 lakh+ transactions. This should end the TDS-versus-TCS tug-of-war and make compliance far simpler.

UPDATED RETURNS: MORE TIME, BUT WATCH THE CLOCK

The window to file an updated return (ITR-U) is being doubled. Under the old law, you had 24 months (2 years) from the end of the assessment year to fix omissions; now, it’s 48 months (4 years). That means, for example, an ITR for FY 2023–24 (AY 2024–25) can be updated up until March 31, 2029. This extension is meant to “nudge” voluntary compliance – essentially giving taxpayers more time to spot and report missed income.

However, the law also tacks on strict conditions. You cannot file an updated return after 36 months if reassessment has kicked in. In practice, if an officer has already issued a notice under Section 148A (essentially the show-cause for reassessment) after 36 months, your window closes unless that notice is later quashed. (If a 148A(3) order explicitly finds “no fit case to reopen,” then the 48-month door reopens.) In short, you get extra time only if the tax department hasn’t already started formal reassessment proceedings late in the game.

PENALTIES ON LATE ITR-U

Filing late just got pricier. Section 140B of the Act imposes an additional tax (a bit like a penalty) on updated returns, calculated as a percentage of the extra tax and interest due. Originally, it was 25% of the tax plus interest if you filed within 12 months of year-end and 50% if filed within 24 months. The amendments introduce two new tiers: now it’s 60% if you file after 24 up to 36 months, and a whopping 70% if you wait out to 36–48 months. In plain terms, the longer you stall, the stiffer the surcharge – so procrastinators face heavier hits.

CONCLUSION: A BUDGET THAT UNDERSTOOD THE BEAUTY OF RESTRAINT

If there’s a timeless lesson in tax policy, it is this: sometimes, the best amendment is no amendment at all. This year’s Budget seems to have embraced that wisdom — preferring fine-tuning over frenzy and choosing to strengthen the framework rather than constantly reshaping it. A “less is fair” philosophy quietly runs through the Finance Act 2025: thoughtful corrections, calibrated expansions, and a deliberate effort to simplify rather than complicate.

In that sense, this Budget has stood the test of time. Amidst the noise of global uncertainty, Trump Tariff and economic recalibrations, the Indian tax system was offered something rare — stability.

And as we write this, perhaps there’s a quiet sense of history too. This Budget series in the BCAJ may well become a nostalgic bookmark — the last commentary on the Income-tax Act, 1961. With the new Income-tax Act, 2025 on the horizon, we stand at the threshold of a new chapter — one that promises modernisation, new hope for a new India and, more importantly, admission of the ultimate truth – even law is not permanent.

For now, we raise a modest toast to a Budget that whispered instead of shouted — and to a law that, for one final time, chose elegance over excess.

Just as partners were settling into their cozy routines of profit-sharing (and occasional stationery disputes), Section 194T stormed into their lives like an uninvited relative at a family dinner—bringing along uncomfortable questions on mismatched Form 26AS entries, accidental GST invitations and sleepless nights for accountants. So, before your accountant contemplates early retirement, dive into this article and decode how to stay friends with the taxman (without losing your partners).

Budget Day in a Chartered Accountant’s life is no less dramatic than the final episode of a Netflix thriller—filled with suspense, sudden twists, and characters (read: taxpayers) you genuinely root for. WhatsApp groups explode faster than popcorn in the microwave, Excel sheets open quicker than umbrellas in Mumbai rains, and suddenly, everyone becomes a tax guru on LinkedIn. Gone are the nostalgic days when earnest CAs gathered in packed study circles, scribbling meticulous budget notes—today, they’re all busy crafting witty LinkedIn posts that get more likes than actual attendance at study circles! Tax professionals, lawyers, and CAs sharpen their keyboards (farewell, pencils!) to dissect, decode, and divine the implications—hoping, praying, and often failing to figure out: who gets hit this year?

This time, it was the humble partnership firm and its partners who found themselves at the receiving end of a legislative surprise—Section 194T, introduced via the Finance Act (No. 2) of 2024. It came in like an uninvited guest at a birthday party: no warning, no cake, just impact. As memes were made and coffee mugs cracked, tax teams scrambled to understand how this provision would affect the sacred bond between a firm and its partners. Many firms (including ours) realised—perhaps for the first time—that the best way to understand the law is to feel its full weight… personally.

However, before we cry over spilt revenue, let’s take a step back and admire the beauty of partnerships. A partnership is a living, breathing embodiment of the phrase Vasudhaiva Kutumbakam—the world is one family—except here, the family files a return, divides profits, and sometimes fights over stationery expenses. While firms operate with collective force, the moment profit-sharing discussions begin, the kumbaya turns into a Game of Thrones episode. Seniority, goodwill, rain-making ability, negotiation prowess (and sometimes just how loud one can argue in partner meetings) all go into deciding who gets how much of the pie.

In this article, we set out to explore how one provision will trigger far reaching impact. The conventional story of a pound of flesh holds good – there will be pain, there will be scar, but no drop of blood. Moreover, of course, all this against the backdrop of traditional issues faced by firms: the perennial people crunch (more humans, fewer hands), client fee pressure, and the age-old CA paradox—“Why is my own assignment never billable?”

So, brace yourself as we untangle the interwoven threads of tax, teamwork, and turf wars. After all, when the firm is the stage, and profits are the script, Section 194T might just rewrite the title to: “To be or not to be a partner.” If you are the managing partner or heading compliance, expect your phone to buzz soon—your partners, after reading this, are likely typing a WhatsApp message right now: “Have you read this? We need to discuss!” You might as well stay ahead—block out 15 minutes to finish this article before their queries land in your inbox.

PARTNERSHIP TAX BASICS

Before diving into case studies, it’s important to understand how partnerships are taxed and how partners are compensated under the Income-tax Act. Here is a quick refresher:

•  Meaning of Partnership firm, partner – firm

“Partnership” is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.

Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.

Partner and partnership stems from legal agreement. The scheme of taxation will accordingly apply to partners who are partners in the agreement. People who are designated as partners to external stakeholders but who are not parties to the partnership deed will not be governed by the scheme.

•  Firm as a Separate Entity

A partnership firm (including an LLP) is a separate person for tax purposes (per Section 2(31)). The firm files its own return and pays tax on its income like any other assessee, with a flat tax rate for firms of approximately 34.944%. It is possible that partners may be taxed at 39% or upwards. Given that the share of profit is exempt, this tax rate arbitrage is significant.

•  Share of Profit – Tax-Free for Partners

After the firm pays tax on its profits, those profits can be distributed to partners as their share of the profit, which is exempt in the partners’ hands under Section 10(2A). This avoids double taxation of the same profit. Notably, this exemption holds true even in unusual scenarios – for instance, if the firm’s taxable income is nil due to brought-forward losses, a partner’s share of profit is still exempt. The same applies if the partner is not an individual, but another firm – a partnership firm receiving profit from another firm also enjoys a Section 10(2A) exemption¹.

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1. Jalaram Transport vs. ACIT [2025] 170 taxmann.com 303 (Raipur - Trib.); 
Radha Krishna Jalan vs. CIT [2007] 294 ITR 28 (Gauhati High Court)

In short, once the income has suffered tax at the firm level, it is not taxed again when passed through as a profit share.

One ongoing controversy is the meaning of share of profit, i.e. what is exempt. Is profit credited in books of account exempt, or is profit computed in accordance with profit and gains of the business or profession exempt, or is profit computed based on firm total income exempt? The difference between book profit and taxable profit is for a variety of reasons: depreciation charge, computation of capital gain (say due to 31^st March 2018 grandfathering), tax exemption for GIFT City unit, disallowance under Act, etc. This issue has been the subject matter of controversy in under-noted decisions² Share of profit would also include income not taxable in the hands of the firm.³ The conclusion of this controversy will be important as the amount paid in excess of the share of profit will be remuneration, which will be subject to TDS under section 194T.

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2. Circular No. 8/2014 dated 31-3-2014; S. Seethalakshmi vs. ITO [2021] 128
taxmann.com 175 (Chennai - Trib.); Explanation to section 10(2A);
3. Vidya Investment & Trading Co. (P.) Ltd vs. UOI [2014] 43 taxmann.com 1
(Karnataka).

•  Remuneration & Interest – Taxable for Partners

In addition to profit share, many partners receive remuneration from the firm – this can be called salary, bonus, commission, monthly drawings, etc. – as well as interest on capital if they’ve invested capital in the firm. These payments are taxable in the hands of the partners (not as “Salaries”, though, but as business income). Section 28(v) specifically treats any salary, bonus, commission or interest from the firm as a partner’s business profit. For the firm, such payments are deductible expenses, but only if they meet the conditions of Section 40(b). Section 40(b) imposes an upper cap on how much partner’s remuneration can be deducted by the firm, linked to the “book profit” of the firm. For example, for a firm with low profits, there is a ceiling (e.g. ₹3 lakh or 90% of book profit or 60% of book profit, etc., as per 40(b)) on deductible remuneration. Amounts beyond the 40(b) limit, if paid, will be disallowed – meaning the firm can’t deduct them (and will pay firm-level tax on those). This excess is not taxable as remuneration in the hands of the partner as per Explanation to section 28(v)

•  Reconstitution of Firm – Special Rules

When a firm is reconstituted (say, a partner retires, a new partner joins, or profit-sharing ratios change), there can be additional tax implications under Sections 9B and 45(4). In essence, these provisions tax certain capital assets or money distributions that happen upon reconstitution or dissolution. Section 9B deems the firm to have sold any assets or inventory distributed to a partner (triggering capital gains or business income at the firm level). Section 45(4) then may tax the firm on any money or asset given to a partner in excess of that partner’s capital account balance (a formula essentially taxing the firm for paying out accumulated reserves or goodwill). The key point is that these provisions tax the firm, not the partner. The partner’s receipt in such cases (be it cash or assets during retirement or reconstitution) is typically not taxed in the partner’s hands (it is treated as a realisation of their capital interest). Thus, if a partner gets paid during a reconstitution event, that payment might trigger tax for the firm under 45(4)/9B, but the partner doesn’t separately pay income tax on it. As we’ll see, Section 194T specifically carves these situations out of its scope, recognising that those payouts are not in the nature of taxable remuneration to the partner.

With this groundwork laid, let’s introduce the protagonist of our story: Section 194T – the new TDS provision that has sent partnership firms back to the drawing board.

SECTION 194T – THE TAXMAN JOINS THE PARTNERSHIP

Effective from 1^st April, 2025, any partnership firm or LLP making payments to its partners now faces a tax withholding duty. In plain language, the firm must deduct tax at source (TDS) at 10% on most forms of partner payouts. Here are the key features of Section 194T:

•  Scope of Payments

“Any amount in the nature of salary, remuneration, commission, bonus or interest” paid or credited to a partner is covered. The law uses broad terms (“by whatever name called”), ensuring that whether you label it monthly salary, annual bonus, commission for bringing in clients, or interest on capital, it’s all under Section 194T’s umbrella.

•  Exclusions:

Notably, genuine profit distributions are not mentioned in that list – so the taxman isn’t taking a bite out of the exempt share of profit. Similarly, withdrawals of capital (like when a partner takes out some of their capital or upon retirement) are outside Section 194T. In other words, Section 194T targets what we might call “partner compensation” but not the return of capital or after-tax profit share. The Memorandum to the Finance Bill and subsequent analysis clarify that payments on dissolution or reconstitution (governed by 45(4)/9B as discussed) are not subject to TDS under 194T. The firm doesn’t have to withhold tax when merely giving a partner his own capital or post-tax accumulated profit – those are more like balance sheet transactions, not income payments.

•  Threshold – A Whopping ₹20,000

Yes, twenty thousand rupees per year, aggregated per partner. If the total of covered payments to a partner is ₹20,000 or less in the financial year, no TDS is required. However, if it likely exceeds ₹20,000, then TDS applies from rupee one. Practically, ₹20k is a very low bar – even a small firm paying token interest on capital will breach it.

•  Timing of Deduction

Like most TDS provisions, it’s whichever is earlier – the moment of credit to the partner’s account (including credit to their capital account) or actual payment. This prevents clever timing tricks. For example, if a firm accrues a bonus to the partner’s capital account at year-end instead of paying it out, that credit is enough to trigger TDS in that year.

Practically, some elements of remuneration, like bonuses or commissions, are linked with firm performance. Typically, books are finalised towards September, i.e. near to tax audit due date. Now, the law requires a deduction of TDS on the said amount which is determined later. The TDS for March needs to be deposited by April 30, and the TDS return needs to be filed by May. Practically, the firm will have to deduct tax on a provisional basis and thereafter amend the TDS return to reflect accurate figures.

• Residents, Non-Residents, Working, Non-Working – All Partners

Unlike some sections that distinguish non-residents (section 195) or require the payee to be a “specified person,” Section 194T casts a wide net. There’s no exception for non-resident partners (so resident firm paying, say, interest to an NRI partner must deduct 10% plus applicable surcharge/cess, subject to treaty relief later). If a partner is non-resident, it may be better view to treat such partner as having business connection in India and deduct tax at 30% plus cess and surcharge under section 195.

Even minor partners or partner’s representatives are covered. Also, it doesn’t matter whether the partner is a “working partner” taking an active part or a sleeping partner – interest paid to a dormant partner is equally subject to TDS. Essentially, if you have a “partner” label, any taxable payment from the firm triggers the tax withholding – period!

• No Escape via Lower TDS Certificate

Interestingly, Section 194T was drafted without a provision to allow lower or NIL deduction certificates under Section 197. Tax professionals noted that you cannot approach the Assessing Officer to reduce the 10% rate, even if the partner’s final tax liability may be lower. Perhaps the logic was simplicity (10% is reasonably moderate). In any case, each partner will have to claim a refund or adjustment when filing returns if 10% TDS overshoots his actual tax liability (for example, if a partner’s income falls below the basic exemption or he has sizeable deductible expenditure against his partnership income).

•  Compliance Burden & Consequences

Firms now have to obtain TAN, deduct 10% every time a partner’s pay is credited/paid, deposit the TDS by the due date, file TDS returns, and issue TDS certificates to partners. Non-compliance has teeth: the usual disallowance under Section 40(a) (ia) will apply. That means if a firm fails to deduct or pay the TDS, 30% of the corresponding partner payment will be disallowed as an expense, adding to the firm’s own taxable income, plus interest and penalties on the TDS default itself. In short, the cost of ignoring 194T is far heavier than the pain of compliance.

KEY CHALLENGES IN IMPLEMENTATION OF SECTION 194T

Section 194T (introduced w.e.f. April 1, 2025) brings partnership firms into the TDS net for payments to partners. While the intent is to improve reporting, it has thrown up some quirky tax compliance and reporting challenges. Below, we unpack the major issues.

MISMATCH BETWEEN FORM 26AS AND PARTNERS’ INCOME (SECTION 28(V) VS 10(2A))

One immediate challenge is the mismatch between the income shown in Form 26AS and the income the partner actually offers to tax under Section 28(v). Section 28(v) taxes a partner’s remuneration, interest, bonus or commission from the firm as business income, while Section 10(2A) exempts the partner’s share of profit from the firm. Trouble arises when a firm, in an abundance of caution, deducts TDS on conservative estimates – including amounts that might eventually be just the partner’s profit share. For instance, firms often allow partners to take profit draws (interim withdrawals of anticipated profits) during the year. If the firm treats these draws as potentially taxable payments and deducts 10% TDS on them, the partner’s Form 26AS will reflect a higher “income” (under Section 194T) than what the partner actually needs to declare as taxable income in return.

Such a scenario is not just theoretical – it is expected in practice. Consider an example: A partner withdraws ₹30 lakh over the year from the firm against upcoming profits. By year-end, the firm’s books decide that out of this, ₹20 lakh is salary (allowable under the deed and taxable for the partner), and the remaining ₹10 lakh is adjusted against the partner’s share of profit. Under Section 194T, the firm, being conservative, might have deducted TDS on the full ₹30 lakh during the year. Consequently, Form 26AS for the partner shows ₹30 lakh credited (with TDS of ₹3 lakh). However, in the partner’s return, only ₹20 lakh is offered as income under Section 28(v) (the ₹10 lakh profit share is not taxable, thanks to Section 10(2A)). This “26AS vs. ITR” mismatch can set off alarm bells in the tax processing system.

Why does this mismatch happen? Section 194T requires TDS at the time of credit or payment, whichever is earlier. If the firm hasn’t definitively credited any salary/interest until year-end, any mid-year withdrawal is technically a “payment” and attracts TDS by law. In our example, every withdrawal got hit with TDS in real time. However, at year-end, when the dust settled, part of those withdrawals were not taxable income at all. The result: Form 26AS shows more income than the partner’s taxable business income. TDS ends up being “deducted where it is not actually deductible,” leading to tax being collected on amounts that never became taxable income. In short, the partner cannot make “income” from himself/herself, yet the TDS mechanism temporarily pretends that they did.

TDS CREDIT WOES UNDER SECTION 143(1)(A) AND RECTIFICATION NEEDS

The mismatch above isn’t just academic – it has real cash flow implications for partners. The Income Tax Department’s CPC (Centralized Processing Center) loves matching figures. When the partner’s return is processed under Section 143(1)(a), the system may notice that the income reported under Profits and Gains from Business/Profession is lower than the amounts on which TDS was deducted per Form 26AS. A straight-laced algorithm does not automatically grasp that the “missing” amount was exempt under Section 10(2A). Instead, it may treat it as under-reported income or disallowance. The immediate effect could be a denial of a portion of the TDS credit – the tax on the “mismatched” amount – in the intimation. In our example, the CPC might allow credit of TDS only proportional to the ₹20 lakh income acknowledged and hold back credit for the ₹10 lakh portion unless that income is brought into the computation. This leaves the partner with a tax-due notice or reduced refund, quite an unwelcome surprise.

Such partial credit denials have been observed whenever income–TDS mismatches occur. It often falls under the umbrella of a “mistake apparent from the record” that requires fixing. The partner then must file a rectification application under Section 154 to resolve the issue. In the rectification, one would cite that the seeming income shortfall was actually exempt profit income (backed by Section 10(2A) and the partnership firm’s audited accounts). Only after this hoop is jumped can the full TDS credit be restored. This procedure is about as enjoyable as watching paint dry – an additional compliance burden that eats up time for both the taxpayer and the department.

The irony is not lost on anyone: the department issues speedy refunds nowadays, yet much of that could be avoidable if the tax were not over-collected in the first place. So, partners finding only partial TDS credit in their 143(1) intimations should not be shocked; instead, gear up to file for rectification, citing the exempt income rationale. It is an extra step in implementing 194T, almost built-in by design.

THE GST ANGLE: WHEN TDS DATA TRIGGERS INDIRECT TAX TROUBLE

Section 194T’s fallout isn’t limited to direct tax. It has an indirect tax twist, thanks to data sharing between departments. Generally, a partner’s remuneration is not considered a “service” and thus not subject to GST – the logic being that a partner isn’t an employee but also isn’t exactly an outside service provider to their firm. In fact, the CBIC has clarified that the salary paid by a partnership firm to its partners “will notbe liable for GST.”. So far, so good on paper – the partner’s income from the firm should be outside GST’s scope.

However, practical reality can differ, especially when compliance data is picked up blindly. GST authorities have started leveraging Form 26AS and income-tax data to smoke out cases where they believe someone exceeded the GST registration threshold without registering. A partner’s receipts under Section 194T could inadvertently light such a beacon. Here’s how: Form 26AS might show substantial “payments to Mr X (Partner) from ABC Firm”, say ₹25 lakh in a year, with TDS under Section 194T. To a GST officer scanning data, that looks like Mr X provided services worth ₹25 lakh (crossing the ₹20 lakh threshold for services) without GST registration. The risk is higher if the nomenclature in the TDS records or books hints at something like “commission” or “professional fees” rather than just “partner’s salary.” Descriptions matter – a label like “partner’s commission” could be misread as if the partner acted as an outside agent to the firm rather than in the capacity of the partner. And crossing ₹20 lakh in any “service” receipts is like waving a big red flag in front of GST authorities.

In short, Section 194T can unintentionally invite the GST inspector to the party. The partner and the firm then have to prove a negative – that these receipts were not for any independent service. It is an added challenge to ensure that tax compliance in one law (TDS) doesn’t create confusion in another. One might quip that a partner now needs not only a good CA but also a good GST consultant on speed dial, just in case the left hand (direct tax) doesn’t tell the right hand (indirect tax) what it’s actually up to.

ACCOUNTANT – THE UNSUNG HERO (OR VILLAIN?) OF SECTION 194T COMPLIANCE

In the whirlwind of partner withdrawals, the accountant emerges not just as someone who balances books, but as the narrator who clearly categorises each payment. Indeed, an accountant capable of distinguishing between withdrawals from previous capital, share of profit, bonus, remuneration, interest, reimbursements, loans from the firm, or simply advances against future payments is nothing short of a rare gem. If your firm happens to have such a precious resource, my advice: keep it secret and keep it safe!

The sheer variety of payment nomenclatures is enough to confuse even the most diligent AO—leading to scenarios where the Taxman may meticulously scrutinise partner capital accounts, placing the horse firmly before the cart and demanding justification for TDS compliance decisions. Accurate accounting thus becomes the saving grace, the ultimate shield against unwarranted scrutiny.

Of course, this is far easier said than done. For most CA firms, self-accounting typically resembles a frantic race against the year-end – where many (or the majority) of the firms finalise the books and file tax returns almost on the eve of the compliance due date. Perhaps, if technology ever advances sufficiently, BCAJ could even host a live poll among readers—if only to humorously reaffirm the author’s suspicion that accountants who excel in accurate partner payment narratives are as common as multi-bagger sightings in Dalal Street!

PRACTICAL TIPS TO MITIGATE THE CHAOS

Implementing Section 194T need not be a nightmare scenario. Firms and partners can take practical steps to mitigate these issues and smooth out the rough edges:

•  Align Income Reporting in the ITR

To pre-empt mismatches, partners may consider reporting the gross amount of firm-related receipts in their income tax return and then separately deducting/exempting the share of profit. In practice, this means if Form 26AS shows ₹30 lakh under Section 194T, the partner can report ₹30 lakh as gross receipts under business/profession in the ITR computation, then claim the ₹10 lakh (in our example) as exempt under Section 10(2A). This way, the income reported matches Form 26AS, and the exempt portion is clearly disclosed as such. It’s a bit of a workaround – effectively telling CPC, “Yes, I got ₹30 lakhs, but ₹10 lakh is tax-free” – but it can save you from the CPC’s automated mismatch adjustments.

Bottom line: mirror the Form 26AS in your ITR to the extent possible, and then claim your lawful exemptions within the return.

•  Smart TDS Strategy for Firms

Firms can reduce mismatches by timing and characterising partner payments carefully. One approach is to credit partner remuneration and interest only at year-end (when profits are ascertained) and treat all interim withdrawals as drawings against capital or anticipated profits. If no specific portion of a draw is designated as “salary/interest” during the year, arguably, no TDS is required on mere drawings. The TDS can be deducted when the remuneration is actually credited (i.e. when it becomes income in the sense of Section 28(v)). Of course, firms must be cautious – this works best when the deed or mutual agreement supports it, and there is confidence that by year-end, some remuneration will indeed be authorised. If the firm ends up not crediting any salary due to losses or low profits, then no TDS on drawings was needed at all – avoiding the scenario of “tax paid without corresponding income”. In essence, don’t let the TDS tail wag the dog: deduct tax when income is crystallised, not simply whenever a partner taps the firm’s ATM. This requires discipline and documentation but can save everyone from unnecessary refund / reconciliation workouts.

•  Partnership Deed Clauses – Clarity is King

It all starts with the deed – A sacred document which, before this amendment, was in some drawer which is today difficult to locate. To prevent misunderstandings, the partnership deed should explicitly define the nature of partner withdrawals and payments. For instance, include a clause that “any drawing by a partner during the year shall be treated as an advance against that partner’s share of profit unless specifically characterised as salary or interest by a resolution/entry.” This makes it clear that until the year-end decision, a withdrawal is not a salary payment, thereby strengthening the case for not deducting TDS on it (since it isn’t “income” yet in Section 28(v) sense). Similarly, for retiring partners, the deed (or retirement agreement) should spell out that any lump sum paid is in settlement of the retiring partner’s capital, share of accumulated profits, and goodwill. Use terms like “share of profit till the date of retirement” rather than calling it a “fee” for departure. This not only helps direct tax (by clarifying that Section 10(2A) covers the profit portion) but is also a shield against GST misinterpretation. If a GST officer inquires, a well-drafted deed allows the response: “This amount was a capital/share settlement as per deed clause X, not a consideration for any service.” In short, paperwork can prevent peril – document the intent so that no one later can recharacterise the nature of the payment.

•  Communication and Consistency

Partners and finance teams should maintain clear communication regarding these payments. Internally, everyone should know what the firm’s policy is on drawings and TDS, so that a lower-than-expected credit or a surprise GST query does not catch a partner off guard. Externally, if a notice does arrive (be it a 143(1)(a) intimation or a GST notice), respond promptly and factually. For a tax credit mismatch, a brief Section 154 rectification application with a note referencing “TDS on the exempt share of profit (Section 10(2A) not included in total income)” usually suffices to set things right. For a GST notice, a well-reasoned reply citing the CBIC clarification that partner remuneration isn’t taxable, along with a copy of the partnership deed and Form 26AS, should clarify the situation.

By taking these steps, firms and partners can turn Section 194T from a head-scratcher into a manageable routine. As the saying goes (with a 194T twist): “Deduct your tax and credit it too – but keep the paperwork straight to avoid a boo-boo!” And that, in essence, captures the balancing act now required in the post-194T era of partnership taxation.

CONCLUSION

The broader message for firms is clear: adapt and move on. Review your partnership agreements. Educate your partners – especially those accustomed to tax-free profit shares – that henceforth, their bank alerts will show slightly lighter credits (but not to worry, it’s their own tax being prepaid).

Ultimately, Section 194T doesn’t change how profits are split in theory – rainmakers will still rain, team players will still team – but it adds a new layer of accountability and cash-flow management to the mix.

One can end on a lighter note: if you thought partner meetings were intense when debating billable hours or client receivables, wait until someone brings up who’s contributing what to the firm’s TDS deposit each month! The silver lining is that this provision has united every kind of partner – from the golf afternoon equal sharer to the midnight oil grinder – in a single cause: figuring out how to comply. The takeaway for practitioners is to embrace Section 194T as just another business reality, as our clients did when it came to section 194Q and section 194R.

Keep calm, deduct on, and let’s get back to doing what we do best – serving clients – while the TDS Challan gets its regular date with the bank.

Introduction

The procedure of block assessment to be made in cases where a search has been conducted under Section 132 or a requisition has been made under Section 132A was earlier introduced in 1995. Under this erstwhile scheme of block assessment, in addition to the assessments which were to be conducted in a regular manner, a special assessment was required to be made assessing only the ‘undisclosed income’ relating to the ‘block period’ in a case where the search has been conducted.

In 2003, these provisions dealing with block assessment in search cases were made inapplicable for the reasons as stated in the Memorandum explaining the provisions of the Finance Bill, 2003 which are reproduced below –

The existing provisions of the Chapter XIV-B provide for a single assessment of undisclosed income of a block period, which means the period comprising previous years relevant to six assessment years preceding the previous year in which the search was conducted and also includes the period up to the date of the commencement of such search, and lay down the manner in which such income is to be computed. The main objectives for the introduction of the Chapter XIV-B were avoidance of disputes, early finalization of search assessments and reduction in multiplicity of proceedings. The idea was to have a cost-effective, efficient and meaningful search assessment procedure.

However, the experience on implementation of the special procedure for search assessments (block assessment) contained in Chapter XIV-B has shown that the new scheme has failed in its objective of early resolution of search assessments. The new procedure postulates two parallel streams of assessment, i.e., one of regular assessment and the other for block assessment during the same period, i.e., during the block period. Controversies have sprung up, questioning the treatment of a particular income as ‘undisclosed’ and whether it is relatable to the material found during the course of a search etc. Even where the facts are clear, litigation on procedural matters continues to persist. The new procedure has thus spawned a fresh stream of litigation.

Thus, the experience was that providing for two parallel assessments; one for undisclosed income and the other for regular income, had resulted in a lot of litigation. As a result, the new Sections 153A, 153B and 153C were introduced wherein it was provided that the assessments pending as on the date of initiation of search would abate and only one assessment would be made wherein the total income of the assessee, including undisclosed income, was required to be assessed. Further, separate assessment was required to be made for every year involved unlike the single assessment for the entire block period as provided under Chapter XIV-B. In 2021, these provisions for making the assessment in the cases of the search were merged with the provisions dealing with reassessments in general, as provided in Sections 147 to 151 with the appropriate amendments.

Thereafter, in the last year, the Finance Act (No.2), 2024, had once again restored the scheme of ‘block assessment’ as provided in Chapter XIV-B but in a revised form. This was made effective from 1-9-2024, i.e. when the search was initiated on or after 1^st September, 2024. Unlike the erstwhile scheme of block assessment, which had provided for making parallel assessments of the undisclosed income of the block period and of the regular income, the revised scheme of block assessment provided for making only one assessment of the block period wherein the total income was required to be assessed including the undisclosed income as well as the other regular incomes.

However, the Finance Act, 2025 has made further amendments to the provisions of Chapter XIV-B having retrospective effect from 1^st September, 2024, i.e. the date from which these provisions were reintroduced by the Finance Act (No. 2) 2024. One of the major amendments which have been made by the Finance Act 2025 is that the scope of the block assessment has been restricted to the assessment of only the ‘undisclosed income’ instead of the ‘total income’. Although the amended provisions do not provide expressly that the assessment of the undisclosed income and of the regular income would be made separately, it implies that there would be two parallel assessments once again as were being made under the erstwhile scheme of the block assessment, which was in force till 2003. Therefore, the provisions which were considered to be highly litigation prone in 2003 have been reintroduced in the Act by the Finance Act, 2025, with effect from 1^st September, 2024. Further, it is worth noting that this amendment was made at the time of passing of the Finance Bill, and, therefore, there is no mention of the reasons for making such an amendment in the Memorandum explaining the provisions of the Finance Bill 2025.

In this article, the important amendments to Chapter XIV-B made by the Finance Act 2025 have been discussed and analysed.

Restricting the scope of assessment to the undisclosed income

Section 158BA provides that the Assessing Officer shall make the assessment of the block period in accordance with the provisions of Chapter XIV-B in a case where the search is initiated under Section 132 or books of account, other documents or any assets are requisitioned under Section 132A on or after 1^st September, 2024. Under this provision, the Assessing Officer was required to make the assessment of the ‘total income’. Now, this section has been amended to provide that the Assessing Officer shall make the assessment of the ‘total undisclosed income’ of the block period. The marginal heading of this section has also been changed appropriately by replacing the words ‘assessment of total income’ with the words ‘assessment of total undisclosed income’.

The consequential changes have also been made to the other provisions of Chapter XIV-B by replacing the reference to the assessment of total income with the assessment of total undisclosed income.

Thus, as mentioned earlier, the basic principle of the scheme of block assessment itself has been changed with retrospective effect from 1^st September, 2024 restricting it now to the assessment of only undisclosed income.

It is worth noting that surprisingly no changes have been made to the provisions dealing with the abatement of the assessments under the other provisions of the Act pending as of the date of initiation of the search. Section 158BA(2) has remained unamended which provides that the assessment or reassessment under the other provisions of the Act pertaining to any assessment year falling in the block period on the date of initiation of search or making of requisition shall abate and shall be deemed to have abated on the date of initiation of search or making of requisition. Although these pending assessments are considered to have been abated, the Assessing Officer is going to make the assessment of only the undisclosed income while making block assessment under the amended provisions. There is no clarity as to whether and how the Assessing Officer would be assessing the income other than the undisclosed income in respect of those assessment years in respect of which the assessments were in progress but have abated as a result of the search being conducted. Therefore, it appears that this particular aspect has remained to be considered while making the amendments to the provisions dealing with the block assessment.

Further, under the erstwhile provisions dealing with the block assessment (as it was in existence prior to 2003), in which assessment was required to be made of only the undisclosed income in the manner same as which is provided now, there was an Explanation to Section 158BA(2) by which the position of the block assessment vis-à-vis the assessment under the other provisions was being clarified as under –

Explanation.—For the removal of doubts, it is hereby declared that—

(a) the assessment made under this Chapter shall be in addition to the regular assessment in respect of each previous year included in the block period;

(b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period;

(c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period.

Under the current provisions as amended by the Finance Act 2025, no such clarity has been provided expressly as to whether the block assessment would be in addition to the regular assessment to be made under the regular provisions or there would be only one assessment, i.e. the block assessment. The very fact that the block assessment only deals with the undisclosed income implies that it is intended that the regular assessment can be made in addition to the block assessment for the purpose of making the assessment of the income other than the undisclosed income. However, if that is the case, then the question arises as to why such regular assessments, which were pending as of the date of initiation of the search are considered to have been abated.

Computation of the total undisclosed income of the block period

Section 158BB provides the manner of computing the income which needs to be assessed by the Assessing Officer under Section 158BA. Since this section was providing for the computation of the total income, it has also been amended consequentially to provide for the computation of only undisclosed income.

The amended provisions of Section 158BB provide that the total undisclosed income of the block period which is required to be assessed shall be the aggregate of the following –

(a).Undisclosed income declared by the assessee in the return furnished under Section 158BC;

(b).Undisclosed income determined by the Assessing Officer under Section 158BB(2).

The ‘undisclosed income’ has been defined in Section 158B(b), and there has been no change in this definition except for the inclusion of the virtual digital asset in the list of several assets like money, bullion, etc., which can be regarded as the undisclosed income if they are representing the income or property which has not been or would not have been disclosed for the purposes of the Income-tax Act.

Further, the provisions of Section 158BB have also been amended to specifically provide that the following income shall not be included in the total undisclosed income of the block period –

(a).The total income determined under the applicable provisions of the Act (like Section 143(1), 143(3), 144, 147, 153A, 153C, 158BC(1) etc.) prior to the date of initiation of the search or the date of the requisition, in respect of any previous year falling within the block period. Therefore, the income already assessed will not be included in the total undisclosed income.

(b).The total income declared in the return of income filed under Section 139 or in response to a notice under Section 142(1) prior to the date of initiation of the search or the date of requisition in respect of any previous year falling within the block period, if it is not covered by (a) above.

(c).The income as computed by the assessee in respect of the period as specified below and subject to the condition as mentioned below –

However, if the Assessing Officer is of the opinion that any part of such income referred to in the above table as computed by the assessee is undisclosed, then he may recompute such income accordingly.

Undisclosed income of any other person

Section 158BD provides for the assessment of the undisclosed income of any other person, i.e. the person other than a person in whose case the search was initiated under Section 132 or requisition was made under Section 132A. Such other person is required to be assessed when the Assessing Officer is satisfied that any undisclosed income emanating from the search belongs to or pertains to or relates to that person.

It was provided that the block period for the purpose of making the assessment of such other person would be the same period which has been considered to be the block period in the case of the person in whose case the search was conducted. However, it is quite possible that multiple persons are covered by the same search which has been conducted. In such case, the last of the authorisations for the search in the case of such different persons might be executed on different dates. As a result, the block period would not be the same and it would differ from person to person who has been searched. Therefore, in such a case, difficulty will arise in determining the block period for the purpose of making the assessment of the other person who was not covered by the search but the undisclosed income belonging to him has been found.

Therefore, the provisions of Section 158BD have now been amended to provide that where more than one person was covered by the search, then the block period for such another person would be the period which has been considered to be the block period in the case of such person amongst all the persons in whose case the search was conducted which is ending on a later date.

Extension of the time limit for furnishing the return of income in response to the notice issued under Section 158BC

As per Section 158BC, the concerned person is required to submit the return of income in response to the notice issued by the Assessing Officer in this regard. Consequent to the shift in the scheme of the block assessment from the assessment of the total income to the assessment of only undisclosed income, the amendment has also been made in this Section to provide that the return of income shall be filed declaring only the undisclosed income and not the total income.

Further, this return of income is required to be submitted within a period, not exceeding sixty days, as may be specified in the notice issued in this regard. The amendment has been made to provide that the time allowed for furnishing the return of income may be extended by a further period of thirty days if the following conditions are satisfied –

i. In respect of the previous year immediately preceding the previous year of search, the due date for furnishing the return has not expired prior to the date of initiation of such search;

ii. The assessee was liable for audit under Section 44AB for such previous year;

iii. The accounts of such previous year have not been audited on the date of issuance of such notice; and

iv. The assessee requests in writing for an extension of time for furnishing such return to get such accounts audited.

Other amendments

A few other amendments have also been made in Chapter XIV-B, which are summarised as under –

•  The ‘undisclosed income’ as defined in section 158B shall now even include ‘virtual digital asset’ in addition to any money, bullion, jewellery or other valuable article or thing, etc.
•  Section 158BA(4) provides that any block assessment which is pending in a case where a subsequent search has been initiated, or requisition has been made shall be duly completed, and thereafter, the block assessment in respect of such subsequent search or requisition shall be made. This provision has been amended to refer to the assessment ‘required to be made’ instead of the assessment which was ‘pending’. Therefore, not only the block assessment which was commenced and pending but also the block assessment required to be made consequent to the search already conducted earlier shall be completed first before making the block assessment in respect of the subsequent search.
• Section 158BA(2) provides for the abatement of the assessment or reassessment or recomputation which is being conducted under any other provisions of the Act other than the block assessment and which is pending on the date of initiation of the search or making of the requisition. Also, section 158BA(3) provides for the abatement of reference made to the Transfer Pricing Officer under section 92CA(1) or the order passed by the Transfer Pricing Officer under section 92CA(3) during the course of such pending proceeding for assessment or reassessment or recomputation.

Further, section 158BA(5) provides for the revival of such pending proceeding under any other provisions if the proceeding initiated for the block assessment under Chapter XIV-B or the order of assessment passed under section 158BC(1) has been annulled in appeal or any other legal proceeding. However, this provision providing for revival was referring only to the ‘assessment’ or ‘reassessment’ which had been abated under sections 158BA(2) or 158BA(3). Now, this provision has been amended to refer not only to the ‘assessment’ or ‘reassessment’ but also to ‘recomputation’ or ‘reference’ or ‘order’.

•  Section 158BE provides that the assessment order in respect of the block period shall be passed within twelve months from the end of the month in which the last of the authorisations for the search was executed or requisition was made. This provision has been amended to provide the period of twelve months shall be reckoned from the end of the quarter in which such last authorisation was executed or requisition was made.
• Section 158BI provided that the provisions of Chapter XIV-B shall not apply where the search was initiated, or the requisition was made before 1^st September, 2024, and proceedings in relation to such search or requisition shall be governed by the other provisions of the Act. This section has been completed and omitted with retrospective effect from 1^st September, 2024.

Important Amendments by the Finance Act, 2025 are covered in three different Articles. It is not possible to cover all amendments at length, and hence, the focus is only on important amendments with a detailed analysis of their impacts. This in-depth analysis will serve as a future guide to know the existing provisions, current amendments, their rationale and impact. We hope that the detailed analysis will enrich the readers. – Editor

The Finance Act, 2025 carried out four amendments in the provisions relating to the exemption of charitable or religious trusts. All these amendments have somewhat relaxed the harshness of the provisions providing partial relief to charitable and religious trusts.

PERIOD OF REGISTRATION FOR SMALL TRUSTS

Every charitable or religious trust seeking exemption under sections 11 and 12 of the Income-tax Act, 1961, is required to be registered under section 12A. The procedure for this is laid down in section 12AB. There are 7 types of applications laid down under section 12A(1)(ac). One of these is a case where an application is made by a trust which was not registered so far under section 12A and which has not yet commenced its activities at the time of making the application [clause (vi)(A) of section 12A(1)(ac)]. Such a trust is granted a provisional registration for a period of 3 years. In all other cases [clauses (i) to (v) and (vi)(B)], registration is currently granted for a period of 5 years by the Commissioner of Income Tax (CIT) or Principal CIT.

By insertion of a proviso to section 12AB(1) with effect from 1st April, 2025, the Finance Act 2025 now grants a longer period of registration of 10 years to certain types of small trusts in all these cases where the period of registration was earlier 5 years, except for one category – clause (vi)(B), i.e. trusts which have commenced their activities and which have never been allowed exemption under clause (iv), (v), (vi) or (via) of section 10(23C) or under section 11 or section 12 before the date of the application since commencement of their activities. These trusts [clause (vi)(B)], even if they are small trusts, will continue to be granted registration only for a period of 5 years. Similarly, the period of registration of trusts covered by clause (vi)(A) remains unchanged at 3 years. There is also no change in the period of section 80G approval, even for eligible small trusts, which remains the same at 5 years.

The small trusts which are eligible to be granted the benefit of the longer period of exemption of 10 years are those trusts whose total income (before considering the exemption under sections 11 and 12) during each of the two previous years preceding the date of application does not exceed ₹5 crore. If income in any of the two years exceeds this limit, the benefit of such a longer period of registration would not be available.

The Finance Minister, in her Budget Speech, has stated:

“I propose to reduce the compliance burden for small charitable trusts / institutions by increasing their period of registration from 5 years to 10 years”.

The Explanatory Memorandum explains the rationale behind this amendment as under:

“2. It has been noted that applying for registration after every 5 years increases the compliance burden for trusts or institutions, especially for the smaller trusts or institutions.

3. To reduce the compliance burden for the smaller trusts or institutions, it is proposed to increase the period of validity of registration of trust or institution from 5 years to 10 years, in cases where the trust or institution made an application under sub-clause (i) to (v) of the clause (ac) of sub-section (1) of section 12A, and the total income of such trust or institution, without giving effect to the provisions of sections 11 and 12, does not exceed ₹5 crores during each of the two previous years, preceding to the previous year in which such application is made.”

In the FAQs issued, the amendments have been explained as under:

Q.2. What amendment has been carried out in respect of registration of trusts?

Ans. The period of validity of registration of a trust or institution with income below ₹5 Crore has been increased from 5 years to 10 years in certain cases.

Q.3. Which cases shall benefit from the above amendment?

Ans. The amended provisions shall be applicable to certain small trusts or institutions whose total income does not exceed ₹5 crores in each of the two previous years, preceding the previous year in which application is made.

In computing income for this limit of ₹5 crore:

i.  The income of the trust has to be considered on a commercial income basis based on the method of accounting followed by the trust;

ii. all incomes of the trust, including donations, have to be considered;

iii.  in case the trust is carrying on a business, the net business income of the trust is to be considered;

iv. Corpus donations are also to be considered, adopting a conservative view, as the tax authorities are of the view that such donations are income which may be exempt under section 11(1)(d);

v.  Administrative expenses are not to be deducted, unless such expenses are incurred to earn the income;

vi. Only profit on the sale of assets as per books of account is to be considered as income, and not the entire sales proceeds nor the capital gains as computed under the head “Capital Gains”.

Since the amendment is with effect from 1^st April, 2025, and is a procedural amendment, it applies to all cases where registration is granted on or after 1^st April, 2025. There is a doubt as to whether it would apply to extend existing registrations automatically, since it also applies to cases covered by clause (i) of section 12A(1)(ac). From the manner in which the proviso is drafted, the amendment will not extend to cases of existing registrations – it will apply only to approvals granted after that date. All those cases where the registration was granted for a period of 5 years from 1^st April, 2021 to 31^st March, 2026, including such small trusts, would now need to apply for renewal of their registration on or before 30^th September, 2025. The renewed registration, when granted, would then be for a period of 10 years if the trust qualifies for such a longer period of registration.

A large number of trusts (approximately 2,50,000 trusts) with existing registration as of 31^st March, 2021, would have been granted registration for a period of 5 years till 31^st March, 2026. The applications of all these trusts would have to be processed within a period of 6 months by 31^st March 2026, a mammoth task indeed, if all documents and activities of each such trust have to be scrutinised. Not only that, during the same period, section 80G renewal applications of the vast majority of trusts having such approval would also have to be processed. Since a large number of such trusts are small trusts with a total income of less than ₹5 crore, it would have been better had the amendment extended the existing 5-year registration automatically to a period of 10 years, in the case of all such trusts whose total income is less than ₹5 crore for the 2 years ending 31^st March 2024 and 31^st March 2025. This would have ensured that the focus of the renewal process would then be on the larger trusts.

One aspect which needs to be kept in mind by such small trusts is that after the next renewal period of 10 years, at the time of subsequent renewal, details would have to be provided of activities, etc., over the longer time period of the last 10 years. It would, therefore, be essential for such trusts to maintain a year-wise record of such activities on an ongoing basis to avoid a situation where the trust is unable to provide details of activities carried out from the date of the last renewal till the date of a subsequent application for renewal. Similarly, the records of the trust would have to be maintained for such a longer period, so as to facilitate reply to any query that may be raised during the process of scrutiny of the renewal application.

SUBSTANTIAL CONTRIBUTOR – SECTION 13(3)

Under section 13(1)(c), if any part of the income or property of the trust is utilised for the benefit of a person specified in section 13(3), such income is subjected to tax at the rate of 30% under section 115BBI, besides attracting a penalty at 100% of such amount under section 271AAE for the first offence, and at 200% of such amount for subsequent offences.

The persons specified in section 13(3) include a person who has made donations exceeding ₹50,000 in aggregate to the trust since its inception till the end of the relevant year (a substantial contributor). This limit was ₹5,000 from 1976 to 1984, ₹25,000 from 1985 to 1994 and ₹50,000 thereafter till 2025. Effectively therefore, this limit, which was earlier being modified every 10 years, had remained unchanged for 30 years. The absurdity of such a low limit resulted in a situation where most large trusts were unable to keep a list of such donors (which is one of the documents required to be kept by a charitable trust), and therefore, in cases of the audit reports (Form 10B or 10BB) in most of the trusts, there was a qualification to the effect that the trust had been unable to identify and maintain a list of such substantial contributors.

This limit of ₹50,000 in aggregate has now been increased with effect from 1^st April 2025 (i.e. AY 2025-26) to a more reasonable aggregate limit of ₹10,00,000, with an additional alternative limit of donations exceeding ₹1,00,000 for the year. Therefore, a person would be regarded as a substantial contributor either if he has made aggregate donations exceeding ₹10,00,000 over the years or has made a donation exceeding ₹1,00,000 during the relevant year. Hitherto, since there was only an aggregate limit, a person who became a substantial contributor in one year would always remain a substantial contributor for future years, since he had already crossed the aggregate limit of ₹ 50,000. Now, given the two alternative limits, it is possible that a person who is a substantial contributor in one year on account of donations exceeding ₹1,00,000 in that year may not be a substantial contributor in a subsequent year due to the fact that he may not have contributed more than ₹ 10,00,000 in aggregate over the years.

Unfortunately, many trusts, particularly large trusts which have been in existence for many decades, would continue to face difficulty in compiling a list of such substantial contributors with accuracy, since the list has to take into account the aggregate donations received over the past many decades, an impossible task. It would perhaps have been better if the limit of aggregate donations had been made applicable only to donations made in the last few years – maybe 5 years or 10 years, which would have ensured proper compliance by all trusts.

RELATIVE AND CONCERN OF SUBSTANTIAL CONTRIBUTORS – SECTION 13(3)

The list of specified persons in section 13(3) also included:

♦ any relative of persons referred to in clauses (a) – author or founder, (b) – substantial contributor, (c) – any member of the HUF if a HUF was an author, founder, or substantial contributor, and

♦any concerns in which any of the above (including trustees and relatives of such persons) has a substantial interest.

The definition of “relative”, contained in Explanation 1 to section 13, was fairly vast, as under:

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) any lineal ascendant or descendant of the individual;

(v) any lineal ascendant or descendant of the spouse of the individual;

(vi) spouse of a person referred to in any of the above clauses;

(vii) any lineal ascendant or descendant of a brother or sister of either the individual or of the spouse of the individual.

Here also, obtaining such details of relatives, particularly from substantial contributors, was an impossible task for the trust, as no donor would want to give so many personal details to an organisation to which he was doing a favour by donating. Similarly, obtaining details of concerns in which donors or their relatives have a substantial interest was again almost impossible.

The Finance Act 2025 has amended the definition of specified persons in section 13(3) by excluding relatives of substantial contributors and concerns in which substantial contributors or their relatives have substantial interest from this definition.

The Explanatory Memorandum has also recognised the practical difficulty as under:

“Suggestions have been received that there are difficulties in furnishing certain details of persons other than author, founder, trustees or manager etc. who have made a ‘substantial contribution to the trust or institution’, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees. These details are about their relatives and the concerns, in which they are substantially interested.”

However, relatives of the author or founder, trustees or manager, and concerns in which the author or founder, trustees or manager or their relatives have a substantial interest would continue to be regarded as specified persons. The FAQs clarify this as under:

“Q.7. Whether the relaxation provided to specified person also covers author, founder of trust, trustees, member or manager of the trusts?

Ans. It is clarified that the relaxation shall not apply to author, founder of trust, trustees, member or manager of the trusts”.

Unfortunately, there has been no amendment to the definition of “relative”, which is fairly wide and ropes in even a person not closely related; to illustrate, a brother-in-law’s or sister-in-law’s granddaughter would also be covered. Fortunately, her husband would not be covered! Even for a trustee, to provide such a detailed list of relatives and concerns in which they are substantially interested is indeed a tall task. Getting new trustees today is, as it is, a difficult proposition for most trusts – such detailed compliance adds to the reluctance of persons to take on what is often an honorary and thankless post. One wishes and hopes that the definition of relative is aligned with that under the Companies Act 2013, which only extends to first-degree relatives – spouse, member of HUF, father, mother, son, son’s wife, daughter, daughter’s husband, brother and sister. Unfortunately, even in the draft Income Tax Bill 2025, the same definition of “relative” is continued.

CANCELLATION OF REGISTRATION – SECTION 12AB

Section 12AB(4) provides for cancellation of registration of a trust, if it has committed specified violations. The list of specified violations is contained in the explanation to s.12AB(4). Clause (g) of the explanation refers to a situation where the application referred to in s.12A(1)(ac) (i.e. application for registration or renewal of registration under s.12A) is not complete or contains false or incorrect information.

This clause has been amended by the Finance Act 2025, to remove the reference to application not being complete with effect from 1^st April 2025. The amended specified violation would now cover only a situation where the application contains false or incorrect information and would apply to situations where the cancellation order is being passed after 1^st April 2025.

The Explanatory Memorandum states that:

“ It is noted that even minor default, where the application referred to in clause (ac) of sub-section (1) of section 12A is not complete, may lead to cancellation of registration of trust or institution, and such trust or institution becomes liable to tax on accreted income as per provisions of Chapter XII-EB of the Act.

It is, therefore, proposed to amend the Explanation to sub-section (4) of section 12AB so as to provide that the situations where the application for registration of trust or institution is not complete, shall not be treated as specified violation for the purpose of the said sub-section.”

In the FAQs, it is clarified as under:

“Q.4. What amendment has been carried out in provisions relating to ‘specified violation’ in the case of trusts or institution?

Ans Under current provision an ‘incomplete’ application for registration is treated as specified violation. This may result in cancellation of registration and consequently, fair market value of the assets becomes chargeable to tax under the Act.

In order to prevent harsh consequences for default of filing incomplete application, the above amendment has been carried out. The trust or institution shall be able to complete the application and the same shall be considered for the purposes of registration.”

This amendment really rectifies a drafting mistake made when the provision was introduced, as if an application was incomplete, under rule 17A(6), the Commissioner has the power to reject the application and cancel the registration. While processing the application, the fact that it is incomplete would be obvious, resulting in a rejection, which may not always be the case with respect to incorrect or false information provided in the form, which may come to light later. Hence, the provision for cancellation was perhaps justified for false or incorrect information, but not for incomplete application.

Post amendment, an issue that may arise is whether an omission to provide certain information may amount to giving false or incorrect information. To illustrate, a practical situation often faced is when the Commissioner has cancelled the registration of a trust, and the Appellate Tribunal has set aside such an order of cancellation. One of the questions to be answered in Form 10AB is whether any application for registration made by the applicant in the past has been rejected. This question has to be answered only with a “yes” or “no”. If the trust states “no”, would this amount to giving false or incorrect information? This should not amount to giving incorrect or false information, as when the Tribunal sets aside the order of rejection of the Commissioner, that rejection order ceases to exist. At best, it can be said to be a provision of incomplete information, though that too may not hold good, as the form itself merely requires ticking of the appropriate box without any further details.

CONCLUSION

These amendments, though providing some relief to charitable trusts, do not really address all the issues and problems being faced in these areas by charitable trusts, as discussed above. These amendments have also been incorporated in the draft of the Income Tax Bill 2025, which has been introduced in Parliament, and therefore, one may have to wait for some time for any further amendments in this regard unless the Income Tax Bill 2025 is appropriately amended before being enacted.

Business reorganizations have always been of vital importance for any entity to meet certain needs, expand the business, etc. and have risen over time to explore various opportunities. The drivers that create interest in various forms of restructuring could be internal or external. Equally important is the tax aspect of such business reorganization.

The judiciaries have given importance to the law of succession while interpreting the tax implications in the hands of the successor. In the present article, we have dealt with the tax implications in the hands of the successor / resulting company and the benefits that can be passed on to the resulting company.

The Apex Court has laid down certain principles as a law of succession, which acts as a guide to assess the implications under various scenarios. In the case of succession through amalgamation, the SC¹ has held that although the outer shell of the entity is destroyed in case of amalgamation, the corporate venture continues to exist in the form of a new or the existing transferee entity. The SC in another decision² emphasized the point that the successor-in-interest becomes eligible to all the entitlements and deductions which were due to the predecessor firm subject to the specific provisions contained in the Act. Basis the said findings of the SC, what can be underlined is that the successor should be entitled to the benefits which would have been otherwise available to the predecessor had the restructuring not taken place.

In the present Article, we are discussing the tax implications in the hands of the successor under a few of the provisions of the Act.

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1   PCIT vs Mahagun Realtors (P) Ltd. : [2022] 443 ITR 194 (SC)

2   CIT vs. T. Veerabhadra Rao : (1985) 155 ITR 152 (SC)

A) CARRY FORWARD AND SET-OFF OF MAT CREDIT

Section 115JAA deals with the carry forward and set-off of Minimum Alternate Tax (‘MAT’) credit in the subsequent years pursuant to any tax liability discharged under section 115JB of the Act. However, the provisions do not provide any specific clarifications for carrying forward MAT credit in case of business reorganizations, except a restriction to carry forward MAT credit in case of conversion of a Company to an LLP as per section 115JAA(7) of the Act. A few of the important points for consideration are discussed hereunder:

Whether MAT liability entity-specific or business-specific?

Before analyzing the impact under different forms of business reorganization, it is important to understand whether MAT liability is entity-specific or business-specific. And consequently, who should be eligible for the MAT credit; i.e., the entity who has discharged the MAT liability or if the MAT liability pertains to the business, then the entity who is in control of the business.

The provisions of section 115JAA state that the credit of the MAT liability discharged in the past should be allowed to the person who has paid such MAT liability. Relevant extracts of the provisions are reproduced as follows, for easy reference.

“…(1A) Where any amount of tax is paid under sub-section (1) of section 115JB by an assessee, being a company for the assessment year commencing on the 1st day of April 2006 and any subsequent assessment year, then, credit in respect of the tax so paid shall be allowed to him in accordance with the provisions of this section.”

Thus, the wording of the provision, basis literal interpretation, allows credit to the same person who has discharged the liability and the same is the contention of the Revenue.

Generally, tax liabilities are taxpayer-specific, wherein an entity is required to discharge the tax liability on the total book profit (in the case of MAT liability), which would be a consolidated profit from all the businesses carried on by the taxpayer. However, an equally important fact of the tax laws is that tax is on the income earned from the businesses carried on by the taxpayer. As held by the SC in the case of Mahagun Realtors (P) Ltd (supra), in case of amalgamation, the corporate venture continues and it just that the form of the entity changes. Thus, the importance is on the venture undertaken and the assets and liabilities are associated with the said venture and not the entity. Even the provisions for recovery of demand in case of succession permit the Revenue Authority to recover demand from the successor. Thus, these provisions also indicate that the tax is on the income earned from the relevant businesses.

Basis the above interpretation, identifying MAT credit particular to any undertaking could be a point of possibility in order to pass on the MAT credit, which would be available for set-off in the hands of the successor company that takes over the relevant part of the business from the transferor company. To put it in other words, it can be contended that the MAT liability discharged is specific to a particular business carried on by the company and can be passed on to the entity that is in control of such business.

Amalgamations and demergers are tax-neutral

Amalgamations and Demergers, if undertaken by complying with the conditions provided under the Act, are intended to be tax-neutral transactions. Accordingly, the successors should be entitled to all the available tax benefits as a part of succession which are associated with the businesses taken over. Thus, where in the past, any MAT liability was discharged on the book profits in relation to the business transferred, the credit of the same should be entitled to the successor company. To view it from another perspective, if the MAT credit relating to the business transferred is carried forward by the transferor company, it would lead to the set-off of the MAT credit in relation to the business which is transferred, against the tax liability on the income that would be retained by the transferor company. This could be an unjust position. Further, the said proposition would otherwise be impossible, at least in the case of amalgamation, where the amalgamating company ceases to exist. Thus, again, the contention that should prevail is that the MAT credit should be passed on to the successor company.

All the assets and liabilities to be transferred in case of amalgamation and demerger

One of the conditions under section 2(1B) dealing with amalgamation requires all the properties of the amalgamating company to become the properties of the amalgamated company. Similar provisions are for demergers wherein even section 2(19AA) requires all the properties of the demerged undertaking to be transferred to the resulting company.

Thus, all the properties could be contended to include the MAT credits of the entity (in case of amalgamation) and undertaking (in case of demerger). The important consideration would be to identify the MAT credit relating to the demerged undertaking in case of a demerger. Thus, the relevant computation needs to be in place to justify the MAT credit relating to the demerged undertaking and if it is possible to identify such MAT credit, a reasonable argument could be that even the MAT credits, as a part of the business, needs to be transferred.

However, a point that requires deliberation is whether MAT credit could be said to be “property” as the above provisions relating to amalgamation and demerger speaks about “properties” and not “assets”. Ideally, the intention in amalgamation and demergers is to include all the properties including trade receivables, cash and bank balance and other advances, etc. Thus, the word “property” would have a broader meaning and a justifiable proposition should be to also include MAT credits.

Approval of the Schemes by the Courts

If there are no statutory provisions on any specific issue, in that case, the scheme of arrangement as approved by the Courts (now NCLT) would have statutory recognition. The Mumbai Tribunal Bench³ had allowed the demerged entity to carry forward the MAT credit as the scheme was approved by the Court, holding that the tax payments until the appointed date would belong to the demerged entity. Thus, where any scheme of arrangement permits the carry forward of MAT credit to the successor, the scheme will prevail.

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3   DCIT vs. TCS E-serve International Limited (ITA No. 2779/Mum/2108)

However, now the judicial authority to grant approvals for the various scheme of arrangements is the National Company Law Tribunal (‘NCLT’). Thus, it needs to be assessed as to whether the decisions, in respect of schemes where Courts were the approving authority, could also prevail and hold good where the approvals of the schemes are through NCLT.

As per the Companies Act, the scheme of arrangement would have statutory force, once the same is approved under the relevant provisions of the Companies Act. Accordingly, it may be argued that the scheme holds a position of sanctity once it receives the sanction of the NCLT and cannot be disturbed. A scheme is said to have statutory force under all the Acts for all the stakeholders unless any clause of the scheme is contrary to other provisions of the Act. Thus, once a scheme is sanctioned and is in force under one law, all the clauses for the said scheme should be said to have legal sanctity.

No case of dual credit

In the case of amalgamation, there are no chances of dual credit that could be claimed by two parties as the amalgamating company would cease to exist post-amalgamation. Hence, there is no question of claiming dual credits by both parties. The same would be a reasonable position to contend⁴

Even in the case of a demerger, if the MAT credit is transferred to the resulting company and the resulting company has paid for such takeover of credit, then naturally, the demerged entity should be debarred from claiming the MAT credit again.

To summarize, the position of carry forward of MAT credit in case of amalgamation is reasonable and there are judicial precedents providing assent for the same. However, the issue is slightly on a separate footing with distinct judicial precedents in the case of demergers. The Ahmedabad Tribunal⁵ has allowed the MAT credit to be carried forward by the resulting company in case of demerger, though certain aspects were not considered or argued by the Revenue. Thus, though a strong argument of the law of succession should equally apply in the case of demergers as in the case of amalgamation, the practical difficulties of apportioning the MAT credit to the demerged entity are equally challenging. Additionally, the contention that MAT credit associated with the business undertaking and not to be entity-specific also needs judicial sanction as the wording of the provisions do not support the same, basis the argument of tax being linked with income.

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4   Ambuja Cements Ltd. vs. DCIT : [2019] 111 taxmann.com 10 (Mum Tri), Capgemini Technology Services India Ltd. in ITA Nos. 1857 & 1935/Pun/2017

5   Adani Gas Limited vs. ACIT in ITA Nos. 2241 & 2516/Ahd/2011

B) DEDUCTIONS UNDER SECTION 40(A) / 43B

At times, there are certain disallowances under section 40(a) for non-deduction of tax at source, or under section 43B for non-payment of statutory dues, or other payments prescribed under the said section. Generally, the deduction for the said expenses is allowed in the year when the tax is deducted or prescribed payments are made, unless the liabilities are discharged before the filing of the return of income under section 139(1) of the Act as prescribed.

The issue arises as to the allowability of deduction in the case of amalgamations or demergers where the disallowances happen in a particular financial year in the hands of the transferor companies, whereas the payments are made after the appointed date by the transferee companies.

In the absence of any explicit provisions in the above scenarios of business reorganizations, a question arises on the allowability of expense in the hands of the predecessor or successor due to the change of hands of the person incurring expenditure, and the person discharging the liability. There are multiple views adopted by the assessees due to a lack of clarity in the law and diverse judicial precedents.

i) As per the general principles of law, the deductibility of the expense is allowed to the assessee who has incurred the expenditure and expensed it out in the profit and loss account. However, the provisions of section 40(a) and section 43B come with an exception, where the allowability is deferred to the year in which the tax is deducted or expenses are paid, respectively.

ii) In the case of amalgamation as well as demerger, the definitions require all the liabilities to be taken over by the transferee company. Thus, the above statutory liabilities should also be taken over by the transferee company to meet the requirements under the Act. Thus, there is no option available to the predecessor companies in the case of a demerger to continue with such liabilities in the demerged entity. In the said scenarios, the question is whether the transferee company would be eligible for the deduction on making the respective payments or discharging the liabilities, or the same should be allowed to the transferor company.

iii) However, where such liabilities are taken over by the resulting company, the same is contended to be a capital expenditure by the Revenue on the ground that it arises on account of a capital account transaction of acquiring the business. Resultantly, the claim is denied to the transferee company and also to the transferor company.

It could be important to highlight the decision of the SC⁶ rendered in the context of taxability under section 41 wherein it was held that the amalgamated company should not be subjected to tax under section 41, as the corresponding expenses were claimed as a deduction by the predecessor entity, which ceased to exist. It was then that an amendment was made to section 41 whereby the provisions were specifically introduced to tax the successor company in the above scenario. The said precedence in the context of section 41 could be considered while assessing the deduction in the hands of the transferor company in case of demerger, or successor company in case of amalgamation and demerger.

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6   Saraswati Industrial Syndicate Ltd vs. CIT : (1990) 186 ITR 278 (SC)

Implications under section 40(a)

iv) We may first analyze the provisions of section 40(a) of the Act which states that any expenditure on which tax is deductible will be allowed as a deduction only when tax is deducted and paid before filing the return of income under section 139(1) of the Act.

The provisions of the Act simply say that the deduction would be available when the tax is deducted and deposited to the credit of the Central Government. It does not talk about who should be allowed a deduction for the same. Thus, what can be construed is that the person who ultimately complies with the above conditions would be eligible for the deduction. When looking at the intent of the provisions, the focus is on the liability to deduct and deposit tax and naturally, the entity that complies with the condition should be eligible for the deduction.

v) Say for example, there is an expense which is debited to the profit and loss account in the books of the predecessor company. However, the tax is not deducted on the same and thus, there is a disallowance while computing the total income of the amalgamating company. Thereafter, amalgamation takes place, and the tax is deducted and paid by the amalgamated entity. A question arises as to whether the amalgamated company would be eligible for the deduction under section 40(a) of the Act. A similar situation may also arise in the case of a demerger. The only difference is that in the case of a demerger, the demerged entity would continue to be in existence, unlike in the case of amalgamation.

In the above scenario, as far as the amalgamation is concerned, a possible contention could be that the deduction should be allowed to the amalgamated company as the predecessor company ceases to exist. However, the scenario in the case of a demerger may differ as the entity that was subject to the disallowance, i.e., the demerged entity, continues to exist. Thus, taking an analogy from the decision of the SC in the case of Saraswat Industrial Syndicate Ltd. (supra), it can be contended that deduction should be allowed to the demerged entity in the year when the liability is discharged by the resulting company. While adopting such a position, there needs to be co-ordination between the entities to understand when such payments are made and that the resulting company is not claiming the deduction as well.

vi) As an alternate view, reference is made to the decision of the SC in the case of CIT v. T Veerabhadra Rao (cited supra), whereby the claim of bad debts was allowed in the hands of the transferee company even though the corresponding income was offered to tax by the predecessor company. Drawing an analogy from the same, deduction could be claimed by the successor company under section 40(a) on discharge of such liabilities even when the expense was incurred by the predecessor and disallowed in its hands.

Implications under section 43B

vii) Section 43B deals with deduction of any expense only while computing the income in the year in which such liability is paid by the assessee, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him. Basis the literal reading of the law, the provisions of section 43B do not specifically mention that the deduction will only be allowed in the hands of the person who incurred and discharged the liability.

viii) Similar to the contention adopted for deduction under section 40(a) and adopting an analogy basis the decision of the SC in the case of Saraswat Industrial Syndicate Ltd. (supra), a similar plea could continue even in case of deductibility under section 43B, whereby, the demerged entity can claim deduction once the resulting company discharges the liability. However, due to the act of impossibility in case of amalgamation where the amalgamating company ceases to exist, the deduction could only be claimed in the hands of the successor company.

ix) Another way of looking at the provisions is that the income tax provisions treat certain specific dues mentioned under the section as expenses of the year in which the same are actually paid and no regard is given to the accounting principles followed by the assessee.

Consequently, it can be argued that the deduction should be allowed to the person discharging the liability. The provisions of section 43B are an exception to the general law in which the provision itself states that the expenses which are otherwise allowable under the Act, should be allowed as a deduction on a payment basis. Thus, in light of the same and obeying the provisions of the Act, the deduction of the expense could be allowed as a deduction basis for actual payment to the entity that has made the payment.

x) At the same time, while adopting the above view, there could be a practical difficulty in cases where the year of demerger is also the first year of the resulting company. The liabilities that would be discharged by the resulting company would pertain to the preceding previous years when the resulting company was not in existence and the expenses were booked by the demerged entity. Thus, the reporting under the relevant clause of the Tax Audit Report for section 43B stating liabilities pre-existing on the first day of the previous and being paid during the year, could be a practical challenge.

xi) The Mumbai Tribunal⁷ has relied on the principle held by the SC in the case of T Veerabhadra Rao, K Koteswara Rao & Co. (cited supra) and allowed the deduction of liabilities under section 43B to the transferee, on the reasoning that the transferee had taken over all the assets and liabilities of the transferor.

xii) The Mumbai Tribunal⁸ has analyzed the eligibility of deduction under section 43B in the hands of the transferor in the year in which slump sale took place. The Tribunal observed that the transferor cannot by contract, transfer or shift his statutory obligation to the transferee and thus, there was no basis to hold that impugned liability stands discharged by the transferor upon sale of its undertaking on slump sale basis.

Thus, in the absence of any explicit provisions, Revenue can contend a similar proposition even for demergers.

xiii) The implications in the case of demergers are litigious with divergent views. Thus, it is advisable to provide for a suitable clause in the scheme of arrangement for such statutory dues, which would give a legal sanction through approval of the scheme. Separately, it is also advised to have a suitable disclosure in the Tax Audit Report about the positions taken, to reflect the conscious and bonafide claim.

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7   In KEC International (2011) 136 TTJ 60 (Mum Tri), Huntsman International (India) Private Limited (ITA No.3916 and 1539/Mum/2014)

8   Pembril Engineering (P) Ltd. v. DCIT (2015) 155 ITD 72 (Mum Tri)

C) IMPLICATIONS UNDER SECTION 79 IN LIGHT OF SECTION 72A

i) Section 79 of the Act restricts the carry forward and set off of business loss incurred in any preceding previous years by a company (other than a company in which the public is substantially interested and an eligible start-up company), if the shares of the company carrying more than 49 per cent of the voting power change hands and are beneficially held by different shareholders in the previous year when the losses are set off, as compared to the year when the losses were incurred. The provisions were introduced to prevent business reorganizations undertaken where the profits earned by a company are intended to be set off against the losses of the target company.

ii) Correspondingly, section 72A of the Act deals with specific provisions for carried forward and set-off of losses in case of amalgamations and demergers, subject to fulfilment of certain conditions.

iii) The provisions are mutually exclusive to each other. However, there could arise a situation in the cases of amalgamation and demergers between unrelated parties, which could lead to a change in the shareholding of the entities and where provisions of section 79 get triggered. At the same time, if the conditions of section 72A are fulfilled, the losses should be allowed to be carried forward in the hands of the successor company. Thus, it would be important to understand the interplay between the two provisions and we have tried to cover some issues in this regard.

Issue regarding carry forward of losses of the predecessor company to the successor company

iv) Before dealing with the interplay between the above provisions, it would be important to understand a scenario where the losses of the demerged entity are transferred to the resulting company, which is a profit-making entity. In the said scenario, the question is whether the provision of section 79 will be applicable in the said scenario. It may be noted that in the above scenario, the demerged entity is not going to claim the losses as the same are transferred to the resulting company. Thus, where the losses are not carried forward and set off by the demerged entity, the question of applying the provisions of section 79 will not be applicable.

Thereafter, another question is whether the provisions of section 79 will be applicable to the resulting company while setting off the losses of the demerged undertaking. It may be noted that the provisions of section 79 could come into play when losses of the same entity are proposed to be set off. In the above scenario, the losses proposed to be set off pertains to the demerged undertaking which comes due to demerger. Thus, ideally, a contention could be that the provisions of section 79 will not be applicable where the resulting company intends to set off the losses acquired by way of demerger.

Having said so, if there is contention to apply the provisions of section 79 even on set-off losses of the demerged undertaking by the resulting company, the following contentions could be considered.

v) One of the important legal interpretations of the above two provisions is that both Section 79 and Section 72A of the Act start with a non-obstante provision. While the former applies notwithstanding anything contained in Chapter VI of the Act, the latter applies notwithstanding anything contained in any other provisions of the Act. Thus, Section 79 of the Act has an overriding effect only over Chapter VI of the Act whereas Section 72A of the Act has an overriding effect over any other provisions of the Act. Thus, section 72A ideally should prevail over the provisions of section 79 of the Act.

vi) Another point to be noted is that the provisions of section 79 speak about losses incurred in the years preceding the previous year in which there is change in the shareholding of more than 49 per cent.

vii) Section 72A(1) states that in case of amalgamation, the losses incurred in the preceding previous years would be deemed to be the loss of the year in which the amalgamation took place and would be available for carry forward and set off for a period of 8 years thereafter. Accordingly, it can be contended that the provisions of section 79 will not be applicable in case of amalgamation and the amalgamated company can carry forward and set off the losses of the amalgamating company.

viii) However, unlike in the case of amalgamation, the provisions relating to a demerger are quite different. The provisions of sub-section (4) of section 72A do not cover the above deeming provisions. Accordingly, the losses of the preceding previous years would pertain to the said years only and would be available for carry forward and set off to the resulting company only for the balance years.

ix) However, a contention may be taken that the provisions of section 72A are more specific as it deal with an explicit scenario of amalgamation and demerger. Thus, as per the general rule of interpretation, the specific provisions will prevail over general provisions. Accordingly, the provisions of section 79 cannot be applied in case of amalgamations and demergers which meet the requirements of section 72A. This proposition is supported by a decision of the Mumbai Tribunal⁹.

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9   Aegis Ltd. vs. Addl. CIT in ITA No. 1213 (Mum) of 2014

x) Thus, overall, considering the general rules of interpretation and intent of the introduction of provisions of section 72A, a liberal view is plausible that provisions of section 79 do not apply where requirements of section 72A are met.

xi) However, it may be noted that the present discussion is only limited towards the interplay of provisions of section 72A v/s section 79. There are other conditions also required to be fulfilled as per other provisions of the Act and requirements prescribed under section 72A need to be met to carry forward and set off the loss.

An issue where the successor company had losses and on account of amalgamation, the shareholding pattern changes by more than 49 per cent.

xii) In this scenario, say for example, the successor company had certain brought forward losses and pursuant to the business reorganization, the shareholding of the successor company changes by more than 49 per cent. Thus, as per the provisions of section 79 of the Act, the losses pertaining to the successor company would lapse. The provisions of section 72A would not apply to such losses, as section 72A deals with losses of the predecessor company getting transferred to the successor company.

xiii) Sub-section (2) of section 79 has provided certain exceptions where the provisions of section 79 will not apply. However, the said exceptions do not cover the above scenario. Thus, a position could be that the provisions of section 79 would get triggered, and the losses of the successor company may lapse.

xiv) Another way to look at the provisions is where the losses of the predecessor company are allowed to be set off in the hands of the successor company even if there is a change in the shareholding of the successor company by more than 49 per cent. However, at the same time, losses of the successor company itself are not allowed to carry forward and set off as the provisions of section 79 get triggered. Thus, this indicates an anomaly in allowing the set off of losses of the predecessor company and the successor company in the same restructuring of amalgamation and demerger.

xv) Additionally, it could also be a difficult proposition to digest the applicability of section 79 as the change in the shareholding is not on account of any transfer of shares by the existing shareholders of the successor company, but change is only in the percentage of shareholding i.e., dilution of the holding due to issue of shares to the new shareholders due to scheme of arrangement. However, it could be difficult to claim losses in the absence of any specific provisions and the basis of the literal reading of the provisions.

xvi) On the contrary, the applicability of section 79 in the above scenario could be genuine to avoid deliberate restructuring to set off the losses of the successor company against the profits of the predecessor company.

xvii) Thus, the contentions could change on the basis of the genuineness of the restructuring undertaken keeping aside the applicability of the provision basis the literal reading.

CONCLUDING THOUGHTS

There are following few other provisions which needs assessment for tax implications in the hands of the successor company:

— Implications under section 56(2)(viib) on the issue of shares pursuant to any business reorganization

— Treatment of depreciation on Goodwill / Intangible assets taken over

— Depreciation on other depreciable assets

— Tax implications under tax holiday provisions

Thus, there are plethora of issues which have implications in the hands of the successor entities apart from other transaction related issues, and it is important to take a position which has a reasonable view.

1. GENERAL BACKGROUND AND SCOPE

1.1 Upon completion of the assessment of total income by the Assessing Officer (AO), the amount of tax payable by the assessee is determined. It is quite common to see huge additions being made, in many cases, which result in huge demands arising as a result of a tax on additions made to the returned income and interest thereon under section 234B (and in cases where the return of income was filed beyond due date than under section 234A as well). The amount determined to be payable by the assessee is stated in the notice of demand issued under section 156 and the amount so mentioned is generally payable within 30 days from the date of issue of the notice of demand. The notice of demand issued under section 156 of the Act accompanies the assessment order.

1.2 Non-payment of the amount specified in the notice of demand, which is validly served on the assessee, within the time mentioned in the notice will mean that the assessee becomes an `assessee in default’ and consequently is liable to not only interest and penalty being levied on the amount of demand which is unpaid but also coercive steps being taken for recovery of the unpaid amount. Refunds of other years may be adjusted against such demands which have arisen as a result of disputed additions.

1.3 As per CBDT Instruction No. 1914 dated 2^nd February, 1993 (hereinafter referred to as “the said Instruction”) —

i) the Board is of the view that, as a matter of principle, every demand should be recovered as soon as it becomes due;

ii) the responsibility of collection of the demand is upon the AO and the TRO;

iii) except for demands which are stayed every other demand is required to be collected;

iv) it is 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;

v) mere issuance of show cause notice with no follow-up is not to be regarded as an adequate effort to recover taxes.

1.4 While an assessee may choose to file an appeal against the assessment order, a question arises as to whether an assessee is bound to pay the demand which is disputed by the assessee. Many times, demands are of such a magnitude as would disrupt the smooth functioning of the business of the assessee. If recovery proceedings are to continue in spite of an appeal having been preferred, then the entire purpose of the appeal will be frustrated or rendered nugatory.

1.5 Does the filing of an appeal operate as a stay or suspension of the order appealed against? Is the assessee entitled to a stay of demand or instalments? Is the AO empowered to grant stay in a case where the assessee chooses to file a revision application under section 264? What is the position in case an assessee chooses not to contest the additions? Is granting of stay mandatory? Is AO bound by the Guidelines issued by CBDT? Is the AO bound by the restrictions imposed by the guidelines on exercise by the AO of the discretionary power conferred upon him by the statute under section 220(6) of the Act? These are some of the many questions which arise for consideration and are considered in this article.

1.6 Upon completion of the assessment, demand may arise as a result of —

i) additions made which are accepted by the assessee;

ii) additions which are disputed by the assessee and against which the assessee chooses to file a revision application under section 264 of the Act;

iii) additions which are disputed by the assessee and against which the assessee files an appeal under section 246 or section 246A to the JCIT(A) or CIT(A);

iv) additions which are disputed by the assessee and against which the assessee files an appeal to the Tribunal.

1.7 In a situation of the type referred to in (i) above it is quite unlikely (even unimaginable) that, in actual practice, a stay will ever be granted. Situations of the type mentioned in (ii) and (iv) above will be covered by the powers vested in the AO under section 220(3) of the Act. The situation of the type mentioned in (iii) above will be covered by the power vested in the AO under section 220(6) of the Act.

1.8 The power of the Tribunal to grant a stay of demand is not covered by this article.

2 ARE DECISIONS RENDERED IN THE CONTEXT OF PRE-DEPOSIT PRESCRIPTIONS PLACED BY A STATUTE OF RELEVANCE?

2.1 A plethora of judicial precedents are available in the context of pre-deposit prescriptions placed by a statute. The principles enunciated therein would clearly be relevant while examining the extent of power placed in the hands of the AO in terms of section 220(6) of the Act — National Association of Software and Services Companies (NASSCOM) vs. DCIT [(2024) 160 txmann.com 728 (Delhi HC); Order dated 1st March, 2024]. Courts have while deciding upon the allow ability or otherwise of the writ petitions filed by the assesses against refusal to grant stay by authorities, have based their decision on judicial precedents rendered in the context of pre-deposit prescription placed by a statute and have applied the ratio laid down by such decisions.

2.2 Consequently, this article contains references to decisions rendered in the context of Excise and Customs Laws to the extent it is considered that the said decisions are helpful in the context of the provisions of the Act.

3 NO COERCIVE RECOVERY CAN BE TAKEN DURING THE PENDENCY OF THE RECTIFICATION APPLICATION AND/OR STAY APPLICATION AND/OR TILL SUCH TIME AS STATUTORY TIME FOR FILING THE APPEAL EXPIRES.

3.1 Many times, assessment orders and/or tax computations have mistakes which are apparent on record and can be rectified by the AO under section 154 of the Act. An assessee is well advised to check if either the assessment order and/or the tax computation has any mistakes which are rectifiable under section 154 of the Act. In the event any such mistakes are found, an application should be made to the AO under section 154 of the Act requesting him to rectify these mistakes by passing an order under section 154 of the Act. Para D(iii) of the said Instruction requires the rectification application should be decided within 2 weeks of the receipt thereof. It goes on to say that instances where there is undue delay in deciding rectification applications, should be dealt with very strictly by the CCITs / CITs. In actual practice, this instruction is followed more in breach, and we find rectification applications undisposed for prolonged periods. Be that as it may, till the rectification application is not disposed of coercive steps cannot be taken for recovery of the demand because correct demand should be determined before an assessee can be treated as an assessee in default. For this proposition reliance may be placed on the decision in Sultan Leather Finishers P. Ltd. vs. ACIT [(1991) 191 ITR 179 (All. HC)].

3.2 Also, where an assessee has made an application to the AO for granting a stay of the demand which has arisen, then till the stay application is not disposed of by the AO, no coercive steps can be taken for recovery of the demand —Dr T K Shanmugasundaram vs. CIT & Others [(2008) 303 ITR 387 (Mad HC)] and UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)].

Very recently, the Delhi High Court while deciding the writ petition filed by NASSCOM (supra) has termed the action of the AO in adjusting the refund against demand for AY 2018-19, while application for grant of stay under section 220(6) was pending to be wholly arbitrary and unfair. The court observed “Undisputedly, and on the date when the impugned adjustments came to be made, the application moved by the petitioner referable to section 220(6) of the Act had neither been considered nor disposed of. The respondents have thus, in our considered opinion, clearly acted arbitrarily in proceeding to adjust the demand for AY 2018-19 against the available refunds without attending to that application. This action of the respondents is wholly arbitrary and unfair.” The court allowed the writ petition and remitted the matter back to the AO for considering the application under section 220(6) in accordance with the observations made by the court in its order.

3.3 In a case where a stay application filed by the assessee before the AO is rejected or the AO has granted a stay but the assessee is not satisfied and has preferred an application to the PCIT / CIT for review of the order of AO then till such time as the application filed before the PCIT / CIT is not disposed of the AO cannot take any coercive steps to recover the demand. Para B(iii) of the said Instruction is also suggestive of this interpretation. However, the assessee should keep the AO informed of having preferred a review of his order.

3.4 No coercive action shall be taken till the expiry of the period within which an appeal can be preferred against the order which has resulted in the creation of the demand sought to be recovered — Mahindra and Mahindra Ltd. vs. UOI [(1992) 59 ELT 505 (Bom. HC)].

3.5 The Bombay High Court has in the case of UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)] held that no recovery of tax should be made pending—

i) expiry of the time limit for filing an appeal; and

ii) disposal of a stay application, if any, moved by the Applicant and for a reasonable period thereafter to enable the Applicant to move to a higher forum.

3.6 Recovery of demand arising as a result of high-pitched assessment is dealt with in Para 5 herein.

4 POWER OF THE AO TO GRANT STAY IN A CASE WHERE AN APPEAL HAS BEEN PRESENTED TO JCIT(A) / CIT (A) — SECTION 220(6)

4.1Section 220(6) reads as under —

“(6) 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 undisposed of.”

4.2 The following points emerge from the above provision—

i) the AO has the discretion to treat the assessee as not being in default in respect of the amount in dispute (in general parlance it is referred to as a grant stay on recovery of the amount demanded);

ii) the stay may be granted without any conditions or with conditions which the AO may think fit to impose in the circumstances of the case;

iii) the discretion can be exercised only in cases where an appeal has been presented under section 246 or section 246A. In other words, the discretion under this sub-section cannot be exercised in cases where an appeal lies to the Tribunal and/or the assessee chooses to file an application under section 264 instead of filing an appeal under section 246A;

iv) the power may be exercised even after the time for making the payment, as per the notice of demand, has expired;

v) the power can be exercised and stay granted only till the appeal remains undisposed;

vi) the discretion can be exercised only in respect of an amount in dispute in an appeal. In a case where a particular addition can be a subject matter of rectification under section 154, it is advisable that the assessee takes up such addition in a rectification application as well as take the issue in appeal;

vii) while the section does not provide that the power will be exercised only upon an application to be made by the assessee, it is unimaginable that an AO may exercise the discretion vested in him by virtue of section 220(6) suo moto;

viii) while on a literal interpretation, it appears that an assessee can make an application / power can be exercised by the AO only where the assessee has `presented an appeal under section 246 or section 246A’.

In practice, it is advisable to make an application even before an appeal is filed. The application, in such a case, should mention that the assessee is in the process of filing an appeal under section 246A of the Act. The assessee should undertake to file an appeal before the expiry of the statutory time for filing of an appeal and also to provide to the AO a copy of the acknowledgement of having filed an appeal once it has been filed. The AO may grant a stay on the condition that an appeal be filed within the statutory time limit. Failure to do so would vacate the stay so granted.

4.3 Every power is coupled with a duty to act reasonably. While section 220(6) confers a discretion / authority upon the AO, going by the principles laid down bythe courts, such an authority has to be construed as a duty to exercise that power. This is evident from the following —

i) The Apex Court in L Hriday Narain vs. ITO [(1970) 78 ITR 26 (SC)] has observed as under —

“If a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case when a party interested and having a right to apply moved in that behalf and circumstances for the exercise of authority are shown to exist. Even if the words used in the statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right-public or private — of a citizen.”

ii) The Allahabad High Court in ITC Ltd. vs. Commissioner (Appeals), Customs & Central Excise [2003 SCC Online All 2224] has held as under-.

“24. Thus, even where enabling or discretionary power is conferred on a public authority, the words which are permissive in character, require to be constituted, involving a duty to exercise that power, if some legal right or entitlement is conferred or enjoyed, and for the effectuating of such right or entitlement, the exercise of such power is essential. The aforesaid view stands fortified in view of the fact that every power is coupled with a duty to act reasonably and the Court / Tribunal / Authority has to proceed to have strict adherence to the provisions of law [vide Julius vs. Lord Bishop of Oxford, (1880) 5 Appeal Cases 214; Commissioner of Police, Bombay vs. Gordhandas Bhanji, 1951 SCC 1088; K S Srinivasan vs. Union of India, AIR 1958 SC 419; Yogeshwar Jaiswal vs. State Transport Appellate Tribunal (1985) 1 SCC 725; Ambica Quarry Works, etc. vs. State of Gujarat (1987) 1 SCC 213.”

4.4 CBDT has, from time to time, issued guidelines regarding the procedure to be followed for recovery of outstanding demand, including the procedure for granting of stay of demand. Presently, the said Instruction read with Office Memorandum (OM) dated 31^st July 2017 interalia provides for a grant of stay upon payment of 20 per cent of the disputed demand. Undoubtedly, under sub-section (6) of section 220 stay cannot be granted in respect of an amount which is admitted to be payable by the assessee.

4.5 A question often arises as to whether the discretion vested in the AO by section 220(6) is circumferenced by the said Instruction and the OM. Can the AO, in case circumstances so demand, exercise discretion and grant a stay of the entire amount of demand or on payment of an amount less than that mandated by the OM. Supreme Court in PCIT & Ors. vs. L G Electronics India Pvt. Ltd. [(2018) 18 SCC 477] has emphasized that the administrative circular would not operate as a fetter upon the power otherwise conferred upon a quasi-judicial authority and that it would be wholly incorrect to view the OM as mandating the deposit of 20 per cent, irrespective of the facts of the individual case.

The said Instruction states the following cases as illustrative situations where an assessee would be entitled to stay of the entire disputed demand where such disputed demand —

i) relates to the issues that have been decided in the assessee’s favour by an appellate authority or court earlier; or

ii) has arisen as a result of an interpretation of the law on which there is no decision of the jurisdictional high court and there are conflicting decisions of non-jurisdictional high courts;

iii) has arisen on an issue on which the jurisdictional high court has adopted a contrary interpretation, but the Department has not accepted that judgment.

The said Instruction read with OM suggests that where a stay is to be granted by accepting a payment of less than 20 per cent of the disputed demand then the AO should refer the matter to the administrative jurisdictional PCIT / CIT.

Undoubtedly, all such instructions and circulars are in the form of guidelines which the authority concerned is supposed to keep in mind. Such instructions/circulars are issued to ensure that there is no arbitrary exercise of power by the authority concerned or in a given case, the authority may not act prejudicial to the interest of the Revenue.

4.6 The courts have held that —

i) the discretion vested in the hands of the AO is one which cannot possibly be viewed as being cabined in terms of the OM [Nasscom (supra)];

ii) the requirement of payment of twenty per cent of the disputed tax demand is not a pre-requisite for putting in abeyance recovery of demand pending the first appeal in all cases — Dabur India Ltd. vs. CIT (TDS) & Another [2022 SCC OnLine Del 3905];

iii) it becomes pertinent to observe that the 20 per cent deposit which is spoken of in the OM dated 31^st July 2017 is not liable to be viewed as a condition etched in stone or one which is inviolable — Indian National Congress vs. DCIT [2024: DHC: 2016 — DB];

iv) CBDT’s Office Memorandum cannot be read as mandating a pre-deposit of 20 per cent of the outstanding demand – Sushem Mohan Gupta vs. PCIT [(2024) 161 taxmann.com 257 (Delhi HC)];

v) Instruction 1914 sets out guidelines to be taken into account while deciding stay applications. As is evident on examining such guidelines, the discretion of the appellate authority remains, and it is not mandated that in all cases 20 per cent of the disputed tax demand should be pre-deposited. This aspect was noticed by this Court in the Order in Kannammal [2019 (3) TMI 1 — MADRAS HIGH COURT] wherein, the appellate authority was directed to take into account the classical principles relating to the consideration of stay petitions – Telugupalayam Primary Agricultural Co-operative Bank vs. PCIT [2024 (2) TMI 549 — MADRAS HIGH COURT];

vi) The requirement of payment of 20 per cent of disputed tax is not a pre-requisite for putting in abeyance recovery of demand pending the first appeal in all cases. The said pre-condition of deposit of 20 per cent of the demand can be relaxed in appropriate cases – Dr B L Kapur Memorial Hospital vs. CIT [(2023) 146 taxmann.com 422 (Delhi HC)];

vii) .. we fail to understand what is so magical in the figure of 20 per cent. To balance the equities, the authority may even consider directing the assessee to make a deposit of 5 per cent or 10 per cent of the assessed amount as the circumstances may demand as a pre-deposit – Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Guj. HC)].

In spite of the clear position having been explained by various High Courts, an assessee desiring a stay of entire demand or stay of demand by paying an amount less than 20 per cent of the disputed demand has to knock on the doors of the writ courts merely because the AOs take a view that they are bound by the Instructions and OMs issued by CBDT.

4.7 The plain reading of the sub-section (6) of section 220 would indicate that if the assessee has presented an appeal against the final order of assessment under section 246A of the Act, it would be within the discretion of the AO subject to such conditions that he may deem 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 so long as the appeal remains undisposed of. What is discernible from the provisions of section 220(4) is that once the final order of assessment has been passed, determining the liability of the assessee to pay a particular amount and such amount is not paid within the time limit as prescribed under sub-section (1) to section 220 or during the extended time period under sub-section (3) as the case may be, then the assessee, because of the deeming fiction, would be deemed to be in default. Therefore, even if the assessee prefers an appeal challenging the assessment order before the Commissioner of Appeals as the First Appellate Authority, he would still be treated as an assessee deemed to be in default because the mere filing of an appeal would not automatically lead to a stay of the demand as raised in the assessment order. It is in such circumstances that the assessee has to make a request before the authority concerned for appropriate relief for a grant of stay against such demand pending the final disposal of the appeal. This relief that the assessee seeks is within the discretion of the authority. In other words, the authority may grant such a stay conditionally or unconditionally or may even decline to grant any stay. However, the exercise of such discretion has to be in a judicious manner. Such exercise of discretion cannot be in an arbitrary or mechanical manner.

4.8 However, when it comes to granting a discretionary relief like a stay of demand, it is obvious that the four basic parameters need to be kept in mind (i) prima facie case (ii) balance of convenience (iii) irreparable injury that may be caused to the assessee which cannot be compensated in terms of money and (iv) whether the assessee has come before the authority with clean hands.

4.9 The power under section 220(6) is indeed a discretionary power. However, it is one coupled with a duty to be exercised judiciously and reasonably (as every power should be), based on relevant grounds. It should not be exercised arbitrarily or capriciously or based on matters extraneous or irrelevant. The AO should apply his mind to the facts and circumstances of the case relevant to the exercise of discretion, in all its aspects. He has also to remember that he is not the final arbiter of the disputes involved but only the first among the statutory authorities. Questions of fact and law are open for decision before the two appellate authorities, both of whom possess plenary powers. In exercising his power, the AO should not act as a mere tax-gatherer but as a quasi-judicial authority vested with the power of mitigating hardship to the assessee. The AO should divorce himself from his position as the authority who made the assessment and consider the matter in all its facets, from the point of view of the assessee without at the same time sacrificing the interests of the Revenue.

4.10 In the context of what is stated above, the following observations of Viswanatha Sastri J. in Vetcha Sreeramamurthy vs. ITO [(1956) 30 ITR 252 (AP)] (at pages 268 and 269) are relevant —

“The Legislature has, however, chosen to entrust the discretion to them. Being to some extent in the position of judges in their own cause and invested with a wide discretion under section 45 of the Act, the responsibility for taking an impartial and objective view is all the greater.If the circumstances exist under which it was contemplated that the power of granting a stay should be exercised, the Income-tax Officer cannot decline to exercise that power on the ground that it was left to his discretion. In such a case, the Legislature is presumed to have intended not to grant an absolute, uncontrolled or arbitrary discretion to the Officer but to impose upon him the duty of considering the facts and circumstances of the particular case and then coming to an honest judgment as to whether the case calls for the exercise of that power.”

4.11 Since the power under section 220(6) is discretionary it is not possible to lay down any set principles on which the discretion is to be exercised. The question as to what are the matters relevant and what should go into the making of the decision, in such circumstances, has been explained in Aluminium Corporation of India vs. C Balakrishnan [(1959) 37 ITR 267 (Cal.)] as follows—

“A judicial exercise of discretion involves a consideration of the facts and circumstances of the case in all its aspects. The difficulties involved in the issues raised in the case and the prospects of the appeal being successful is one such aspect. The position and economic circumstances of the assessee are another. If the Officer feels that the stay would put the realisation of the amount in jeopardy that would be a cogent factor to be taken into consideration. The amount involved is also a relevant factor. If it is a heavy amount, it should be presumed that immediate payment, pending an appeal in which there may be a reasonable chance of success, would constitute a hardship. The Wealth-tax Act has just come into operation. If any point is involved which requires an authoritative decision, that is to say, a precedent that is a point in favour of granting a stay. Quick realisation of tax may be an administrative expediency, but by itself, it constitutes no ground for refusing a stay. While determining such an application, the authority exercising discretion should not act in the role of a mere tax-gatherer.”

4.12 The Apex Court has in the case of Pennar Industries Ltd. vs. State of A.P. and Ors. [(2009) 3 SCC 177 (SC)] has held that —

“If on a cursory glance, it appears that the demand raised has no leg to stand, it would be undesirable to require the Applicant to pay full or substantive part of the demand. Petitions for stay should not be disposed of in a routine manner unmindful of the consequences flowing from the order requiring the Applicant to deposit full or part of the demand. There can be no rule of universal application in such matters and the order has to be passed keeping in view the factual scenario involved.”

4.13 It is a settled position that when a strong prima facie case, on merits, has been demonstrated, then no demand whatsoever can be enforced. This proposition can be substantiated by the ratio of the following decisions —

i) If the party has made out a strong prima facie case, that by itself would be a strong ground in the matter of exercise of discretion as calling on the party to deposit the amount which prima facie is not liable to deposit or which demand has no legs to stand upon, by itself, would result in undue hardship if the party is called upon to deposit the amount — CEAT Limited vs. Union of India [250 ELT 200];

ii) In the case of UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)] the Bombay High Court, referring to the decision in the case of CEAT Limited (supra) observed that “where the assessee has raised a strong prima facie case which requires serious consideration, as in the present case, a requirement of pre-deposit would itself be a matter of hardship.”

iii) The Delhi Bench of the Tribunal in the case of Birlasoft (India) Ltd. vs. DCIT [(2011) 10 taxmann.com 220 (Delhi Trib.)], following the decision of the Apex Court in Pennar Industries Ltd. (supra) held that where the taxpayer demonstrates prima facie case, the Tribunal must weigh in favour of granting stay of disputed demand, particularly if recovery of such demand would cause financial hardship to the taxpayer.”

4.14 Demand needs to be stayed where the order giving rise to the demand has been passed in violation of principles of natural justice such as the opportunity of personal hearing not having been granted, request for short adjournment for filing reply to show cause notice having been neglected and assessee was devoid of opportunity to file reply on account of option of furnishing the response on the portal having been disabled, assessment order having been passed without considering the reply of the assessee. The assessee in Renew Power P. Ltd. vs. National E-Assessment Centre [(2021) 128 taxmann.com 263 (Delhi HC)] filed a writ against the assessment order as having beenpassed in violation of the principles of natural justice. The court on the basis of prima facie opinion of the order having been passed in violation of principles of natural justice granted a stay on the operation of the assessment order, notice of demand, and also notice for initiation of penalty proceedings under section 270A of the Act.

Similarly, even in the case of B L Gupta Construction P. Ltd. vs. National E-Assessment Centre [(2021) 127 taxmann.com 131 (Delhi HC)], where the assessment order was passed in violation of principles of natural justice, the court granted a stay on the operation of the assessment order and demand notice.

In the following cases also the courts have, in writ petitions filed by the assessee, granted a stay on the operation of the assessment order, demand notice and initiation of penalty proceedings on the ground that the assessment order was passed in violation of principles of natural justice —

i) Lemon Tree Hotels Ltd. vs. NFAC [(2021) 437 ITR 111 (Delhi HC)]

ii) GPL-PKTCPL JV vs. NFAC [(2022) 145 taxmann.com 156 (Delhi HC)]

iii) Dr. K R Shroff Foundation [(2022) 444 ITR 354 (Guj. HC)]

iv) Dangee Dums Ltd. vs. NFAC [(2023) 148 taxmann.com 22 (Guj. HC)]

5 POWER OF THE AO TO GRANT STAY — SECTION 220(3)

5.1 Section 220(3) reads as under —

“(3) Without prejudice to the provisions contained in sub-section (2), on an application made by the assessee before the expiry of the due date under sub-section (1), the Assessing Officer may extend the time for payment or allow payment by instalments, subject to such conditions as he may think fit to impose in the circumstances of the case.”

5.2 The following points emerge from the above provision—

i) the provisions of sub-section (3) of section 220 are without prejudice to the provisions of sub-section (2) of section 220 i.e., even if a stay is granted by the AO under section 220(3), the liability to pay interest leviable under sub-section (2) of the Act shall continue;

ii) the power conferred upon the AO under sub-section (3) can be exercised only upon satisfaction of twin conditions viz. an application being made by the assessee and such application being made before the expiry of the due date under sub-section (1);

iii) the AO has the power to either extend the time for payment or allow the payment by instalments;

iv) extension of time or payment by instalments may be permitted without imposing any conditions or it may be coupled with such conditions as the AO may think fit to impose in the circumstances of the case;

5.3 It is not necessary that the assessee making an application under sub-section (3) should have preferred an appeal under section 246A. This sub-section will therefore cover even cases where an appeal against an order lies to the
Tribunal or the assessee chooses to file a revision application under section 264 of the Act or the assessee accepts the additions made and chooses not to file an appeal.

5.4 On a comparison of the power vested under sub-section (3) with the power vested under sub-section (6), the following similarities and differences are evident —

SIMILARITIES

i) In both cases, the power is discretionary. In both cases, the power can be exercised and stay granted either with or without conditions as the AO may deem fit.

ii) In both cases, the assessee should make out a prima facie case; point of violation of principles of natural justice, if any; financial hardship and balance of convenience may be established.

DIFFERENCES

i) Power vested under section 220(3) can be exercised by the AO only on an application made by the assessee. Sub-section (6) does not have a reference to making an application by the assessee as a pre-condition for the exercise of the power vested under sub-section (6);

ii) Application under sub-section (3) needs to be made before the expiry of the time period mentioned in the notice of demand. However, an application under sub-section (6) may be made by the assessee even after the time period for making the payment, as mentioned in the notice of demand, has expired;

iii) For exercising the power vested under sub-section (3) it is not necessary that the assessee should have preferred an appeal to CIT(A). Even an assessee who has preferred a revision application under section 264 of the Act or an assessee who has preferred an appeal directly to the Tribunal can also apply for a stay. However, the power vested under sub-section (6) can be exercised only after the assessee has presented an appeal to the JCIT(A) / CIT(A).

iv) Sub-section (3) does not provide for an outer limit beyond which stay cannot be continued. However, under sub-section (6) can be granted only till such time as the appeal before CIT(A) is not disposed of.

v) The provisions of sub-section (3) are without prejudice to the provisions of sub-section (2) whereas sub-section (6) is not without prejudice to the provisions of sub-section (2).

vi) The stay granted pursuant to power under sub-section (6) can be only of disputed demand whereas that is not a pre-condition for grant of stay under sub-section (3).

vii) The said Instruction and the Office Memorandums are in connection with powers vested in the AO under sub-section (6).

6 INSTRUCTIONS ISSUED BY CBDT

6.1 With an intention to streamline recovery procedures, the Board has issued Instruction No. 1914 dated 2.2.1993 (herein referred to as “the said Instruction”). The said Instruction is stated to be comprehensive and is in supersession of all earlier instructions on the subjects and reiterates the then-existing Circulars on the subject.

6.2 Instruction No. 1914 is partially modified by Office Memorandum [F. No. 404/72/93-ITCC] dated 29th February, 2016 and also by Office Memorandum [F. No. 404/72/93-ITCC] dated 31^st July, 2017.

6.3 OM dated 29^th February, 2016 recognises that the field authorities often insist on payment of a remarkably high proportion of disputed demand before granting a stay of balance demand which results in hardship for taxpayers seeking a stay of demand. Therefore, to streamline the process of grant of stay and standardize the quantum of lumpsum payment, OM dated 29^th February, 2016 provides for a lump sum payment of 15 per cent of the disputed demand as a pre-condition for a stay of demand disputed before CIT(A). Exceptions to this general rule, as given in the said Instruction read with OMs, are discussed in 6.7 below.

6.4 OM dated 31^st July, 20217 only modifies the lump sum payment required to be made from 15 per cent as provided in OM dated 29^th February, 2016 to 20 per cent. All other guidelines provided by OM dated 29^th February, 2016 continue to be effective.

6.5 It is a settled position that such circulars and instructions are in the nature of guidelines and are issued to assist the Assessing Authority in the matter of grant of stay and cannot substitute or override the basic tenets to be followed in the consideration and disposal of the stay applications. However, the AOs feel that they are bound by the instructions issued by CBDT and therefore cannot act contrary thereto. Consequently, no matter how strong the facts of the case are, an AO never grants a stay of the entire demand but stays 80 per cent of the demand only if 20 per cent of the demand is paid.

6.6 The Bombay High Court in the case of Bhupendra Murji Shah vs. DCIT [(2020) 423 ITR 300 (Bom. HC)] held that the AO is not justified in insisting on payment of 20 per cent of the demand based on CBDT’s instruction dated 29^th February, 2016 during the pendency of the appeal before CIT(A). The court held that this approach may defeat and frustrate the right of the Applicant to seek protection against collection and recovery pending appeal. Such can never be the mandate of law. The operative paragraph of the order makes an interesting read and therefore is reproduced hereunder —

“We are not concerned here with the Circular of the Central Board of Direct Taxes. We are not concerned here also with the power conferred in the Assessing Officer of collection and recovery by coercive means. All that we are worried about is the understanding of this Deputy Commissioner of a demand, which is pending or an amount, which is due and payable as tax. If that demand is under dispute and is subject to appellate proceedings, then, the right of appeal vested in the Petitioner / Applicant by virtue of the Statute should not be rendered illusory or nugatory. That right can very well be defeated by such communication from the Revenue / Department as is impugned before us. That would mean that if the amount as directed by the impugned communication is not brought in, the Petitioner may not have an opportunity to even argue his appeal on merits or that appeal will become infructuous if the demand is enforced and executed during its pendency.

In that event, the right to seek protection against collection and recovery pending appeal by making an application for stay would also be defeated and frustrated. Such can never be the mandate of law. In the circumstances, we dispose of both these petitions with directions that the Appellate Authority shall conclude the hearing of the Appeals as expeditiously as possible and during the pendency of these appeals, the Petitioner / Applicant shall not be called upon to make payment of any sum.”

6.7 An AO may demand a lump sum payment which is greater than 20 per cent of the disputed demand in the following cases where the disputed demand is as a result of additions —

i) which are confirmed by the appellate authorities in earlier years;

ii) on which decision of the Apex Court or jurisdictional High Court is in favour of revenue;

iii) which are based on credible evidence collected in a search or survey operation.

However, in cases where the disputed demand arises because of addition which is decided by appellate authorities in favour of the assessee and / or the addition is on an issue which is covered in favour of the assessee by the decision of the Apex Court and / or the jurisdictional High Court and the AO is inclined togrant stay upon payment of an amount lower than 20 per cent of the disputed demand, the OM dated 29^th February, 2016 directs the AO to refer the matter to the administrative PCIT / CIT and states that the PCIT / CIT after considering all relevant facts shall decide the quantum / proportion of demand to be paid by the assessee as lump sum payment for granting a stay of the balance demand.

Therefore, while the AO can grant a stay upon directing payment of an amount greater than 20 per cent of the disputed demand, it appears on a literal interpretation of the said Instruction that the AO cannot reduce the magical figure of 20 per cent mentioned in the guidelines. This is contrary to what several courts have held upon interpreting the provisions of section 220(6) and even guidelines and circulars e.g., Madras High Court has in Mrs Kannammal vs. ITO [(2019) 103 taxmann.com 364 (Mad. HC)] has held as under —

“12. 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 Circulars themselves, the financial stringency faced by an assessee 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 per cent 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.

6.8 In case the AO has granted a stay on payment of 20 per cent of the disputed demand and the assessee is still aggrieved, he may approach the jurisdictional administrative PCIT / CIT for a review of the decision of the AO.

6.9 The AO shall dispose of the stay application within 2 weeks of filing of the petition. Similarly, if reference has been made by the AO to PCIT / CIT or a review petition has been filed by the assessee the same needs to be disposed of within 2 weeks of the AO making such reference or assessee filing such review, as the case may be.

6.10 The other salient points arising out of the said Instruction No. 1914 read with the two OMs dated 29th February, 2016 and 31st July, 2017 are —

i) A demand will be stayed only if there are valid reasons for doing so;

ii) Mere filing of an appeal against the assessment order will not be sufficient reason to stay the recovery of demand;

iii) In the event that an appeal has been filed by an assessee to CIT(A), the AO shall grant stay upon payment of 20 per cent of the disputed demand;

iv) In the following cases, the AO can in his discretion, ask for payment of an amount greater than 20 per cent of the disputed demand —

a) where the disputed demand is on account of an addition which has been confirmed by the appellate authorities in earlier years;

b) where the disputed demand is on account of an issue on which the decision of the Apex Court or jurisdictional High Court is in favour of the revenue;

c) where the addition is based on credible evidence collected in a search or survey operation, etc.

However, this stands modified by a direction to refer the matter to the Administrative PCIT/CIT (see para 6.12).

6.11 The Bombay High Court in Bhupendera Murji Shah vs. DCIT [(2020) 423 ITR 300 (Bom.)] has held that – “The AO is not justified in insisting upon the payment of 20 per cent of the demand based on CBDTs instruction dated 29.2.2016 during the pendency of the appeal before the CIT(A). This approach may defeat and frustrate the right of the assessee to seek protection against collection and recovery pending appeal. Such can never be the mandate of law.”

6.12 However, where the disputed demand is on account of an addition which has been decided by appellate authorities in favour of the assessee in earlier years or where the decision of the Apex Court or jurisdictional High Court is in favor of the assessee, the said Instruction requires the AO to refer the matter to the administrative PCIT / CIT. The said Instruction states “The AO shall refer the matter to the administrative PCIT / CIT who after considering all relevant facts shall decide the quantum / proportion of demand to be paid by the assessee as lump sum payment for granting a stay on the balance demand.” The Instruction is shifting the discretion granted to the AO by the statute under section 220(6) to a superior authority. It is highly debatable as to whether CBDT has the power to divest the AO of his statutory powers and vest the same into a superior authority.

6.13 Section 220(6) empowers the AO to grant a stay subject to such conditions as he may think fit to impose in the circumstances of the case. While the section leaves it to the AO to decide the conditions to be imposed, the said Instruction No. 1914 lists 3 conditions, which may be imposed, as an illustration viz. —

i) requiring an undertaking from the assessee that he will cooperate in the early disposal of the appeal failing which the stay order will be cancelled;

ii) reserve the right to review the order passed after the expiry of a reasonable period (say 6 months) or if the assessee has not co-operated in the early disposal of the appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the above situation;

iii) reserve the right to adjust refunds arising, if any, against the demand to the extent of the amount required for granting stay and subject to the provisions of section 245.

The conditions to be imposed are illustrative. The AO may consider imposing a condition/s which are other than the above-stated 3 conditions. However, such conditions to be imposed by the AO will need to be imposed considering the judicial exercise of his discretion. An AO imposing conditions will need to pass a speaking order listing reasons for his deciding to impose such conditions as he may decide to impose failing which his order may be subject to challenge as being arbitrary and having been passed without application of mind. Gujarat High Court has in the case of Harsh Dipak Shah (supra) observed that “Many times in the overzealousness to protect the interest of the Revenue, the authorities render their discretionary orders susceptible to the complaint that those have been passed without any application of mind.”

6.14 Where stay has been granted by the AO upon payment of 20 per cent as mentioned in the said Instruction and the assessee is aggrieved by such an order, the assessee may approach the jurisdictional administrative PCIT / CIT for a review of the decision of the AO.

6.15 The stay application as well as the review by the PCIT / CIT need to be decided within 2 weeks of filing of the application / making of a reference by the assessee / AO.

7 HIGH PITCHED ASSESSMENTS

7.1 High-pitched assessments are assessments where the assessed income is several times the returned income. Demand arising as a result of high-pitched assessment is generally required to stay.

7.2 The then Deputy Prime Minister, during the 8th Meeting of the Informal Consultative Committee held on 13^th May 1969, observed as under —

“Where the income determined on assessment was substantially higher than the returned income, say, twice the amount or more, the collection of tax in dispute should be held in abeyance till the decision on the appeals, provided there was no lapse on the part of the Applicant.”

The above observations were circulated to the field officers by the Board as Instruction No. 96 dated  21^st August, 1969 [F. No. 1/6/69-ITCC]. CBDT has on 1^st December, 2009 issued `Clarification on Instructions on Stay of Demand’ [F. No. 404/10/2009-ITCC] wherein it is clarified that there is no separate existence of Instruction no. 96 dated 21^st August, 1969 and presently it is Instruction No. 1914 which holds the field currently. Instruction No. 1914 does not mention a word about high-pitched assessment.

7.3 The courts have taken note of the tendency to make high-pitched assessments by the AO. Courts have observed that this tendency results in serious prejudice to the assessee and miscarriage of justice and sometimes may even result in insolvency or closure of the business if such power were to be exercised only in a pro-revenue manner — N Jegatheesan vs. DCIT [(2016) 388 ITR 410 (Mad. HC)] and Maheshwari Agro Industries vs. UOI [SB Civil Writ Petition No. 1264/2011 (Raj. HC)]. The Rajasthan High Court in Maheshwari Agro Industries (supra) has held that “it may be like the execution of death sentence, whereas the accused may get even acquittal from higher appellate forums or courts.”

7.4 Courts have consistently understood assessments where assessed income is twice the returned income to be a case of `high pitched assessment’ e.g., Gujarat High Court in Harsh Dipak Shah (infra) has held that the “high pitched assessment” means where the income determined and assessment was substantially higher than the returned income for example, twice the returned income or more”. The Madras High Court in N. Jegatheesan vs. DCIT [(2015) 64 taxmann.com 339 (Mad. HC)], in para 14, observed — “`High Pitched Assessment means where the income determined and assessment was substantially higher than returned income, say twice the later amount or more, the collection of tax in dispute should be kept in abeyance till the decision on the appeal provided there were no lapses on the part of the assessee.”. To a similar effect are the observations of the Delhi High Court in the case Valvoline Cummins Limited vs. DCIT [(2008) 307 ITR 103]; Soul vs. DCIT [(2010) 323 ITR 305] and Taneja Developers and Infrastructure Limited vs. ACIT [(2010) 324 ITR 247].

7.5 The view taken by the AO that in view of the CBDT Instructions and guidelines, he does not have the power to grant a stay unless 20 per cent of the disputed demand is paid is not legally correct.

Para 2B(iii) of the said Instruction No. 1914 states that “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 order appears to be unreasonably high pitched ….”

Para 2B(iii) of Circular No. 1914 CBDT which directs factors to be kept in mind both by the Assessing Officer and by the higher Superior Authority continues to exist and this part of Circular No. 1914 is left untouched by Circular dated 29^th February, 2016. Therefore, while dealing with an application filed by an Applicant, both the AO and PCIT are required to examine whether the assessment is “unreasonably high pitched” or whether the demand for depositing 20 per cent / 15 per cent of the disputed demand amount would lead to a “genuine hardship to the Applicant” or not? — Flipkart India Pvt. Ltd. vs. ACIT [396 ITR 551 (Kar. HC)].

7.6 The courts have in the following cases stayed the entire demand which was raised pursuant to high-pitched assessments e.g., see —

i) Delhi High Court in Valvoline Cummins Limited vs. DCIT [(2008) 307 ITR 103 (Del HC)]; Soul vs. DCIT [(2010) 323 ITR 305 (Del HC)]; Taneja Developers and Infrastructure Limited vs. ACIT [(2010) 324 ITR 247 (Delhi HC)]; Maruti Suzuki India Ltd. vs. ACIT [222 Taxman 211 (Delhi HC)]; Genpact India vs. ACIT [205 Taxman 51 (Delhi HC)];

ii) Bombay High Court in Humuza Consultants vs. ACIT [(2023) 451 ITR 77 (Bom. HC)]; BHIL Employees Welfare Fund vs. ITO [(2023) 147 taxmann.com 427 (Bom. HC)]; Mahindra and Mahindra vs. Union of India [59 ELT 505 (Bom. HC)]; Mahindra and Mahindra Ltd. vs. AO [295 ITR 42 (Bom. HC)]; ICICI Prudential Life Insurance Co. Ltd. vs. CIT [226 Taxman 74 (Bom. HC)]; Disha Construction vs. Ms. Devireddy Swapna [232 Taxman 98 (Bom. HC)]

iii) Gujarat High Court in Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Gujarat)];

iv) Andhra Pradesh High Court in IVR Constructions Ltd. vs. ACIT [231 ITR 519 (AP)]

v) Allahabad High Court in Mrs R Mani Goyal vs. CIT [217 ITR 641 (All. HC)]

vi) Rajasthan High Court in Maharana Shri Bhagwat Singhji of Mewar (Late His Highness) vs. ITAT, Jaipur Bench & Others [223 ITR 192 (Raj. HC)]

7.7 Gujarat High Court in Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Gujarat)] has held that in case of high pitched assessment, wheretax demanded was twice or more of declared taxliability, the application of stay under section 220(6) could not be rejected merely by describing it to be against interest of the revenue if recovery was not made, and; in such cases, revenue could even consider directing the assessee to make a pre-deposit of 5 per cent or 10 per cent of the assessed amount as circumstances may demand.

8 APPLICATION FOR STAY

8.1 It is seen in practice that generally an application made to the AO for a grant of stay is brief and merely mentions the fact that an appeal has been preferred against the order giving rise to the demand in respect of which stay is being sought. However, it needs to be noted that merely filing an appeal against the assessment order will not be sufficient reason to stay the recovery of the demand.

8.2 It is advisable that the stay application should contain arguments to support the contention that the assessee is entitled to a stay of recovery. The assessee must explain the facts of his case in brief, the assessment history, briefly describe the nature of additions made, the arguments in support of the contention that the addition is incorrect and is likely to be deleted in appellate proceedings, and particulars of the appeal filed. The three factors which an assessee must establish in his application are prima facie case, financial stringency, and balance of convenience. In addition, violation of principles of natural justice, if any, must be narrated.

Balance of convenience means comparative mischief or inconvenience that may be caused to either party. An assessee must demonstrate that the balance of convenience is in its favour.

In Avantha Realty Ltd. vs. PCIT [(2024) 161 taxmann.com 529 (Delhi)], the court remanded the matter back for fresh adjudication to the PCIT on the ground that the assessee failed to directly raise contentions such as prima facie case, the balance of convenience and irreparable loss that may be caused. Rajasthan High Court in Kunj Bihari Lal Agarwal vs. PCIT [2023] 152 taxmann.com 339 (Rajasthan)] quashed the order passed by PCIT granting stay upon payment of 20 per cent and remanded it for fresh adjudication since PCIT had failed to give any findings about financial hardships pointed out by assessee and had also not taken into consideration factors such as prima facie case, balance of convenience and irreparable loss while passing impugned order. Madras High Court in Aryan Share and Stock Brokers Ltd. vs. PCIT [(2023) 146 taxmann.com 508 (Madras)] set aside the stay order since it was passed without taking note of financial stringency and balance of convenience.

8.3 Undoubtedly, all instructions and circulars are in the form of guidelines which the authority concerned is supposed to keep in mind. Such instructions/circulars are issued to ensure that there is no arbitrary exercise of power by the authority concerned or in a given case, the authority may not act prejudicial to the interest of the Revenue. However, when it comes to granting a discretionary relief like a stay of demand, it is obvious that the four basic parameters need to be kept in mind (i) prima facie case (ii) balance of convenience (iii) irreparable injury that may be caused to the assessee which cannot be compensated in terms of money and (iv) whether the assessee has come before the authority with clean hands — Harsh Dipak Shah vs. Union of India [(2022) 135 taxmann.com 242 (Gujarat HC)]

9 PARAMETERS TO BE FOLLOWED BY THE AUTHORITIES WHILE DISPOSING OF STAY APPLICATIONS

9.1 Many times stay applications are disposed of in a routine manner. Applications are rejected without granting reasons. Courts have come down heavily on the disposal of stay applications in an arbitrary manner leading the orders to their challenge in writ courts. Casual disposal of stay applications leads to severe consequences e.g., if a garnishee is issued and recovery made from the bank account then the business may get crippled, salaries / wages which are due could remain unpaid, etc. More than two decades back, the Bombay High Court in the case of K E C International vs. B R Balakrishnan [(2001) 251 ITR 158 (Bombay)] laid down the following parameters which authorities should comply with while passing orders on stay applications —

i) while considering the stay application, the authority concerned will at least briefly set out the case of the assessee;

ii) the authority will consider whether the assessee has made out a case for unconditional stay; if not, whether a part of the amount should be ordered to be deposited for which purpose, some short prima facie reasons could be given by the authority in its order;

iii) in cases where the assessee relies upon financial difficulties, the authority concerned can briefly indicate whether the assessee is financially sound and viable to deposit the amount if the authority wants the assessee to so deposit;

iv) 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 provided by the statute to go into appeal. However, if the authority concerned comes to the conclusion that the assessee is likely to defeat the demand, it may take recourse to coercive action for which brief reasons may be indicated in the order; and

The court added that “if the authority concerned complies with the above parameters while passing orders on the stay application, then the authorities on the administrative side of the department like Commissioner need not once again give reasoned order.”

9.2 In spite of clear parameters having been laiddown, the authorities are even today passing orders more in breach of the above parameters. It is in the interest of the revenue to pass orders which are reasoned and speaking so that they stand the tests laid down by the judiciary.

10 CAN A RECOVERY NOTICE BE ISSUED IF THE AO HAS NOT ISSUED A LETTER / PASSED AN ORDER GRANTING A STAY

10.1 A question which often arises in actual practice is that recovery notices are issued while the stay application has been made but no order has been passed rejecting the application / granting a stay. At the outset, such an inaction on the part of the Assessing Officer is contrary to the mandate of para 2B(i) of the said Instruction. Para 2B(i) requires the Assessing Officer to dispose of the stay petition filed with him within two weeks of the filing of the petition by the taxpayer. The said Instruction also states the obvious i.e., the assessee must be intimated of the decision without delay. The said Instruction also deals with a situation where a stay petition is filed with an authority higher than the AO then a responsibility is cast upon such higher authority to dispose of the petition without any delay and in any case within two weeks of the receipt of the petition. Such higher authority is required to communicate the decision thereon to the assessee and also to the Assessing Officer immediately. The obvious reason for communicating the decision to the Assessing Officer immediately is that the Assessing Officer can thereafter take further actions which are in consonance with the said decision.

10.2 As has been mentioned in para 3, no recovery can be made during the pendency of the stay application.

As long as the order rejecting the application is not passed and communicated to the assessee, the position in law would be that the stay application will be regarded as pending and undisposed with the authority to whom it is made. The proposition that no recovery can be made during the pendency of the stay application is supported by the ratio of the decisions of the Madras High Court in Dr T K Shanmugasundaram vs. CIT & Others [(2008) 303 ITR 387 (Mad. HC)] and Bombay High Court in Mahindra and Mahindra Ltd. vs. UOI [(1992) 59 ELT 505 (Bom. HC)] and UTI Mutual Fund vs. ITO [(2012) 345 ITR 71 (Bom.)].

10.3 To sum up, upon an application having been made by an assessee seeking a stay of demand, the AO ought to pass an order granting a stay or rejecting the application made by the assessee.

10.4 The remedy available to an assessee against whom recovery has been made or steps have been taken for recovery while the stay application remains undisposed of will be to approach the higher authorities against such an illegal recovery and/or in the alternative file a writ petition to the High Court. More often than not, in such matters, a writ is the only effective remedy if the assessee wants the recovery made to be restored. Needless to mention, filing a writ petition is both expensive and time-consuming apart from the fact that it results in scarce judicial time on avoidable issues.

11 WHERE DISPUTED DEMAND IS PENDING AND STAY THEREOF HAS BEEN GRANTED UPON PAYMENT OF 20 PER CENT, CAN REFUND BE ADJUSTED AGAINST THE BALANCE WHICH HAS BEEN STAYED

11.1 In a case where disputed demand is outstanding and AO has granted stay thereof upon payment of 20 per cent which has been paid, can the refund due for another year be adjusted against the outstanding demand which has been stayed. The categorical answer is in the negative. Once the demand is stayed then recovery thereof is not permissible. Adjustment of refund against the said demand which has been stayed also amounts to recovery thereof. This position is supported by the ratio of the decision of the Bombay High Court in Bharat Petroleum Corporation Ltd. vs. ADIT [(2021) 133 taxmann.com 320 (Bombay)].

11.2 In the event the assessee has not yet paid the lump sum amount of 20 per cent upon payment of which the stay of balance is to be granted, the refund, if any, can be adjusted only to the extent of 20 per cent. Bombay High Court has in Hindustan Unilever Ltd. vs. DCIT [(20150 377 ITR 281 (Bombay)] that it is not open to the revenue to adjust refund due to the assessee against recovery of demand which has been stayed by order of stay.

11.3 The situation of adjustment of refund against outstanding disputed demand qua which stay application is pending has been dealt with in para 3.2 above.

12 POWER OF CIT(A) TO GRANT STAY

12.1 The Supreme Court in ITO vs. Mohammed Kunhi [(1969) 71 ITR 815 (SC)] held that the Appellate Tribunal had powers to stay the collection of tax even though there was no specific provision conferring such power on the Tribunal. The Supreme Court had approved the principle that the power of the appellate authority to grant a stay was a necessary corollary to the very power to entertain and dispose of appeals. This lends credence to the general principle that wherever the appellate authority has been invested with power to render justice and prevent injustice, it impliedly empowers such authority also to stay the proceedings, in order to avoid causing further mischief or injustice, during the pendency of appeal. In fact, CIT(A) exercising power under section 251 has powerswhich are wider in content, and amplitude as compared to those of a Tribunal under section 254 of the Act. This is apart from the fact that the powers of CIT(A) are co-terminus with the powers of the AO. CIT(A) can do all that the AO can do. Therefore, relying upon the ratio of the decision of the Apex Court in Mohd. Kunhi (supra) it can safely be concluded that section 251 impliedly grants power to CIT(A) to do all such acts (including granting stay) as are necessary for the effective disposal of the appeal.

12.2 It is not correct to say that because a power to grant a stay, while the appeal is pending before CIT(A), has been specifically conferred upon an AO, the CIT(A) does not have power to grant a stay of demand during the pendency of the appeal before him because. Section 220(6) is no substitute for the power of stay, which was considered by the Supreme Court as a necessary adjunct to the very powers of the appellate authority. The powers conferred on the Assessing Officer and Tax Recovery Officer cannot be equated to the powers of the appellate authorities, either in their nature, quality, or extent or vis-à-vis the hierarchy — Paulsons Litho Works vs. ITO [(1994) 208 ITR 676 (Mad)].

12.3 In actual practice, CIT(A) generally does not grant a stay of demand. CIT(A) either keeps the stay application pending or in the alternative contends that under the Act it is the AO who has the discretion to grant a stay of demand or otherwise and that there is no express provision in the Act which grants power to CIT(A) to stay the demand raise.

12.4 The following decisions support the proposition that CIT(A) has the power to grant stay of demand —

i) Karmvir Builders vs. Pr. CIT [(2020) 269 Taxman 45 (SC)];

ii) Sporting Pastime India Ltd. vs. Asstt. Registrar [(2021) 277 Taxman 19 (Mad.)];

iii) Gorlas Infrastructure (P.) Ltd. vs. Pr. CIT [(2021) 435 ITR 243 (Telangana)];

iv) Prem Prakash Tripathi vs. CIT [(1994) 208 ITR 461 (All)];

v) Paulsons Litho Works vs. ITO [(1994) 208 ITR 676 (Mad)];

vi) Debashish Moulik vs. DCIT [(1998) 231 ITR 737 (Cal)];

vii) Punjab Kashmir Finance (P.) Ltd. vs. ITAT [(1999_ 104 Taxman 584 (P & H)];

viii) Bongaigaon Refinery & Petrochemicals Ltd. vs. CIT [ (1999) 239 ITR 871 (Gau)];

ix) Tin Mfg. Co. of India vs. CIT [(1995) 212 ITR 451 (All)]

12.5 Upon the filing of an appeal to CIT(A), where the assessee is of the view that it is entitled to stay of disputed demand without insisting upon the payment of 20 per cent of the disputed demand, it is desirable that a stay application is filed before CIT(A) as well. This will be useful in case the jurisdictional administrative PCIT / CIT does not pass the review order in favour of the assessee.

13 WRIT JURISDICTION

13.1 In cases where the assessee seeks a stay of demand by paying an amount less than 20 per cent of the disputed demand, more often than not, an assessee has to file a writ petition to seek a stay of demand. This is indeed a sorry state of affairs. As to what must be mentioned in the memorandum of the writ has been conveyed by the Apex court in ITO, Mangalore vs. M Damodar Bhat [1969 71 ITR 806 (SC)]. The Apex Court has conveyed that the writ applicant in the memorandum of his writ must furnish specific particulars in support of his case that the AO has exercised discretion in an arbitrary manner. It is just not sufficient to make an averment in the memorandum of writ application that “the order of the ITO made under section 220 is arbitrary and capricious.” In the absence of the specific particulars in the writ application, the High Court should not go into the question of whether the AO has arbitrarily exercised his discretion.

14 CONCLUSION

Section 220(6) confers discretion upon an AO to grant a stay of demand, whether conditionally or otherwise, in cases where the assessee has preferred an appeal to JCIT(A) / CIT(A). While granting a stay the AO has to exercise his discretion judiciously and grant a stay considering the facts and circumstances of the case. Prima facie case, balance of convenience, financial stringency and undue hardship need to be considered before deciding the stay application. The said Instruction, in the garb of standardising the procedure and percentage, curtails the power of the AO when it directs that the AO shall insist upon payment of at least 20 per cent of the demand. The said Instruction has been understood by the courts as only a guideline but not a curtailment of the power vested in the AO by the statute. The said Instruction is unfair as it states that if the circumstances so demand the AO can direct payment of a sum greater than 20 per cent of the disputed demand. However, if the circumstances demand that a sum lower than 20 per cent of the disputed demand be collected and the balance stayed then the said Instruction requires the AO to make a reference to the administrative PCIT / CIT. In case of high-pitched assessment, the assessee should be granted a total stay of demand. Stay application should state briefly the facts of the case and the merits, the application should demonstrate that the assessee has a prima facie case in its favour and bring out financial stringency and balance of convenience. Substantial litigation will be reduced if the authorities consider the stay application judiciously on merits. CBDT should issue a clarification to the effect that while 20 per cent payment is a general rule, the AO can without making a reference to the higher authorities grant a complete stay where circumstances so require.