Stay of Tax Demand u/s 220(6): 20% Deposit Waiver Guide

A large demand notice under Section 156 after an assessment — whether a faceless assessment under Section 144B, a reassessment under Section 147 or a search assessment — usually gives 30 days to pay the tax, interest and any penalty.

A common and costly misconception is that filing an appeal before the Commissioner (Appeals) or Joint Commissioner (Appeals) automatically puts the demand on hold. Filing Form 35 does not by itself stay the demand. Unless a stay is granted, the Assessing Officer (AO) and the Tax Recovery Officer (TRO) can take recovery action, including garnishee notices under Section 226(3) to banks.

For a contractor in Raipur, a steel unit in Urla or a rice mill in Kalahandi, a sudden bank attachment can stop payments to suppliers, staff and lenders. This guide explains how stay of demand works under Section 220(6), the CBDT guideline on a 20% deposit and its exceptions, stay before the Principal Commissioner (PCIT) and the Tribunal (ITAT), bank attachments, and writ remedies.

Which Act applies? This guide refers to the Income-tax Act, 1961, which continues to govern demands and appeals arising from assessments under that Act. The Income-tax Act, 2025, in force from 1 April 2026, contains corresponding provisions on payment of demand, stay and recovery under new section numbers.

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1. Section 220(6): The AO's Discretion

Under Section 220(1), a demand must be paid within 30 days of service of the notice under Section 156. If it is not paid in time, the assessee is treated as in default under Section 220(4), and simple interest at 1% per month or part of a month runs under Section 220(2).

Section 220(6) gives the AO discretion to hold back recovery while an appeal is pending:

"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."

Principles governing the discretion

1. It is a quasi-judicial discretion. The AO should consider the merits of the case and the assessee's financial position, and pass a reasoned order on the stay application.
2. The application should be decided before coercive action. CBDT instructions require stay applications to be disposed of promptly, and courts have frowned on recovery action taken while an application is pending and undecided.
3. Conditions must be reasonable. Insisting on full payment where the order has obvious defects is not a proper exercise of discretion.

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2. The CBDT Guideline on Pre-deposit

How the guideline developed

• Instruction No. 96 (21 August 1969): where income assessed is substantially higher than income returned — commonly referred to as a high-pitched assessment, where the assessed income is twice the returned income or more — collection of the disputed tax should ordinarily be held in abeyance until the first appeal is decided, unless there are exceptional circumstances.
• Instruction No. 1914 (1993): laid down the general framework for stay of demand and recovery.
• Office Memorandum of 29 February 2016: modified that instruction and set a standard of granting stay on payment of 15% of the disputed demand when an appeal is pending before the Commissioner (Appeals).
• Office Memorandum of 31 July 2017: raised the standard from 15% to 20%.

The guideline is not a fixed rule

Field officers sometimes treat 20% as automatic — for example, a notice asking for 20% within seven days "failing which recovery will be initiated". That reading is incorrect.

The 2016 Office Memorandum itself recognises that a lower amount may be accepted in some cases (for instance, where the addition is on an issue decided in the assessee's favour by appellate authorities in earlier years, or by a High Court or the Supreme Court), and a higher amount may be sought in others (for instance, where the issue has already been decided against the assessee). It also allows the assessee to approach the PCIT if not satisfied with the AO's decision.

Situations where a lower deposit or full stay is commonly sought

Decisions on the 20% guideline

• Pr. CIT v. LG Electronics India Pvt. Ltd. (Supreme Court, 2018): the Court observed that the administrative circular does not fetter the authority from granting stay on deposit of a lesser amount in appropriate cases.
• Valvoline Cummins Ltd. v. DCIT (Delhi High Court, 2008): the Court emphasised that the authorities must consider the prima facie merits and whether the assessment is high-pitched, rather than mechanically insisting on payment.

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3. Escalation: PCIT, ITAT and the High Court

The sequence

1. Assessment order and demand notice under Section 156 — 30 days to pay.
2. File the appeal (Form 35) before the Commissioner (Appeals) within 30 days, and file a stay application under Section 220(6) with the AO.
3. AO's decision:
   • Stay granted (on 20% or a lower deposit) — recovery of the balance is held back until the appeal is decided, subject to the conditions imposed.
   • Stay refused, or 20% insisted on without considering the grounds — go to step 4.
4. Apply to the PCIT having jurisdiction for review of the AO's decision.
5. PCIT's decision:
   • Relief granted or deposit modified — follow the PCIT's order.
   • Relief refused, or a garnishee notice is issued under Section 226(3) — go to step 6.
6. Further remedies:
   • If the appeal is pending before the ITAT, apply for stay under Section 254(2A).
   • If the action is arbitrary or urgent (for example a bank attachment without a decision on the stay application), file a writ petition under Article 226 before the High Court.

Application to the PCIT

Where the AO rejects or does not decide the stay application, the assessee may apply to the jurisdictional PCIT. A well-prepared application usually contains:

• an addition-by-addition analysis showing why the assessment is high-pitched or unsustainable;
• the audited balance sheet, cash flow position and bank limit statements, where hardship is pleaded;
• a specific request — full stay, a reduced deposit, or payment in instalments.

Stay before the ITAT — Section 254(2A)

Where the appeal is before the Tribunal:

• Deposit: under the first proviso (as amended by the Finance Act, 2020), the ITAT may grant stay subject to the assessee depositing not less than 20% of the disputed amount or furnishing equivalent security.
• Period: a stay may be granted for up to 180 days.
• Extension: if the appeal is not decided within that period for reasons not attributable to the assessee, the stay may be extended, subject to the same deposit condition, up to a total of 365 days.
• Beyond 365 days: the proviso that would have vacated the stay automatically after 365 days was read down by the Supreme Court in Pr. CIT v. Pepsi Foods Ltd. (2021), so that the stay is not vacated where the delay is not attributable to the assessee.

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4. Bank Attachments under Section 226(3)

If no stay is obtained, the AO or TRO can issue a garnishee notice under Section 226(3) to any person who owes money to, or holds money for, the assessee — most commonly the assessee's bank.

How it works

1. The bank must comply: it is required to pay over the amount due to or held for the assessee, up to the demand amount.
2. Accounts affected: typically current and savings accounts and fixed deposits.
3. Remittance: the bank remits the amount to the government.

Grounds commonly raised against an attachment

• Before the 30-day period expired: recovery before expiry of the period in the demand notice is not permitted unless the AO has, with prior approval of the Joint Commissioner, shortened the period under the proviso to Section 220(1) on the ground that allowing it would be detrimental to the revenue.
• While a stay application is pending: taking recovery action before the AO or PCIT has decided a pending stay application is open to challenge.
• No order communicated: attaching accounts without serving the order rejecting stay deprives the assessee of the chance to seek the next remedy.
• Undrawn cash credit or overdraft limits: Section 226(3) reaches money due to or held for the assessee. The undrawn portion of a cash credit or overdraft limit is a lending facility, not money held for the assessee, and is a common ground of challenge where banks block such limits.

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5. Writ Remedies under Article 226

Where the administrative route fails, or bank accounts are attached without a decision on the stay application, a writ petition under Article 226 of the Constitution can be filed — before the Chhattisgarh High Court at Bilaspur for assessees in Chhattisgarh, and the Orissa High Court at Cuttack for assessees in Odisha.

Grounds typically raised

1. Breach of natural justice: stay rejected without a hearing, or by a non-speaking order.
2. Arbitrary or high-pitched assessment: additions based on third-party statements without cross-examination, or treating gross receipts as income.
3. Lack of jurisdiction: for example, a reassessment notice issued without following the Section 148A procedure, in light of Union of India v. Ashish Agarwal (Supreme Court, 2022), or beyond the time limits in Section 149.
4. Mechanical insistence on 20%: ignoring a strong prima facie case or genuine hardship.

Relief the High Court may grant

• Certiorari: quashing an illegal garnishee notice under Section 226(3).
• Mandamus: directing the AO or PCIT to decide the stay application afresh, after considering the grounds raised.
• Interim stay: restraining recovery and restoring operation of bank accounts until the appeal is decided.

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6. Stay Powers at a Glance

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7. Hypothetical Scenarios from Regional Industries

A. Civil contractors (Raipur, Durg, Bhilai)

Contractors often face additions for alleged unrecorded labour payments or disallowance of sub-contract expenses.

• Pressure point: much of their working capital is locked in bank guarantees, security deposits and earnest money.
• Stay argument: showing that a 20% deposit would put performance guarantees at risk supports a request for a reduced deposit or full stay.

B. Rice mills and paddy traders (Kalahandi, Jayapatna, Bhawanipatna)

Mills sometimes face large additions based on differences between physical stock and procurement records.

• Pressure point: milling is seasonal and runs on cash credit and pledge limits.
• Stay argument: milling agreements, delivery schedules and limit statements show that an attachment during the procurement season would halt operations, supporting a request to the PCIT for stay or release.

C. Steel re-rolling and foundry units (Urla, Bhanpuri, Durg)

Units may face additions for alleged bogus purchases based on suppliers' GST registrations being cancelled later.

• Pressure point: power, raw material and wages require continuous liquidity.
• Stay argument: where physical receipt of goods is supported by e-way bills and weighbridge slips, the assessee has a prima facie case that supports a stay on a reduced deposit.

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8. Timeline After a Demand Notice

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Frequently Asked Questions

Does filing an appeal stop recovery of the demand? No. Recovery is held back only if stay is granted by the AO, PCIT, ITAT or High Court.

Is a 20% deposit compulsory before the AO grants stay? No. It is the standard under the CBDT guideline, but a lower deposit — or full stay — can be granted in appropriate cases, as the Supreme Court noted in LG Electronics.

Is a deposit compulsory before the ITAT? Under Section 254(2A), the Tribunal's stay is subject to a deposit of not less than 20% or equivalent security.

Procedures for stay and recovery are governed by CBDT instructions that are revised from time to time, and by the transition to the Income-tax Act, 2025. Confirm the current position before acting on a specific demand.

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