Identify the notice, deadline and governing Act
This guide addresses proceedings governed by the Income-tax Act, 1961, including earlier years that remain under that Act. For later proceedings governed by the Income-tax Act, 2025, check section 536 and the applicable provision, including section 411(12) for treating an appellant as not in default.
Under section 220(1) of the 1961 Act, a section 156 demand other than advance tax ordinarily has to be paid within 30 days of service. A shorter time may be specified in the notice if the statutory revenue-risk condition is met and the Joint Commissioner has given previous approval. Before the deadline, a taxpayer may request an extension or instalments under section 220(3). Separately, where a qualifying first appeal has been presented, section 220(6) allows the Assessing Officer (AO) to treat the taxpayer as not in default for the disputed amount while the appeal is pending, subject to conditions. Filing the appeal or the stay application alone does not create a statutory stay.
If an amount remains unpaid after the period under section 220(1), simple interest under section 220(2) is generally 1% per month or part of a month. Check statutory reductions or waiver, the balance actually outstanding and the effect of appellate relief. A stay of recovery does not by itself stop that interest. Default can lead to recovery under sections 222–226, subject to the applicable procedure. Distinguish a recovery certificate under section 222 from an AO or Tax Recovery Officer notice to a third party under section 226(3).
What the 20% figure means at first appeal
| Authority | Rule or guidance | Practical effect |
|---|---|---|
| CBDT Instruction 1914, as set out in the operative text reproduced in Oasys Cybernetics | Administrative guidance on recovery and requests to keep disputed demands in abeyance, including strong merits or hardship in appropriate cases. | Do not treat a pending appeal or a high assessment as automatic relief. |
| CBDT office memorandum of 29 February 2016 | Introduced a 15% standard for first appeal cases, with exceptions and a mechanism to refer a higher or lower amount to the jurisdictional Principal Commissioner or Commissioner. | Supports case-specific variation and administrative review of conditions. |
| CBDT office memorandum of 31 July 2017 | Replaced the 15% standard with 20% of disputed demand and retained the other guidelines. | Separate undisputed amounts and explain why the facts justify a different condition. |
The Supreme Court’s short order in PCIT v LG Electronics India Pvt Ltd makes clear that the guidance does not prevent the authorities from ordering a lower deposit on the facts. It did not strike down the memorandum or guarantee an unconditional stay. UTI Mutual Fund v ITO explains the need for fair consideration and reasons. Ask for a written order setting out the amount stayed, the terms, the period and the next steps.
Build the case for interim relief
- Merits: attach the assessment and appeal, and identify the strongest ground and supporting record. A ₹15 crore assessment against a ₹50 lakh return is 30 times the returned income; that ratio is evidence of scale, not proof that the assessment is wrong. For a procedural ground, identify the correct limitation or hearing provision for the proceeding and period.
- Hardship: quantify accessible cash, payroll, statutory dues, covenants and drawing power. Explain whether a deposit would disrupt operations and support that claim with bank statements and a cash flow forecast.
- Balance and revenue protection: explain how proposed security, instalments or other conditions would protect collection. Verify title, encumbrances and the realistic value of offered assets.
Choose the forum for the stage of the dispute
| Stage | Forum and provision | Action |
|---|---|---|
| First appeal filed | AO under section 220(6) | File promptly with the Form 35 acknowledgement, demand service record and evidence. Ask for interim protection pending a reasoned decision. |
| AO decision or referral | Jurisdictional Principal Commissioner or Commissioner under the CBDT guidance | Seek review of the condition or a referral for a different deposit, as applicable. |
| Appeal forum | First appellate authority where applicable; ITAT under section 254(2A) once its appeal is filed | The Madras High Court in Paulsons Litho Works recognised an ancillary power at first appeal. Check governing precedent and procedure. The tribunal has a distinct statutory deposit or security requirement. |
| Urgent judicial review | High Court under Article 226 | Explain why available remedies are inadequate on the facts. Consider a writ where immediate unlawful recovery or a serious procedural failure requires urgent protection. |
Respond to a bank garnishee notice
Section 226(3) can direct a bank or other third party owing or holding money for the assessee to pay up to the amount required to discharge the arrears. It does not authorise seizure of every balance regardless of the demand or of whether the money is owed or held for the assessee. Obtain the underlying demand, evidence of its service, the bank notice, payment status and any stay orders. Check the legal basis for shortened time or urgent recovery and confirm whether the bank has already remitted funds.
UTI Mutual Fund directs restraint as a general rule while time to appeal remains, while a stay application is pending, and for a reasonable period after it is disposed of. It recognises exceptional recovery where there is reason to believe the taxpayer may defeat the demand; reasons matter. Request withdrawal or suspension promptly and send the bank any formal protection order. If needed, seek urgent interim relief, including restoration of sums already remitted where appropriate. There is no universal 24-hour waiting rule or guaranteed restitution or costs.
Five worked illustrations
All examples are hypothetical. Stated demands are assumed notice amounts, not independent tax assessments.
1. ₹13.80 crore demand and limited cash
For AY 2021–22, assume a company with ₹8.50 crore turnover and ₹3.20 crore net worth returned ₹45 lakh. The AO adds ₹14.50 crore under section 68 and ₹2.20 crore under section 40(a)(ia), resulting in ₹17.15 crore of assessed income, about 38.11 times the return. The stipulated demand of ₹13.80 crore includes assumed interest and is about 162.35% of turnover and 4.31 times net worth. Verify the tax base, interest and credits separately if challenging the notice itself.
| Metric | Assumed amount | Hardship implication |
|---|---|---|
| 20% of fully disputed demand | ₹2.76 crore | Administrative benchmark for this request. |
| Accessible cash | ₹42.50 lakh | Cash gap of ₹2.335 crore before operating needs. |
| Monthly payroll and statutory dues | ₹58 lakh for 180 employees | Support commitments with the payroll and payments schedule. |
| Working capital facility | ₹5 crore sanctioned; ₹4.85 crore drawn | Nominal undrawn balance is ₹15 lakh; actual availability depends on drawing power and covenants. |
Support the disputed customer advances with contracts, customer confirmations, transaction history and bank evidence; GST registrations alone do not prove genuineness. If the AO applies 20% mechanically, request review and, if urgent, ask the High Court for appropriate interim protection. A court may reconsider, remit, or impose terms depending on the facts.
2. Garnishee notice on day 16
An LLP is served on 10 February 2024 with an ₹85 lakh demand. Assuming the ordinary 30-day period applies, the payment deadline is 11 March 2024. A bank notice on 26 February is 16 days after service. If ₹62 lakh was remitted, ₹23 lakh of the original demand would remain before other adjustments. If the LLP approaches the High Court on 28 February, it should show the service and remittance evidence and check whether any shortened period or other valid statutory basis existed. Ask for protection and appropriate restoration of funds without assuming a particular court order.
3. Offer 5% now and 15% in instalments
On an assumed ₹1.50 crore disputed demand involving section 43B(h) in a year to which it applies, 20% is ₹30 lakh. An offer of 5% now (₹7.50 lakh) plus 15% in six instalments (₹22.50 lakh total; ₹3.75 lakh each) would leave ₹1.20 crore, or 80%, of demand stayed if those terms were accepted and met. Attach a six-month cash flow forecast and explain the proposed undertaking on 25 trucks. A written order should specify the instalment dates and the consequence of a missed payment.
4. India–US MAP and security
Assume an Indian subsidiary faces an ₹18 crore transfer pricing adjustment and an assumed ₹6.20 crore demand, all disputed. Confirm the correct domestic appeal route: a final assessment following DRP directions normally goes directly to the ITAT under section 253, unlike an ordinary appealable AO order. The taxpayer can consider Article 27 MAP separately. Check whether the specific issue, years, procedural stage and applicant qualify under the bilateral collection-suspension memorandum. Where security is demanded in India, use the Annex A irrevocable bank guarantee from a scheduled bank or an eligible Indian branch of a foreign bank. A proposed ₹6.20 crore guarantee equals the assumed demand but must be checked for any applicable interest coverage and other requirements; a MAP request alone does not stay recovery. Record any suspension and its scope in writing.
5. ITAT stay and the statutory security alternative
Assume a company appeals a ₹4.25 crore demand following an adverse section 68 decision. Check the actual recovery notice and the applicable time for payment. File the tribunal appeal and a separate stay application complying with Rule 35A; section 253(7) prescribes a ₹500 stay application fee. The first proviso to section 254(2A) allows an initial stay of up to 180 days, subject to a deposit of at least 20% of the amount payable or security of equal amount. On these facts 20% is ₹85 lakh. A ₹45 lakh payment is about 10.59% and leaves ₹40 lakh to reach that benchmark. Do not assume that part payment plus a land title satisfies the statute; seek an express ruling on the proposal and evidence the value and enforceability of any security. After the ₹45 lakh payment the unpaid amount is ₹3.80 crore, before other adjustments.
Filing checklist
- Confirm service and both the appeal and payment deadlines. File the appeal and make a separate stay request promptly.
- Reconcile disputed and undisputed amounts, payments and credits. Document merits, available cash and proposed security.
- Keep filing acknowledgements, the written decision, conditions and expiry dates. Monitor bank notices and take prompt action if needed.
Frequently asked questions
Can the first appellate authority consider a stay?
Check the applicable jurisdiction and procedure. Paulsons Litho Works recognised the first appellate authority’s ancillary power; the Supreme Court’s Mohammed Kunhi decision concerned the ITAT. Section 220(6) itself concerns the AO.
Does Form 35 automatically stop collection?
No. Seek written protection and monitor the payment and appeal deadlines independently.
Does a stay stop section 220(2) interest?
Ordinarily no. Check the unpaid balance, applicable interest period, appellate effect and any separate waiver.
What if the demand notice was never served?
Request the notice and service record, raise the specific objection, and seek urgent protection where warranted. The remedy depends on the facts and governing recovery provision.
When can directors of a private company face recovery?
Section 179 can impose joint and several liability for unrecoverable company tax on directors from the relevant period, subject to its conditions and the director’s statutory defence. Check the recovery efforts, notice and opportunity to respond before assuming personal liability.
Can an ITAT stay extend beyond 365 days?
In DCIT v Pepsi Foods Ltd, the Supreme Court struck down the words that required vacation even where delay was not attributable to the taxpayer. The Tribunal can grant an extension beyond 365 days in a deserving case when the delay is not attributable to the taxpayer. Apply for extension with evidence; continuation is not automatic.
Sources
- Income-tax Act, 1961: sections 156, 179, 220, 222–226, 249 and 253–254
- Income-tax Act, 2025: section 411 and transition under section 536
- CBDT: official explanation of its 29 February 2016 office memorandum
- Madras High Court, Oasys Cybernetics: text of Instruction 1914 and the 2016 and 2017 CBDT office memoranda
- Supreme Court order, PCIT v LG Electronics India Pvt Ltd, 20 July 2018
- Bombay High Court, UTI Mutual Fund v ITO: consideration of stay and safeguards on recovery
- Madras High Court, Paulsons Litho Works v ITO: ancillary first appellate stay jurisdiction
- ITAT rules and guidance, including Rule 35A
- Supreme Court, DCIT v Pepsi Foods Ltd, 6 April 2021
- India–US income-tax treaty, Article 27
- India–US competent authority memorandum on suspension of collection and its security annex
- CBDT MAP guidance: collection suspension and parallel domestic remedies