[Del HC] Pre-deposit of 20% tax demand not a prerequisite for keeping tax recovery in abeyance

The Delhi High Court, in Dabur India Limited v CIT (TDS) [2023] 146 taxmann.com 315 (Delhi), has held that the requirement of pre-deposit payment of 20% of the tax demand in order to be granted stay of recovery, is not a mandatory pre-requisite during the pendency of first appeal, and this condition can be relaxed in appropriate cases.

Brief facts

• The present case had arisen from the orders passed by the Assessing Officer ('AO') under section 201 of the Income-tax Act, 1961 ('the Act') holding M/s Dabur India Limited ('the assessee') as an 'assessee in default', on the account of non- deduction of TDS under section 194H of the Income Tax Act.

• The issue related to the distribution of free samples by the assessee under sales promotion scheme to the stockists thereby, and the cost of items distribution was treated as brokerage / commission under section 194H of the Act by the AO. Consequently, there was a tax demand against the assessee which remained unpaid.

• Apparently, the question as to whether distribution of free samples under sales promotion scheme is a commission / brokerage or rather a trade incentive, has been answered by the Delhi High Court in CIT v Jai Drinks 336 ITR 383 (Del). The court had held that it is a trade incentive.

• The assessee filed applications for stay of demand before the AO and Commissioner of Income Tax (CIT), which were rejected summarily. The assessee, thus, moved the High Court praying for a writ.

Held

The Delhi High Court, while setting aside the impugned order passed by the Commissioner of Income Tax, held as follows:

• The court relied on the case of PCIT v M/s LG Electronics India Pvt Ltd [2018] 18 SCC 447, in which it was held that tax authorities are eligible to grant stay even on deposit of amounts lesser than 20% of the disputed amount. On a parity of reasoning, the requirement of payment of 20% of the tax is not a perquisite for putting in abeyance recovery of demand pending first appeal in all cases.

• The court held that the pre-deposit requirement of 20% can be relaxed in appropriate cases and a reading of the Office Memorandum (OM) dated 29th February 2016 supports this conclusion.

• In the present case, while summarily dismissing the stay application of the assessee, the three cardinal principles of granting stay i.e., (i) the prima facie case,* (ii) *balance of convenience and (iii) irreparable injury, had not been considered.

• Thus, the matter was remanded back to the CIT who was directed to decide the stay application on merits, besides being directed to also grant a personal hearing to the assessee.

Our Analysis

The requirement for pre-deposit in income-tax procedure was introduced in 2016 vide OM dated 29th February 2016. This OM which originally put the pre-deposit requirement of 15% to be paid in order to be granted stay while the first appeal (before the CIT(A)) was pending. Subsequently, vide OM dated 31st July 2017, the pre-deposit requirement was increased to 20%.

The OMs fixed the pre-deposit requirement while at the same time providing also for certain situations where the requirement could be waived off or the quantum could be reduced.

This decision builds on those situations or circumstances when it holds that in appropriate cases the requirement of pre-deposit could be waived or reduced. In situations such as high-pitched assessments, or in cases where repeat additions are made by the tax department while the appellate authorities have consistently held in favor of the assessee, the pre-deposit requirement ought to be waived.

It is to be noted, however, that such writ petitions are case-specific and rather than laying down a principle or precedent in law, they highlight the tendency of the court to grant relief in specific circumstances. As such, even this case may not result in orders granting stay of demand at the AO or CIT level, yet it encourages the aggrieved assessees the facts of whose cases carry enough merits to be granted writ reliefs.

*Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion. *