Stay of Income-tax demand – whether 20% of disputed tax is mandatory

Stay of Demand and the 20% Recovery Rule: Statutory Framework, CBDT Instructions and Judicial Reinforcement by the Bombay High Court

The power of the Income-tax Department to recover tax demand during the pendency of appellate proceedings is statutorily traceable to section 220 of the Income-tax Act, 1961, which provides that any amount specified as payable in a notice of demand shall be paid within the stipulated time. However, the Act itself recognises that rigid recovery during pendency of appeal may cause undue hardship. Section 220(6) therefore empowers the Assessing Officer, where an appeal is filed, to treat the assessee as not being in default in respect of the disputed demand, subject to such conditions as may be imposed. This statutory discretion has, over time, been structured and disciplined by administrative instructions issued by the Central Board of Direct Taxes so as to ensure uniformity, fairness and avoidance of arbitrary recovery.

The foundational administrative guidance in this regard is CBDT Instruction No. 1914 dated 21 March 1996, which laid down broad parameters for grant of stay of demand. Recognising the inconsistent practices across field formations and the increasing litigation on coercive recovery, the CBDT substantially modified this framework by Office Memorandum F.No.404/72/93-ITCC dated 29 February 2016. This Office Memorandum standardised the norm that, in cases where demand is disputed before the first appellate authority, stay should ordinarily be granted on payment of 15% of the disputed demand, unless the case fell within exceptional categories warranting a higher or lower amount. This was a significant policy shift, intended to balance the interests of revenue with the right of the assessee to pursue statutory remedies without financial strangulation.

The policy was further refined by Office Memorandum F.No.404/72/93-ITCC dated 31 July 2017, which enhanced the standard pre-deposit requirement from 15% to 20% of the disputed demand. Importantly, the 2017 Office Memorandum clarified that 20% is the norm and not an inflexible rule. Any departure, either upwards or downwards, can be made only after recording reasons and with the approval of the jurisdictional Principal Commissioner or Commissioner of Income-tax. Thus, the administrative scheme clearly limits the authority of the Assessing Officer and mandates adherence to a structured decision-making process, thereby conferring a legitimate expectation upon the assessee that recovery during pendency of appeal will ordinarily be confined to 20% of the disputed demand.

These principles came up for authoritative consideration before the Bombay High Court in Fork Media Group Private Limited v Centralized Processing Centre Bengaluru, decided on 24 December 2025. In this case, the petitioner was faced with a situation where refunds for Assessment Years 2022–23 and 2023–24 were adjusted against a disputed penalty demand under section 270A for Assessment Year 2021–22, even though the penalty was already the subject matter of an appeal before the first appellate authority. As a result of such adjustment, the department had effectively recovered an amount far in excess of 20% of the disputed demand.

The petitioner repeatedly represented before the Assessing Officer that, in view of the pendency of the appeal and the binding CBDT instructions of 1996, 2016 and 2017, recovery could not exceed 20% of the disputed demand and that the excess adjustment was liable to be refunded. While the department did not dispute the applicability of the CBDT Office Memorandum dated 31 July 2017, it sought to justify the excess recovery on the ground that the adjustment had been carried out by the Centralised Processing Centre and that such over-adjustment was unintentional, arising out of administrative lag or miscommunication.

The Bombay High Court categorically rejected the legality of such excess recovery. The Court reaffirmed that CBDT instructions issued under section 119 of the Act are binding on the tax authorities and that once an appeal is pending, recovery must ordinarily be restricted to 20% of the disputed demand unless a higher recovery is specifically approved by the Principal Commissioner or Commissioner after due application of mind. In the absence of any such approval, adjustment of refunds resulting in recovery beyond 20% was held to be contrary to law. The Court emphasised that administrative or systemic lapses between the Assessing Officer and the CPC cannot prejudice the statutory and procedural rights of the assessee.

Applying these principles, the High Court directed the department to retain only 20% of the disputed penalty for Assessment Year 2021–22 and to refund the excess amount recovered by way of adjustment within a stipulated period. The ruling thus reinforces the legal position that the 20% norm under the CBDT Office Memorandum of 31 July 2017 is not merely advisory but has binding force, and that any recovery in excess thereof, without following the prescribed procedure, is unsustainable in law.

The decision in Fork Media Group Private Limited assumes particular significance in the contemporary regime of automated adjustments and faceless processing, where recovery often takes place mechanically through refund set-offs. The judgment serves as a reminder that automation cannot override statutory safeguards and binding administrative instructions, and that taxpayer rights during pendency of appeal remain fully protected notwithstanding the mode of recovery adopted by the department.

Disclaimer:

This article is intended solely for academic and professional discussion. It does not constitute legal advice or a formal opinion. The views expressed are personal and based on the author’s understanding of the statutory provisions, CBDT instructions and judicial precedents as on the date of writing. Readers are advised to consult the relevant statutory provisions and professional advisors before acting on the basis of this article.