Appeal Pending but Tax Demand Recovered? How to Get a Stay
Updated: 4 days ago
The appeal is filed. Yet the department has sent a recovery notice, adjusted your refund, or attached your bank account for the same demand you are disputing.
This is not a mistake by the department. An appeal does not, by itself, stop recovery. What stops it is a stay, and you have to ask for one at the right forum, with the right deposit.
Quick answer: Filing an appeal does not stop recovery of an income tax demand.
Pending a CIT(A) appeal, the AO can stay it under section 220(6) (section 411(12) of the 2025 Act), usually on payment of 20% of the disputed demand under the CBDT office memorandum.
Before the ITAT, stay under section 254(2A) (section 363(6)) needs a deposit or security of at least 20% and lasts up to 180 days, extendable to 365.
Contents
The Income-tax Act, 2025 applies from 1 April 2026. Proceedings and appeals that arise under the Income-tax Act, 1961 generally continue under it, so this post gives the 1961 section first and the 2025 Act section in brackets.
For the full mapping, see income-tax appeals under the 2025 Act vs the 1961 Act.
Why filing an appeal does not stop recovery
A notice of demand under section 156 (section 289) must normally be paid within 30 days under section 220(1) (section 411(1)). After that, the taxpayer is an assessee in default.
Under section 220(2) (section 411(3)), simple interest at 1% for every month or part of a month runs on the unpaid amount. Recovery can follow, including attachment of bank accounts under section 226(3) (section 416).
Filing Form 35 before the CIT(A) or Form 36 before the ITAT changes none of this by itself. A stay is a separate request, made to a separate authority, and it must be asked for.
Practice guide for professionals
For a clause-by-clause working reference with worked examples, see the Amended Form 3CD Practical Guide (PDF, ₹299).
Stay before the AO: Section 220(6) and the 20% rule
Section 220(6) lets the AO, where an appeal has been presented to the CIT(A), treat the assessee as not in default for the amount in dispute until the appeal is disposed of. The AO acts "in his discretion" and can impose conditions.
Section 411(12) of the 2025 Act carries the same power for appeals presented under sections 356 and 357. It applies only while the first appeal is pending, not after the CIT(A) has decided it.
CBDT office memorandum F.No. 404/72/93-ITCC dated 29 February 2016, issued in partial modification of Instruction No. 1914 of 1996, standardised how much the AO should ask for.
The AO is to grant stay till disposal of the first appeal on payment of 15% of the disputed demand.
The office memorandum of 31 July 2017 raised that standard rate to 20%.
The office memorandum of 25 August 2017 clarified that the change is prospective, so stays already decided at 15% were not to be reopened only for that reason.
The memorandum also sets time limits:
the AO should dispose of a stay petition within two weeks of filing; and
the Principal CIT or CIT should decide a reference or a review within two weeks too.
When the AO can ask for more or less than 20%
The 20% is a standard, not a fixed rate. The 2016 memorandum names situations where the AO may consider a different amount and must refer the case to the Principal CIT or CIT, who decides the lump sum.
More than 20%: the same addition was confirmed by appellate authorities in earlier years, the Supreme Court or jurisdictional High Court has decided the issue in favour of the Revenue, or the addition rests on credible evidence found in a search or survey.
Less than 20%: the same addition was deleted by appellate authorities in earlier years, or the Supreme Court or jurisdictional High Court has decided the issue in the taxpayer's favour.
A taxpayer who is not satisfied with the AO's decision can approach the jurisdictional Principal CIT or CIT for a review.
In PCIT v. LG Electronics India Pvt. Ltd. (Supreme Court, Civil Appeal No. 6850 of 2018, order dated 20 July 2018; (2018) 303 CTR 649), the Court clarified that the authorities may, on the facts of individual cases, accept a deposit of less than 20% pending appeal.
The memorandum does not fetter that quasi-judicial discretion.
Worked example: stay pending CIT(A)
Rajdeep Traders (illustrative) receives an assessment order for AY 2023-24 with an addition under section 68 for unexplained cash credits.
The notice of demand is for ₹25,00,000, made up of tax of ₹20,00,000 and interest of ₹5,00,000. The firm files Form 35 disputing the whole addition.
Standard stay: 20% of ₹25,00,000 is ₹5,00,000. On paying it, the firm can ask the AO to stay the balance of ₹20,00,000 till the CIT(A) decides the appeal.
Case for less: if the ITAT deleted a similar section 68 addition for AY 2021-22 on the same lenders, the firm can ask for a lower deposit, citing that order and LG Electronics.
Interest risk: the stay only stops recovery. If the addition is finally upheld, section 220(2) interest of 1% a month on ₹20,00,000, about ₹20,000 a month, is payable for the period of default.
If the CIT(A) partly allows the appeal: the demand is recomputed through an order giving effect, and a fresh stay is needed for the ITAT stage.
Stay before the ITAT: Section 254(2A)
After the CIT(A) order, section 220(6) no longer helps, because the first appeal is over. The taxpayer applies to the ITAT, which decides on the merits of the stay application.
Under the first proviso to section 254(2A), inserted in its present form by the Finance Act, 2020, the Tribunal may grant stay for up to 180 days on condition that the assessee deposits not less than 20% of the tax, interest, fee, penalty or other sum payable, or furnishes security of an equal amount. Section 363(6) of the 2025 Act has the same condition.
To extend an ITAT stay beyond 180 days:
file an application for extension;
comply with the 20% deposit or security condition; and
satisfy the Tribunal that the delay is not attributable to the assessee.
The original and extended stay together cannot exceed 365 days (section 363(7)).
The third proviso said the stay is vacated after 365 days even if the delay is not the assessee's fault. In DCIT v.
Pepsi Foods Ltd. (Supreme Court, 6 April 2021; [2021] 4 SCR 1; 2021 INSC 227), the Court struck down that part as violating Article 14. The stay now lapses only if the delay is attributable to the assessee.
Section 363(8) of the 2025 Act repeats the words "even if the delay in disposing of the appeal is not attributable to the assessee".
How courts will apply the Pepsi Foods reasoning to the new provision is not yet settled, so check the current position when a 2025 Act stay nears its limit.
For how the Tribunal hearing itself runs, read ITAT procedure and strategy.
What a good stay application contains
Courts have long tested stay requests on three points: a prima facie case, the balance of convenience, and financial hardship. The Bombay High Court set these out in KEC International Ltd. v. B.R. Balakrishnan (2001) 251 ITR 158 (Bom).
Assessment year, demand notice number and date, and the exact amount in dispute.
Proof that the appeal has been filed (Form 35 or Form 36 acknowledgement).
Short grounds showing a prima facie case, with earlier appellate orders or binding rulings on the same issue.
Any amount already paid or adjusted against refunds, and an offer of payment or security.
Facts on hardship, such as liquidity, working capital or a high-pitched addition far above the returned income.
A request to keep recovery in abeyance until the stay application is decided.
File it in writing with the jurisdictional AO and keep the acknowledgement. An application that is never decided is itself a ground for review.
If the AO refuses or recovers anyway
Seek review by the Principal CIT or CIT under the 2016 memorandum, which expects such a review to be decided within two weeks.
If the CIT(A) appeal is pending, a request to the CIT(A) to take up the appeal early can reduce the period of exposure.
Where the AO passes no reasoned order, or attaches a bank account while the stay application is pending, High Courts have intervened in writ jurisdiction under Article 226. That is a remedy of last resort and depends on facts.
Watch for refund adjustment: a refund for another year can be set off against the demand under section 245 (section 438), after an intimation. Respond to that intimation and point to the pending stay.
If the demand itself comes from a processing error, rectification may be faster than a stay. See income tax demand: rectification or appeal.
Common mistakes
Assuming that filing Form 35 or Form 36 stops recovery.
Paying nothing and waiting, which invites bank attachment and builds up 1% monthly interest.
Not applying again for stay at the ITAT stage after the CIT(A) decides.
Not recording the reasons for seeking less than 20%, with copies of earlier favourable orders.
Letting an ITAT stay run out without applying for an extension before the 180 days end.
Related reading
Sources
Sections 156, 220, 226, 245, 246A, 253 and 254(2A) of the Income-tax Act, 1961; sections 289, 356, 357, 362, 363, 411, 416 and 438 of the Income-tax Act, 2025; CBDT Instruction No. 1914 dated 21 March 1996; CBDT OMs F.No.
404/72/93-ITCC dated 29 February 2016, 31 July 2017 and 25 August 2017; PCIT v. LG Electronics India Pvt. Ltd. (SC, 20 July 2018); DCIT v. Pepsi Foods Ltd. (SC, 6 April 2021); KEC International Ltd. v. B.R. Balakrishnan (2001) 251 ITR 158 (Bom).
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