Stay of Demand Pending Appeal

Filing an appeal does not suspend a demand. Thirty days after the notice of demand is served, interest begins to run. The Assessing Officer may then adjust refunds against the demand or begin recovery, even though the Commissioner (Appeals) may take a year or more to hear the case. A stay is a separate request, made to a different authority at each stage. This guide covers who grants it, on what terms, and what the 20 per cent figure does and does not mean.

Which Act governs which years

For demands relating to AY 2026-27 and earlier years, the Income-tax Act, 1961 applies. Section 536(2)© of the Income-tax Act, 2025 continues the 1961 Act for proceedings, “including … appeals”, for tax years beginning before 1 April 2026. Section 536(2)(i) adds that a sum payable under the 1961 Act “may be recovered under this Act”. Section 536(2)(g), as substituted by the Finance Act, 2026, applies the 1961 Act’s interest provisions to defaults in such old-year proceedings that occur on or after 1 April 2026. The rate is to be the one in the corresponding provision of the 2025 Act.

Stage	1961 Act (AY 2026-27 and earlier)	2025 Act (tax year 2026-27 onwards)
Notice of demand, 30 days to pay	ss.156, 220(1)	ss.289, 411(1)
Interest at 1 per cent a month	s.220(2)	s.411(3)
Not treated as in default pending first appeal	s.220(6)	s.411(12)
Stay by the Tribunal	s.254(2A)	s.363(6) to (8)

Stage one: the Assessing Officer under section 220(6)

Section 220(6) says that where an assessee has appealed under section 246 or 246A, the Assessing Officer “may, in his discretion and subject to such conditions as he may think fit to impose … treat the assessee as not being in default in respect of the amount in dispute in the appeal … as long as such appeal remains undisposed of”. Section 411(12) of the 2025 Act is in the same words, for appeals under sections 356 and 357.

The provision gives a discretion. How it is exercised is governed by CBDT instructions.

Instruction No. 1914. The Board’s guidelines on recovery and stay are in Instruction No. 1914 dated 21 March 1996. Part C provides that a demand will be stayed only for valid reasons, that mere filing of an appeal is not enough, and that security or a lump-sum or instalment payment may be required.

The Office Memorandum of 29 February 2016 (F.No. 404/72/93-ITCC). The Board noted that field officers “often insist on payment of a very high proportion of the disputed demand”. It laid down, in paragraph 4:

• (A) where the demand is disputed before the Commissioner (Appeals), the Assessing Officer “shall grant stay of demand till disposal of first appeal on payment of 15% of the disputed demand”, unless the case falls in (B);
• (B) where the Assessing Officer thinks more than the standard is warranted, or less, the matter goes to the administrative Principal Commissioner or Commissioner, who decides the amount. The examples of “more” are an addition confirmed in earlier years, a Supreme Court or jurisdictional High Court decision in favour of the Revenue, or an addition based on credible search or survey evidence. The examples of “less” are an addition deleted in earlier years, or a decision in the assessee’s favour;
• © an assessee still aggrieved after stay on the standard payment may ask the Principal Commissioner or Commissioner to review the Assessing Officer’s decision;
• (D) the Assessing Officer is to dispose of a stay petition within two weeks of filing, and the Principal Commissioner or Commissioner is to dispose of a reference or review within two weeks;
• (E) conditions may be attached. These include an undertaking to co-operate in early disposal of the appeal, a right to review the stay after a reasonable period (six months is given as an example), and a right to adjust refunds up to the amount required for stay, subject to section 245.

The Office Memorandum of 31 July 2017 (same file number). The Board found 15 per cent “to be on the lower side”. It directed that “all references to 15% of the disputed demand in the aforesaid O.M dated 29.2.2016 hereby stand modified to 20% of the disputed demand”. The other guidelines were left unchanged.

What the 20 per cent is not

The 20 per cent is a standard in an administrative instruction. It is not a statutory pre-deposit, and it does not cap the authorities’ discretion in either direction.

The point was settled in Principal Commissioner of Income Tax v. LG Electronics India Pvt. Ltd. The Assessing Officer had levied a penalty of about Rs 32 crore under section 271(1)© for AY 2007-08. The assessee appealed and applied under section 220(6). The Assessing Officer asked for 15 per cent. On review, the Principal Commissioner, by an order-sheet entry, asked for 20 per cent (Rs 6.4 crore), relying on the 2017 memorandum. The assessee’s argument was that the penalty was time-barred. The Delhi High Court (W.P.© 6778/2017, order dated 8 August 2017) set the order aside because it made “no reference to the central issue in the pending appeal” and was “without reasons”. It directed a fresh hearing “without reference to the OM dated 31st July, 2017, which, on the face of it, appears to curtail his discretion”. The Revenue appealed. The Supreme Court (Civil Appeal No. 6850 of 2018, order dated 20 July 2018) recorded the Additional Solicitor General’s submission that the circular “will not operate as a fetter” on the Commissioner, a quasi-judicial authority. It clarified that “it will be open to the authorities, on the facts of individual cases, to grant deposit orders of a lesser amount than 20%, pending appeal”.

Two consequences follow. A stay order has to engage with the prima facie merits of the appeal and give reasons. And an application asking for less than 20 per cent, or for an unconditional stay, is within the authority’s power to grant, though nothing obliges it to.

Making the application to the Assessing Officer and the Principal Commissioner

What to have ready

• The filed appeal: the acknowledgement or transaction ID of Form 35 (or Form No. 99 under the 2025 Act). Section 220(6) applies only once an appeal has been “presented”.
• The demand notice and the computation of the disputed amount. The tax on returned income has to be paid anyway before the appeal is admitted.
• The grounds that show a prima facie case: earlier-year appellate orders deleting the same addition, binding decisions, or patent errors in the order.
• Any facts showing hardship.
• Any security offered.

Procedure

1. Apply in writing to the jurisdictional Assessing Officer. Where the demand is visible on the e-filing portal, the portal’s “Response to Outstanding Demand” facility allows the assessee to disagree with a demand and give reasons, including that an appeal has been filed. That response is not itself a stay order. The procedure is in Responding to an Outstanding Demand.
2. If the Assessing Officer grants stay on 20 per cent and the assessee wants less, apply to the administrative Principal Commissioner or Commissioner for review under paragraph 4© of the 2016 memorandum.
3. Where a stay is refused, or granted without reasons, the LG Electronics orders show the High Court’s writ jurisdiction being used to set the order aside.

Section 220(3) of the 1961 Act, and section 411(5) of the 2025 Act, separately allow the Assessing Officer, on an application made before the due date, to extend time or allow instalments.

Stage two: the Tribunal under section 254(2A)

Once the Commissioner (Appeals) has decided, section 220(6) no longer applies, because it lasts only “as long as such appeal remains undisposed of”. Stay pending the second appeal is sought from the Tribunal.

The first proviso to section 254(2A) lets the Tribunal, “after considering the merits of the application”, stay proceedings for up to 180 days. The condition is that “the assessee deposits not less than twenty per cent of the amount of tax, interest, fee, penalty, or any other sum payable”, or furnishes security of equal amount. Here the 20 per cent is statutory. The second proviso allows extension only on application, only if the deposit condition is met, and only if the delay “is not attributable to the assessee”. The total period is not to exceed 365 days.

The third proviso, as enacted, said the stay “shall stand vacated” after 365 days “even if the delay in disposing of the appeal is not attributable to the assessee”. In Deputy Commissioner of Income Tax v. Pepsi Foods Ltd. (Civil Appeal No. 1106 of 2021, decided on 6 April 2021), the assessee had appealed to the Tribunal for AY 2008-09. Its stay had been extended to near the 365-day ceiling, and it challenged the proviso in the Delhi High Court, which struck down the offending words. The Supreme Court agreed that treating assessees who delay appeals the same as those who do not was arbitrary and violated Article 14. It held that the proviso “will now be read without the word ‘even’ and the words ‘is not’”. A stay “shall stand vacated … only if the delay in disposing of the appeal is attributable to the assessee”.

Section 363(6) to (8) of the 2025 Act carries over section 254(2A) for tax year 2026-27 onwards. Section 363(8) reads: “The order of stay shall stand vacated if the appeal is not disposed of within the period allowed … even if the delay in disposing of the appeal is not attributable to the assessee”. These are the words the Supreme Court struck down from the 1961 provision. How Pepsi Foods applies to their re-enactment in the 2025 Act has not yet been decided. For appeals relating to AY 2026-27 and earlier years, section 254(2A) as read down in Pepsi Foods governs.

A stay application to the Tribunal carries a fee of Rs 500 (section 253(7); section 362(8)). Under the Tribunal’s Practice Note of 30 September 2026, a stay application in an e-filed appeal is filed on the Tribunal’s e-filing portal in the same way as the appeal (see Appealing to the ITAT).

Interest keeps running

A stay prevents recovery. It does not stop interest under section 220(2), or section 411(3), if the appeal fails. The Finance Act, 2026 made one exception for penalty demands. A fourth proviso to section 220(2), deemed inserted from 1 March 2026, says no interest is charged on a demand raised on account of a penalty under section 270A until the Commissioner (Appeals) decides, or until the Tribunal decides in DRP cases. The proviso applies only to assessments under section 143 or reassessments under section 147 “made on or after the 1st day of April, 2027”. The substituted section 411(3)(b) of the 2025 Act gives the same relief for penalties under section 439, up to the order under section 359, or under section 363 in DRP cases.

The procedure in order

1. File the appeal first; a stay under section 220(6) needs an appeal presented.
2. Apply to the Assessing Officer with the grounds, the prima facie case and any hardship, and ask for the amount the facts justify.
3. The standard under the 2016 and 2017 memoranda is 20 per cent; LG Electronics confirms that less may be ordered on the facts.
4. Where the assessee is dissatisfied, it may seek review by the Principal Commissioner or Commissioner within the two-week framework of the 2016 memorandum.
5. After the first appeal is decided, apply to the Tribunal under section 254(2A), with the Rs 500 fee, a 20 per cent deposit or equal security, and the application filed on the Tribunal’s portal.
6. Before the 180-day period ends, apply for extension and show that the delay is not attributable to the assessee.

The next guide covers the Dispute Resolution Panel, the alternative to the first appeal for transfer-pricing cases and non-residents: The Dispute Resolution Panel.