My stay application was rejected in two lines telling me to pay twenty per cent, the bank account has been emptied under s.226(3) and a recovery certificate has gone to the Tax Recovery Officer - what can I still do?
The client is a private limited company trading in steel tubes, assessed at a circle in Ludhiana. An assessment under s.143(3) for AY 2023-24 dated 27 March 2026 added Rs 3,42,00,000 as unexplained credits on unsecured loans from eight parties, and the notice of demand for Rs 1,54,80,000 including interest was served on 30 March 2026. The appeal was filed on 24 April 2026. A stay application went in on 27 April 2026, annexing confirmations and bank statements for six of the eight lenders, the audited accounts showing a working capital gap, and a cash flow statement. On 11 August 2026 an order was passed under s.220(6) which reads, in its entirety, that the assessee is directed to pay twenty per cent of the outstanding demand as per the Board's Office Memorandum failing which recovery will be enforced; it does not mention the company's submissions, the lenders, or the financial material. On 1 September 2026 a notice under s.226(3) went to the company's bank; the company learnt of it from the bank on 3 September. On 9 September 2026 the bank remitted Rs 41,00,000 from the current account and marked a lien on the undrawn portion of the cash credit limit. On 14 September 2026 a recovery certificate under s.222 was drawn and sent to the Tax Recovery Officer. The appeal has not been listed.
Get certified copies of three documents before anything else - the s.220(6) order, the s.226(3) notice with the date it was served on the bank, and the s.222 certificate - and establish whether the company was given notice of the garnishee before the bank was, and whether the Rs 41,00,000 came out of a credit balance or out of the undrawn overdraft limit. Those two facts decide which of the available arguments are worth running. The two-line order is what everything else rests on: if it goes, the garnishee and the certificate that followed it are left standing on nothing, and the whole file can be reset without arguing the merits of the credits.
An order under s.220(6) that simply directs payment of twenty per cent by reference to a Board circular is not a decision at all. A High Court has held that stay applications must be decided by reference to prima facie case, financial stringency and balance of convenience, communicated as a speaking order, and that circulars are guidelines which cannot substitute those tests. Another has set aside a two-line order for the same reason and held that the officer, exercising a quasi-judicial power, must apply all three. A third has held that financial stringency is only one of the three, so rejecting an application for want of hardship evidence alone is not enough. An older decision sets out what the officer actually has to write down: the assessee's case in brief, short prima facie reasons if a part deposit is directed, whether the assessee is financially sound where difficulty is pleaded, and whether the time given is adequate.
It is neither a floor nor a ceiling; it is an administrative norm the officer may depart from in either direction on the facts. The Supreme Court has held that the Board's Office Memoranda of 29 February 2016 and 31 July 2017 do not fetter the quasi-judicial discretion of the officer or the Commissioner, who may grant stay on a deposit of less than twenty per cent. A High Court has said there is nothing magical about the figure, that it is a starting point and not a floor, and that five or ten per cent may be directed if the equities require it; another has held that the Assessing Officer, exercising a quasi-judicial discretion, may order less without going up to the Principal Commissioner. And in a case where the appeal was filed and part-heard, a High Court directed that the assessee not be called upon to pay any sum, much less twenty per cent, and that the bank attachment be raised forthwith, because a statutory right of appeal must not be rendered illusory by recovery.
Interest under s.220(2) is triggered by a notice of demand under s.156 and a default in paying within the time allowed - the Supreme Court has held that both are conditions precedent, so where a demand was met promptly there was no default and no interest. Here the thirty days from service on 30 March 2026 have long gone, so the charge has attached and runs on the unpaid balance month by month. What a stay under s.220(6) does is stop the assessee being treated as in default for recovery purposes; the library's notes on the notice of demand and on the interest family both treat the s.220(2) charge as a separate consequence of missing the date. A High Court has held that where an assessment is restored on appeal the original demand revives from inception and interest runs from the expiry of the thirty days, an intervening appellate order notwithstanding - which is the shape of the exposure if the appeal is won below and lost above.
Section 226(3) is garnishee machinery: a written notice to anyone holding money for the assessee. Clause (iii) uses 'shall' for the copy to the assessee, so a High Court has held that notice to him is mandatory and that where a stay application is on file with an appeal pending the officer should decide it before attaching. Another has held that recovery should not be made pending expiry of the appeal period or disposal of the stay application, and for a reasonable period afterwards, and that reasonable prior notice must precede a withdrawal from an attached account. Where a garnishee notice issued on the very day a stay application was rejected and the account was emptied two days later, a High Court found an element of impropriety and arbitrariness and ordered the money reversed. On the amount, the section reaches money due to the assessee or held for him, which presupposes a debtor-creditor relationship - so an undrawn cash credit limit is not money the bank owes.
Section 222 and the Second Schedule are the wider recovery machinery, not a bigger version of the garnishee: they allow attachment and sale of movable and immovable property, arrest and detention, and the appointment of a receiver, and they are worked by the Tax Recovery Officer rather than by the Assessing Officer. That means a second forum and a second set of remedies. A third party whose property is attached for the company's arrears files a claim or objection under Rule 11, and the Tax Recovery Officer must investigate it, with the burden on the objector to adduce evidence of his interest or possession. What the Tax Recovery Officer cannot do is decide title: the Supreme Court has held that in a Rule 11 enquiry he can only decide who is in possession and in what capacity, and that to have a transfer declared void the Department must file a suit.
No appeal lies against any of this. Section 246A is an exhaustive list and s.226 does not appear in it, so a garnishee notice cannot be taken to the first appellate authority at all; the remedies are an objection by statement on oath from the person served and a petition under article 226. The same is true of the refusal of stay. The petition therefore has one target - an order that records no reasons, applies none of the three parameters and was followed within three weeks by a garnishee and a certificate - and asks for a fresh decision and for the money to be restored meanwhile.
On one High Court's view the first appellate authority has inherent, implied and ancillary power to stay recovery of a disputed demand while an appeal under s.246 or s.246A is pending, even though the Act confers no express power - and that view was taken on facts where the Assessing Officer had refused stay and attached the bank account. A High Court has also held that an assessee who has filed an appeal in time under s.246A is not to be treated as an assessee in default and need not file a separate stay application at all. If the appeal is lost below, the Supreme Court has held that the Tribunal has power to stay recovery as incidental to its appellate jurisdiction - but after the 2020 amendment to the first proviso to s.254(2A) a Tribunal stay comes only on a deposit of not less than twenty per cent or security of equal amount, and a Tribunal bench has accordingly granted stay against security rather than cash.
Section 281 makes a transfer made during the pendency of a proceeding void as against the Department's claim - only as against the Department, and only where the tax exceeds Rs 5,000 and the asset exceeds Rs 10,000 - unless it was for adequate consideration and without notice of the proceeding, or made with the Assessing Officer's previous permission. The Board's circular sets out the route: apply in the prescribed form at least thirty days before the proposed transaction, and permission is to be granted where there is no demand and none likely within six months, where an undisputed demand is paid with interest, or where a disputed demand is stayed and secured. That is the orderly way to sell an asset to fund a deposit, and it also removes the department's best reason for a provisional attachment.
Non-speaking stay orders of this kind are set aside more often than not, and the usual order is a direction to decide the application afresh by a reasoned order within a few weeks, with recovery held meanwhile. That is a reset, not a win - the officer frequently arrives back at twenty per cent, this time with reasons, and the money has then to be found. Sums already taken out of a bank account are sometimes ordered restored, particularly where the garnishee followed hard on the rejection, but courts have also declined to interfere where the twenty per cent simply was not paid, and a company should not plan on getting the Rs 41,00,000 back. The recovery certificate ordinarily goes quiet rather than being withdrawn. The one outcome that ends the matter is the appeal itself, which is why every step above is worth less than getting it heard.
