The Income Tax Appellate Tribunal, Bangalore, has clarified the conditions under which a stay on disputed tax demand may be granted under Section 254(2A) of the Income Tax Act, 1961. The order underscores that while the Tribunal retains discretion to grant interim relief, such relief is no longer automatic and is strictly contingent upon statutory compliance, particularly the mandatory deposit of 20% of the disputed amount.
Background & Facts
The Dispute
The appellant, M/s. Brandmuscle India Private Limited, Bengaluru, is challenging a final assessment order dated 26.12.2025 passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961. The assessing officer made transfer pricing adjustments totaling Rs. 4,87,32,529, resulting in a total tax demand of Rs. 1,83,16,880 for the assessment year 2022-23. A notice of demand under Section 156 was issued on the same date.
Key Facts
- The disputed demand of Rs. 1,83,16,880 arises solely from transfer pricing adjustments made by the Transfer Pricing Officer (TPO)
- The assessee contends that the comparables selected by the TPO are inappropriate and that the profit margin applied is not reflective of the arm’s length principle
- The assessee filed an appeal before the ITAT under Section 253(1) on 15.01.2026
- The appeal remains pending and no hearing on merits has yet been concluded
- The assessee has not made any payment towards the disputed demand prior to filing the stay application
Procedural History
- 26.12.2025: Final assessment order passed under Section 143(3) r.w.s. 144C(13)
- 26.12.2025: Notice of demand issued under Section 156 for Rs. 1,83,16,880
- 15.01.2026: Appeal filed before ITAT (ITA No. 592/Bang/2026)
- 06.03.2026: Stay application filed under Section 253(7) read with Section 254(2A)
- 16.03.2026: Order pronounced on stay application
Relief Sought
The assessee sought a full stay of the disputed demand of Rs. 1,83,16,880, arguing that payment would cause irreparable financial hardship and that the prima facie case and balance of convenience favored the appellant.
The Legal Issue
The central question was whether the Appellate Tribunal has the authority to grant a full stay of tax demand under Section 254(2A) without the assessee depositing at least 20% of the disputed amount, and what constitutes a sufficient prima facie case to warrant such relief.
Arguments Presented
For the Appellant
The authorized representative argued that the transfer pricing adjustment was legally unsustainable due to flawed comparables and inappropriate methodology. Citing Dunlop India Ltd. and Asian Hotel Ltd., the appellant contended that a strong prima facie case existed, the balance of convenience favored the assessee, and non-grant of stay would cause irreparable injury by forcing the company to liquidate assets or disrupt working capital. It was submitted that the Revenue had not demonstrated any risk of revenue loss that would justify immediate recovery.
For the Respondent
The Department’s representative did not oppose the grant of stay outright but insisted that the amended first proviso to Section 254(2A) mandated a 20% deposit as a precondition. The respondent emphasized that the statutory amendment was enacted to prevent abuse of the stay mechanism and that the Tribunal lacked discretion to bypass this condition, regardless of the merits of the appeal.
The Court's Analysis
The Tribunal undertook a detailed analysis of the statutory framework under Section 254(2A), particularly after its amendment. It acknowledged the appellant’s submissions regarding the transfer pricing issues but clarified that the existence of a prima facie case, while necessary, is not sufficient on its own to warrant a blanket stay.
"The power of stay by the Tribunal is not likely to be exercised in a routine way or as a matter of course in view of the special nature of taxation and revenue laws."
The Tribunal relied on the Supreme Court’s ruling in ITO v. Mohammed Kunhi to affirm that stay is an extraordinary remedy, reserved for cases where the appeal’s purpose would be rendered nugatory without it. It further cited the Delhi High Court’s observation in Asian Hotel Ltd. that a prima facie case requires raising serious, bona fide questions - not a guaranteed win, but a plausible challenge.
Crucially, the Tribunal held that the amended first proviso to Section 254(2A) imposes a mandatory condition: no stay can be granted unless the assessee deposits at least 20% of the disputed demand or furnishes equivalent security. The Tribunal explicitly rejected the notion that it could override this statutory condition, even if the balance of convenience or prima facie case favored the assessee.
"The Tribunal has no power to grant blanket stay especially after the amendment in 1st Proviso to section 254(2A) of the Act unless the assessee demonstrates that the very foundation on which the notice/Order was passed is illegal or raises some jurisdictional issues..."
The Tribunal concluded that while the appellant’s arguments on transfer pricing were not frivolous, they did not meet the threshold of jurisdictional illegality or statutory invalidity that would justify dispensing with the deposit requirement.
The Verdict
The stay petition was partly allowed. The Tribunal directed the assessee to deposit 20% of the disputed demand of Rs. 1,83,16,880, amounting to Rs. 36,63,376, on or before 31.03.2026, and produce proof of deposit to the assessing officer by the same date. Subject to this condition, a stay of the remaining 80% of the demand (Rs. 1,46,53,504) is granted for a period of 180 days from the date of this order, or until disposal of the appeal, whichever is earlier. The appeal shall be disposed of within the stipulated 180-day period.
What This Means For Similar Cases
Deposit Is Non-Negotiable
- Practitioners must now treat the 20% deposit under Section 254(2A) as a mandatory precondition for any stay, irrespective of the strength of the prima facie case
- Failure to deposit within the stipulated time renders the stay order void ab initio
- The deposit requirement applies even if the assessee has filed a writ petition in a High Court challenging the assessment
Prima Facie Case Alone Is Insufficient
- Merely raising plausible transfer pricing arguments or disputing comparables does not justify a full stay
- The Tribunal will not entertain arguments that the assessment is "wrong" unless it is shown to be legally unsustainable or jurisdictionally flawed
- Practitioners must now structure stay applications around statutory non-compliance by the revenue, not just factual or methodological disagreements
Time-Bound Disposal Is Enforced
- The 180-day limit on stay is now strictly operational; tribunals are expected to prioritize such appeals
- Delay in disposal beyond 180 days without cause may expose the revenue to liability for interest or compensation
- Practitioners should file advance applications for extension of stay only if the appeal is genuinely delayed due to court backlogs, not procedural delays by the assessee
