This document provides a summary of provisions related to tax collection and recovery in India. It discusses key sections of the Income Tax Act that deal with collection and recovery (sections 220-232). It outlines the legislative history of changes to various sections over time. It then discusses the concepts of an "assessee in default" and levy of interest on defaulted payments. Specific topics covered include when tax is payable, deeming a taxpayer in default, computation of interest on defaulted payments, and how interest is adjusted in cases where the tax demand amount changes over time such as due to appeals.

1. COLLECTION AND RECOVERY
(Y V S T Sai, IRS)
Joint Director of Income Tax (Hqrs)
NADT, Nagpur
(Restricted Circulation. For Departmental Use Only)
1. A NOTE ON THE READING MATERIAL PROVIDED IN THIS
MODULE:
This module contains reading material which is suitable for a reader interested
in acquiring basic knowledge on the topic as well as a reader who wishes to
make an in depth study. Basic readers can skip sections 2 and 3 of this module.
They can also skip the footnotes and the additional reading material available at
various sub-sections of the module. The author also wishes to make a
disclaimer that the reading material reflects only the personal understanding of
the author and cannot be presumed as the official view of Income Tax
Department.
2. SECTIONS COVERED IN THIS CHAPTER AND SCOPE OF THE
SECTIONS:
Part „D‟ of XVII of the Income Tax Act deals with the provisions of collection and
recovery. In this part, sections 220 to 232 are covered. Schedule II and
Schedule III of the I.T Act deal with the procedure for recovery of taxes. This
chapter deals with subjects like “interest to be charged on default of payments”,
“circumstances under which an assessee can be deemed to be in default”,
“penalty for non-payment of tax”, “drawl of tax recovery certificate (TRC)”,
“modes of recovery”, “procedure for effecting recovery” and “steps to prevent
persons with tax arrears to leave India”.
3. LEGISLATIVE HISTORY:
Section 220 corresponds to provisions of section 45 of the Income Tax Act,
1922. Initially, the period for payment of tax upon service of demand notice was
35 days. Through Direct Tax Laws (Amendment) Act, 1987, this period was
reduced to 30 days w.e.f 01-04-1989 by amending subsection (1) of section
220. Also rate of interest charged for delayed payment of tax, which is at
present prescribed @ 1% per month or part of month has undergone various
changes from 4% per annum to 15% per annum and 1.5 % per month or part
of the month to the present rate.
First proviso to subsection (2) of section 220 was inserted by Finance Act, 1963
with retrospective effect from 01-04-1962. This proviso covers situations where
interest gets reduced upon rectification, appeal effect, revision and settlement.
Second proviso dealing with charging of interest for periods from pre 01-04-89
to post 01-04-89 was inserted w.e.f 01-04-89. Powers were granted to CIT u/s
220(2A) to waive/reduce the interest by insertion of section 220(2A) from 01-
10-84. In 1986, a retrospective amendment was w.e.f 01-10-84 to extend
section 220(2A) even to those cases where tax is already paid. When section
221 was incorporated in the original Act, the authority empowered to levy the
penalty was not specified and no discretion was given to the AO. To remove
these anomalies, a new section was substituted w.e.f 01-04-71 empowered the
AO to levy penalty and also use discretion to not to levy penalty when he is
satisfied that the default was for good and sufficient reasons.
Explanation to section 221(1) was inserted w.e.f 01-10-75 to enable levy of
penalty even in cases where tax has been paid before levy of penalty.

2. Section 222 (1) and 222(2) were substituted with new sections from 01-04-89
bestowing powers on the TRO to directly draw TRC and take action instead of
the AO drawing TRC and referring the case to the TRO. Explanation to secton
222(1) was inserted w.e.f 01-10-75 to extend recovery action to those
properties which are transferred by an assessee on or after 01-06-73 to certain
relatives otherwise than for adequate consideration.
Section 223 to 225 were also substituted from 01-04-89 to bestow powers to
TROs to take direct action in certified cases. In order to enable simultaneous
action for recovery by the TRO having jurisdiction on a place where defaulter
has property along with the TRO where the defaulter is assessed to tax, section
223(2) was substituted from 01-10-75. Section 226 was also amended from 01-
04-89 to enable TRO to take action u/s 226 when TRC is drawn. Section 228
enabling recovery of Indian Tax in Pakistan and vice versa being redundant was
omitted w.e.f 01-04-89. Section 228A enabling recovery of tax in pursuance of
agreements with foreign countries was inserted w.e.f 01-04-72. Section
228A(2) was substituted from 01-04-89 to take into account the powers
bestowed on TRO as described above.
As per section 230 as it existed up to 01-04-89, a person who was not
domiciled in India or a person domiciled in India but in the opinion of the IT
Authority is leaving India with an intention to not to return, was required to
obtain tax clearance certificate before leaving India. This position broadly
continued even after 01-04-89 till 31-05-2003 except for the fact the category
of persons domiciled in India was modified to cover persons intending to leave
India as emigrants, or on a work permit with the object of taking up
employment or other occupation abroad and in whose cases special
circumstances existed. However, the position is liberalized after 01-05-2003 by
making the clearance certificate compulsory only in cases where special
circumstances exist. In other cases, declaration by the person is enough.
Section 230A, which put restrictions on registration of transfer of immovable
property without a clearance certificate has been omitted for good w.e.f 01-06-
2001. Similarly, section 231 which prohibited initiation of recovery proceedings
after expiry of three years from the last day of the financial year in which
demand was raised has been omitted w.e.f 01-04-89. Apart from the above,
amendments are made from time to time in the provisions wherever necessary
to incorporate change in designations of the authorities.
4. INTRODUCTION:
If one has to state the single most important objective of a Tax Administrator,
one would immediately state that it is “tax collection”. The revised figures of
direct tax collection for the F.Y 2005-06 is Rs 1,67,073 Crores and the budget
estimate of direct tax collection for the F.Y 2006-07 is pegged at Rs 2,06,419
Crores. This shows that there is an ever increasing demand on Income Tax
authorities to collect more and more taxes. If one looks at the figures of income
tax collection of our country, one would find that nearly 45% of the collection is
made through Advance Tax and 35% is from TDS. That is, 80% of the tax is
collected through voluntary payments. Yet, it cannot be ignored that a
substantial amount is collected due to untiring efforts of the Tax Administrators.
Still, a whopping amount of Rs. 63,000 Cr (Rs 630 billion = $14.4 billion) is
locked up as arrears of income tax due to litigation in various courts as stated
by Hon‟ble Law and Justice Minister H.R. Bhardwaj in the Rajya Sabha on 15-
05-2006. The arrears pending collection as on 01-04-2005 stood at Rs 99,320
Cr. With the enactment of Fiscal Responsibility and Budget Management Act,
2003 (FRBM Act), Government has a bounden duty to reduce the fiscal deficit in

3. a phased manner. Steps like collection of tax arrears can boost the efforts of
Government to get more revenue and meet the targets under the FRBM Act.
Therefore, collection of the mounting arrears requires well-planned strategy.
Year after year, CBDT follows a clear-cut strategy for collection of taxes, which
is communicated well in advance to the field formations. The strategy is
comprehensive and includes steps for recovery of arrears like:
Measures to ensure early disposal of high demand appeals pending at various
levels like CIT(A), ITAT, HC or SC and also applications pending before
Settlement Commission and
Formation of task force for recovery of arrears
Laying of stiff targets in the area of collection of arrears.
Recently through Finance Act 2006, this strategy has been supplemented by
legislative measure like fixing the time barring dates for assessment at 31st
December instead of the earlier date of 31st March. This reduction in time period
for assessment helps in collection of the demand in the same financial year in
which it is raised. To ensure speedy disposal of tax litigations, Government
also established the National Tax Tribunal (NTT) in January 2006 but the same
could not become functional due to stays granted by various High Courts. A
well-planned assessment does not cause much pain during the collection
process. Realizing this fact, CBDT through its instruction nos. 1937/2006 as well
as 8/2004 emphasized the need to gather information about the assets of the
assessee during the assessment process itself. Interest of the revenue can be
protected by the AO during the pre-assessment stage itself by taking steps like:
issue of notice u/s 210(3) in case of likely default of payment of Advance tax
provisional attachment u/s 281B (say to tackle situations where there is
leakage u/s 143(1) but assessment is picked up for scrutiny or reopened)
declaration of transfer as void u/s 281 in appropriate cases and
quick assessment of persons leaving India (u/s 174) Despite all these
precautions, in a large number of cases, it becomes necessary to collect the tax
only after assessment is made. The present reading material covers the
provisions that enable the Department to collect/recover the tax in such
situations.
It can broadly be stated that a person who has not paid tax even after a
demand is made, may be visited with the following consequences:
Pecuniary consequences (in the form of interest and penalty)
Attachment and sale of movable and immovable property
Appointment of receiver to manage property/business
Arrest and detention for prison up to six months
Institution of civil suit in a Court of law
Recovery through State Government (when ever the job is assigned to the
State Government)
Recovery from assets, if any in a foreign country through
DTAA
Prosecution in case of employment of fraudulent means to prevent recovery
In the subsequent sections, we will examine in detail these aspects of
collection/recovery. However, before discussing the above points, it is obligatory
on our part to understand that when tax is payable.
5. WHEN IS TAX PAYABLE ?
Leaving apart the provisions of Advance Tax, TDS and selfassessment tax, tax
is payable by any assessee before the expiry of due date (30 days) from the
date of service of demand notice u/s 156 of the I.T Act, 1961. One point that is
mandatory for remembrance is that when there is no service of demand notice,

4. there is no tax liability. Therefore, the essential condition for a tax demand is
the service of demand notice. The due date is prescribed in section 220(1) of
the I.T Act, 1961 and can be shortened by the AO if he is of the opinion that
granting of 30 days time is detrimental to the interests of revenue. However, as
per the proviso to section 220(1), such action should be taken only after
obtaining approval of the Joint/Addl Commissioner of Income Tax. However, this
power needs to be exercised with caution. As stated by the Andhra Pradesh
High Court in the case of Subbshree Trading Enterprises Pvt Ltd Vs ACIT [111
STC 144], the decision to shorten the due date cannot be taken in an
overzealous and hasty manner.
6. ASSESSEE IN DEFAULT:
If an assessee does not make the payment of the demanded tax within the due
date, he shall be deemed as an “assessee deemed in default” u/s 220(4) of the
I.T Act, 1961. The other situations in which an assessee shall be treated as an
assessee in default/deemed to be in default are when there is default in;
i. deduction or deposit of TDS (u/s 201(1))
ii. advance tax payment (u/s 218)
iii. payment of self-assessment tax (u/s 140A(3)) and
iv. payment of installments granted (u/s 220(5))
A third party to whom notice u/s 226(3) (garnishee notice) is issued shall also
be treated as an “assessee deemed to be in default” u/s 226(3)(x), in case of
non-compliance of the notice. To avoid the tag of being in default, an assessee
can file an application before the AO under section 220(3) before the expiry of
the due date, seeking installments or extension of time for payment of the
demand. In such a case, the AO has discretion to grant installments or
extension of time subject to conditions as he may think fit to impose in the
circumstances of the case. But, eithergrant of installments or extension of time
does not entitle the assessee to for non-levy of interest. An assessee in default,
is akin to a debtor of the Government of India and will be visited with pecuniary
and non-pecuniary consequences.
7. LEVY OF INTEREST U/S 220(2):
Levy of interest is an automatic consequence that falls on any assessee in
default. The rate of interest underwent through lot of changes since the
inception of the Act and the present rate of interest stands at 1% per month or
part of the month. Interest charged u/s 220(2) is compensatory in nature and
the levy is automatic. There is no need to give opportunity to the assessee
before levy of interest u/s 220(2). No appeal lies against levy of interest1.
i. MANNER OF COMPUTATION AND ADJUSTMENT OF INTEREST:
Rule 119A of the I.T Rules prescribed the method for computation of interest
u/s 220(2). Till 31-03-1989, interest was calculated on annual basis. In such a
case, part of the month shall be ignored. From 01-04-1989, interest is
calculated on monthly basis. In such a case, part of the month shall be treated
as full month. If a period spans from a date prior to 01-04-1989 to a date after,
then interest for the part prior to 01-04-1989 shall be calculated on annual
basis and on monthly basis for the post 01-04-1989 period. Tax (including
penalty or any other sum) on which interest is computed shall be rounded off to
the nearest hundred and any fraction of hundred shall be ignored while
rounding off. As per instruction no. 1936 dated 21-03-1996, whenever an
amount is collected towards pending demand, credit shall first be1 An interested
reader can read the judgment of Madras High Court in the case of Suresh Gokuldas [229 ITR
721]. given to the tax and then to the interest. In other words, the amount shall

5. first be adjusted towards tax and only when the tax demand is fully met,
adjustment towards interest is to be made.
ii. COMPUTATION OF INTEREST ON VARIATION OF DEMAND:
It is not uncommon to see that in most of the cases, demand which is initially
created undergoes changes. This can happen due to reduction or enhancement
in appeal, set aside, cancellation, revision, rectification or reassessment.
Circular no. 334 deals with some of the situations. Following are some of the
examples:
a. If there is reduction of demand in appeal, interest is payable on the final
demand from the due date mentioned in original demand notice served on the
assessee i.e interest is payable from the due date immediately arising out of the
assessment order (may be referred as original due date)
b. If there is enhancement in demand (either in appeal or in revision or upon
rectification), new demand notice shall be issued only for the new demand and
interest on the new demand shall be paid from the new due date. However,
interest on demand which is already pending shall be from the original
due date
c. If the assessment is set aside in one appeal but restored back in further
appeal, interest shall be paid from the original due date
d. In case of reassessment also, interest is leviable on the old demand from the
original due date2
e. Care should be taken while giving effect to appellate orders in light of the
judgment of Supreme Court in the case of Killick Nixon Ltd Vs CIT [258 ITR
627]3
2
Nb Mir Barkat Ali Khan Vs ITO [172 ITR 13] (AP)
3
In this case, CIT(A) granted relief on certain issues and set aside the matter on certain issues.
The AO, while passing the modification order, computed the revised income after considering
relief granted by the CIT(A) but on the set aside issues kept the matter pending for verification.
Meanwhile, the assessee utilized the KVSS scheme to settle his case on the basis of the
modification order. Thereafter, the AO issues a notice for verification of the issues set aside by
the CIT(A). Assessee replied that no further verification can be made as his case is covered
under KVSS. On appeal, the Apex Court held that once the AO has passed the modification order,
all the issues are treated as considered by him and therefore, it cannot be stated that there is
scope for issue of further notice for verification. In light of this order, it is better to pass a single
modification order considering all the issues decided in appeal.
iii. WAIVER/REDUCTION OF INTEREST U/S 220(2A):
Interest levied or to be levied u/s 22)(2) can be waived off or reduced by the
CCIT/CIT, upon application by the assessee, whenthe CCIT/CIT is satisfied that;
1. genuine hard ship would be caused to the assessee and
2. non-payment of tax was due to circumstances beyond the control of the
assessee and
3. the assessee has cooperated in the enquiries for assessment and recovery
The CCIT/CIT can waive/reduce the interest only when the above three
conditions are cumulatively fulfilled.
iv. ADDITIONAL READING MATERIAL ON VARIATION OF INTEREST:
In case full tax is paid by the assessee upon demand but refund was issued due
to order of CIT(A), there is no need for the assessee to pay interest on original
demand even after ITAT restores the order of AO as per the judgment of Kerala
High Court in the case of A V Thomas & Co [160 ITR 818]. In a case where
assessment is fully set aside, the demand goes into abeyance. In equal breadth,
the assessee is also not entitled for any refund before fresh assessment is
made. Nothing is due to revenue nor to the assessee till fresh assessment is
made as held by the Apex Court in the case of CIT Vs Chittor Electric Supply

6. Corporation [212 ITR 404].
v. ADDITIONAL READING MATERIAL ON WAIVER/REDUCTION OF INTEREST:
Courts cannot interfere with the discretionary power of the CCIT/CIT u/s
220(2A) as held by the Kerala High Court in the case of GTN Textiles Ltd Vs CIT
[217 ITR 653].
Similarly, once the application of the assessee is rejected, second application by
the assessee is not maintainable. Settlement Commission does not have
unrestricted powers to waive the interest paid/payable u/s 220(2) as held by
the Apex Court in the case of CIT Vs Damani Brothers [259 ITR 475]. But,
Settlement Commission can consider the circumstances mentioned in section
220(2A) in the manner in which CCIT/CIT considers them.
8. POWER TO TREAT AN ASSESSEE AS NOT IN DEFAULT U/S
220(6):
When an assessee preferred appeal before the CIT(A) u/s 246 or 246A, he can
file a petition seeking stay of demand before the AO. The Act bestows
discretion4 on the AO to consider such cases for treating the assessee as not in
default till the time appeal is disposed off but subject to imposition of conditions
that are fit. As propounded by the Kerala High Court in the case of Pradeep
Ratanshi Vs ACIT & another [221 ITR 502], this discretion lies only with the AO.
It goes without saying that whenever a petition seeking stay is filed,
opportunity of hearing is a must before disposal of the petition. Apart from the
AO, the CIT(A) also enjoys the power to grant to stay which is implicit in his
jurisdiction as heldby the Apex Court in the case of ITO Vs M K Mohammad
Kunhi [71
ITR 815].
i. GUIDE LINES ISSUED BY CBDT THROUGH INSTRUCTION NO. 1914:
CBDT has issued comprehensive guidelines on the power to treat an assessee
not to be in default (termed as stay in common parlance) through Instruction
no. 1914. Circular nos. 530 and 589 also cover the issue of stay. The following
are the guidelines thatemerge from the instruction as well as the circulars:
Any demand should be recovered as soon as it is due
Primary responsibility of collection of demand lies with the AO and when
TRC is drawn with the TRO
Mere issue of show cause notice to the assessee does not amount to efforts
made by the AO for collection
Mere filing of appeal does not entitle the assessee for automatic stay of
collection of demand
Stay can be considered in cases where the AO adopted an interpretation of
law which is different that pronounced by various High Courts or the
jurisdictional High Court when the judgment is not accepted.
Stay can also be considered with respect to additions where the assessee
already won the case for earlier years.
Only demand related to the disputed additions needs to be considered for
stay.
4
Supreme Court in a land mark judgment in the case of S G Jaisinghani Vs Unionof India [65 ITR
34] held that discretion should be within defined limits and to beguided by law. Discretion should
be predictable and based on known principles oflaw. It should not be vague, arbitrary or fanciful.
It should be governed by rule oflaw and not humour. The Apex Court also held that whenever
discretion wasabsolute, man has suffered.
Assessee has to cooperate for early finalization of appeal
In case of reversal of judgment relied upon by the assessee, stay stands
vacated.

7. Present financial capacity of the assessee is also one of the considerations
for grant of stay
Any petition for stay should be disposed off within two weeks of filing by
passing a speaking order
Ordinarily, the power to grant stay should be exercised only by the AO or
his immediate superior. Higher authorities should intervene only in exceptional
circumstances.
While granting stay, AO can impose suitable conditions like grant of
installments, insistence for lump sum payment or seek security
AO may reserve the right to review the order after a reasonable period of
time
AO also has the right to adjust refunds, if any
Liberal installments up to 18 months can be granted in suitable cases
The expression “stay of demand” should not be used in the order on the
petition for stay. Instead, the words “not treated as assessee in default for the
time being” as mentioned in section 220(6) shall be used.
ii. ADDITIONAL MATERIAL ON GRANT OF STAY:
In the case of Hindusthan Rubber Works Ltd Vs ITO [81 ITR 397], the Kolkata High Court
held that grant of stay for limited period is not proper. Similarly, in the case of Gajanan
Agencies Vs ITO [210 ITR 865], the Kerala High Court held that section 220(6) does not
contemplate installments. It is felt by the author that these cases have little relevance in
light of Instruction no. 1914, which clearly permits grant of stay for limited period and also
grant of scheme of installments. As per section 220(7), when an assessee has been
assessed on income arising from a foreign country, whose regulations do not permit
transfer of money, the AO shall not treat the assessee as a defaulter in respect of tax
related to such income till the time restrictions on the transfer of money are lifted except in
cases where the money was utilized or could have been utilized for meeting expenditure in
that country.
9. STAY OF DEMAND DURING SECOND APPEAL BEFORE ITAT:
The Act does not bestow any powers to the Income Tax authorities to grant stay of
collection of demand after the first appeal is disposed off and second appeal is filed by the
assessee before ITAT. The statutory power in such cases is vested with ITAT. As per first
proviso to section 254(2A), in cases where stay of collection of demand is granted by ITAT,
the appeal shall be decided within 180 days of the order granting stay. If not, as per
second proviso to the same section, the order granting stay shall stand automatically
vacated. However, in practical situation, even in cases where appeal is pending before
ITAT, assessees file petitions for stay before IT authorities and the same are considered by
them. This is because of the reason that before considering any stay petition, normally
ITAT demands the assessee to state whether his petition for stay of demand is rejected by
IT authorities or not. Another reason is that there is possibility of collection of at least part
of the demand by way of grant of installments etc by I.T authorities themselves so that
litigation on this issue is avoided and precious time is saved by both the sides. However,
the practice is purely administrative in nature and guided by conventions rather any specific
procedure laid down for this purpose.
10. PENALTY U/S 221:
Penalty is not a mode of recovery. In case of an assessee deemed to be in
default, penalty u/s 221 can be levied for nonpayment of taxes within due date.
This power is specific to AO only. This penalty can also be levied from time to
time but the total amount of the penalty cannot exceed the total amount of tax
demanded. Levy of penalty is discretionary where as levy of interest u/s 220(2)
is automatic. If the assessment goes in appeal, penalty u/s 221 also goes.
Penalty u/s 221 can be levied in case of TDS default as well as default in

8. payment of advance tax. However, penalty on penalty cannot be imposed. Also,
as per section 229, recovery of penalty is to be done in the same manner in
which tax is recovered. Pendency of appeal is no bar for levy of penalty. There
is no time limit for levy of penalty. However, the period should be reasonable.
As per explanation to section 221(1) and also Circular no. 262, even if an
assessee paid all the taxes after the due date but before levy, penalty can be
levied.
11. TAX RECOVERY CERTIFICATE U/S 222:
When an assessee is deemed to be in default, TRO can draw a tax recovery
certificate u/s 2225 and initiate the recovery proceedings by following the
procedure laid down in schedule II to the I.T Act. This is the most important
provision from which the TRO derives jurisdiction. (TRC is drawn in form no. 57
under rule 117B of I.T Rules). Upon drawl of TRC , the TRO can attach and sell
the movable and immovable properties of the assessee, he can appoint 5
Prior to 01-04-89, the AO had to draw a TRC and forward it to the TRO for initiation of recovery
action. From 01-04-1989, TRO has to draw the certificate on his own. The setup of Tax Recovery
Commissionrates which used to exist in some of the metros was also abolished and at present
each range has one TRO. a receiver to manage the business of the assessee or he
can arrest the assessee and send him for detention up to six months. Circular
no. 551 describes the functions of the TRO in detailed manner. Once TRO is
drawn, both AO and TRO exercise jurisdiction over the case. Of course, the
powers of the TRO are restricted only to recovery action. As stated in section
224 of the I.T Act, it is not open to the assessee to question the correctness or
validity of the TRC. But, it shall be open to the TRO to cancel or amend the
certificate, if he thinks so. He can also correct the clerical or arithmetical
mistakes, if any in the certificate. TRO also has the powers to grant installments
or to grant stay and he derives this power from section 225 of the I.T Act,
1961. This power runs parallel to the power of the AO. He shall also amend the
TRC, whenever there is variation in demand due to decisions in appeal etc.
More than one certificate can be drawn by a TRO in a single case, if it is
necessary. As provided in section 223, more than one TRO can initiate recovery
proceedings in the same case. This is because both the TRO in whose
jurisdiction the assessee carries on business or profession or the principal place
of business is situated as well as the TRO in whose jurisdiction the assessee
resides or any movable or immovable property of the assessee is located
exercise jurisdiction over the case. In all such cases, if the TRO who has drawn
the TRC is unable to effect recovery, and if he is of the opinion that it is
necessary to transfer the TRC to the other TRO, he has to forward the copy of
the TRC to the other TRO. Thereafter, the other TRO shall proceed as if he drew
the TRC.
i. ADMINISTRATIVE PROCEDURE FOR POST ASSESSMENT COLLECTION:
Post assessment collection procedure is described in Chapter 10 of the Manual
of Office Procedure 2003. Details of Demand & Collection Register (D&CR),
where the current entries are recorded, and Arrear Demand and Collection
Register (AD&CR), to which the arrears are transferred are available in this
Chapter. Both these registers are very important and must be kept update
without fail. Each quarter, the AO is bound to send dossier reports in all cases
with arrear demand of Rs 10 lakhs and above pending for collection. In cases
with demand of Rs 100 lakhs and above, monthly dossiers are also sent in some
of the charges. Monthly CAP-I report also reflects the correct position.
Important details regarding collection can also be mentioned by the AO in his
monthly DO letter.

9. With the advent of computerization, D&CR and AD&CR are automatically
generated by the ITD applications because processing u/s 143(1) is done in the
AST package and details of scrutiny, rectification, modification etc., are also
entered through AST package. Chapter 10 of the Manual of Office Procedure
describes the system of Individual Ledger Accounting System (IRLA) of ITD
application package where in arrear and collection details of each assessee are
maintained on line. Detailed discussion on the ITD application package is
subject matter of another module of the elearning material.
ii. ADMINISTRATIVE PROCEDURE FOR DRAWAL OF TRC:
Administrative procedure for drawl of TRC is described in Chapter 12 of the
Manual of Office Procedure 2003. Details of the procedure are as follows:
AO has to ensure that all possible steps for collection are taken by him
before referring the case to TRO. In fact, he has to certify that all possible
measures for recovery u/s 226 (which will be described in the section below) as
well as proceedings u/s 221 are taken.
AO should also verify the correctness of the arrears, prepare all the
statements including Form No. 57, details of assets, addresses of debtors etc.,
and pass on to the TRO for drawl of TRC
TRC should be drawn only after the approval of the JCIT/Addl CIT is
obtained. Before granting approval the Range head should be satisfied that all
actions are taken by the AO
As per F No 401/2/2002-ITCC of CBDT, TRC has to be drawn by TRO in all
cases where demand is more than one year old. This means within one year of
creation of the demand, AO has to take all possible measures
As per Instruction no. 1893, TRO should promptly intimate the AO when a
TRC is drawn so that the AO will not initiate any action under 226. When a TRC
is drawn, AO should make an entry in D&CR about the fact and also report the
same in dossier reports.
AO must update the TRO of any variation of demand and also about
pendency of appeal effects, actions u/s 154, revision proceedings etc, if any
If any collection is made by the AO, the same should be promptly intimated
to the TRO and vice versa
Both AO and TRO shall intimate each other about pendency of petitions for
stay or grant of stay/installments, if any
iii. ADDITIONAL MATERIAL – PROCEDURE LAID DOWN IN SCHEDULE II OF THE
IT ACT, 1961 FOR RECOVERY PROCEEDINGS:
Statutory procedure to be followed in case of recovery proceedings initiated by
the TRO is laid down in Schedule II of the I.T Act, 1961. The procedure laid
down in Schedule II is also referred as Income Tax Certificate Proceedings
(ITCP). The procedure is similar to that prescribed that in CPC for recovery in
case of judgment debtors. Salient features of Schedule II are described below:
Upon drawl of TRC, the TRO shall serve a notice on the defaulter granting
him time of 15 days from the date of service to pay the arrears
Interest u/s 220(2) and cost incurred in recovery of arrears shall also be
recovered from the assessee
Proceeds received on sale of assets or otherwise by TRO shall first be
adjusted against arrears mentioned in the TRC including costs incurred during
recovery and interest. Thereafter, if any amounts are payable as on the date of
receipt of the proceeds, the same have to be adjusted. If any balance is left out,
the amount should be paid to the assessee within three months from the date of
delivery or possession of the property. If there is any delay, then simple interest
@ 6% per annum should be paid to the assessee.

10. In case of claims and objections, TRO can conduct investigations to
ascertain the facts.
There is general bar on jurisdiction of civil courts on the proceedings of the
TRO save where fraud is alleged
Whenever a property is attached, a warrant of attachment shall be issued to
the assessee by the TRO
Attachment shall not be excessive
Seizure of property has to be between sunrise and sunset and the officer
authorized by the TRO can break open doors etc., if necessary to gain entry to
the property
Sale has to be through public auction after 15 days of the sale proclamation
in case of movable property (except in case of perishable goods) and 30 days in
case of immovable property. In case of negotiable instruments and shares, the
sale can be through a broker
Auction cannot be held on holidays.
In case of attachment of currency notes and coins, TRO may direct that
such coins or currency notes may be deposited with the AO for adjustment of
tax arrears.
Procedural irregularity cannot vitiate the sale.
If within 30 days of the sale of the immovable property, the assessee or any
other person whose interests are affected by the sale deposits money towards
tax arrears along with interest and penalty of 5% of the purchase money to the
purchaser and file an application before the TRO requesting him to set-aside the
sale.
When there is no application to set-aside the sale and the sale has become
absolute, the TRO issues a sale certificate.
No sale of immovable property can be made after a lapse of three years
from the date on which all appellate proceedings or settlement proceedings are
finalized in a case.
As per Rule 69 of the Second Schedule to the IT Act, TRO can attach
business/property of a defaulter and appoint a receiver to manage the
business/property
TRO also has the power to issue arrest warrant against a person after
serving a show cause notice on a defaulter as to why he can not be committed
to the civil prison for not paying the taxes when he is satisfied that the defaulter
dishonestly concealed or transferred any property with the object of obstructing
recovery proceedings or even if he has adequate means, refuses or neglects to
pay tax. The reasons should be recorded in writing by the TRO before issue of
show cause notice. But, when the defaulter is likelyto abscond, warrant of arrest
can be issued without show cause notice
If the defaulter does not appear in response to the show cause notice, TRO
can issue a warrant of arrest. This work can be entrusted to the Inspector of
Income Tax or Police. Once, a person is arrested, he has to be produced within
24 hours before the TRO, who may hear him and pending hearing send the
defaulter to custody.
Upon conclusion of the enquiry, TRO can pass order of detention in case of
the defaulter and send him to prison for up to six months in case of TRC drawn
for arrear of more than Rs 250/-. For lesser arrear, the sentence is restricted to
a period of six weeks. During the period of imprisonment, subsistence allowance
shall be borne by the TRO
Women, minor children and persons of unsound mind cannot be arrested or
sentenced

11. If a defaulter dies during recovery proceedings, the proceedings will be
continued against the legal representatives of the deceased. In case, the
assessee dies before drawl of TRC, TRC has to be drawn against the legal
representatives of the deceased.
Appeal from the original order of the TRO lies with the CCIT/CIT and shall
be filed within 30 days of the date of the order. If the appellate authority
directs, the recovery proceedings can be stayed pending disposal of the appeal.
Review of the order can also be done by the CCIT/CIT after giving notice to
all interested parties to correct mistakes if any.
12. OTHER MODES OF RECOVERY PRESCRIBED U/S 226:
Apart from the modes of recovery prescribed in section 222, department can also employ
other modes, which are prescribed in sections 226 to 228A and 232. In this section the
modes prescribed u/s 226 are described. It is worthwhile to mention here that as provided
in section 226(1), recourse to section 226 can be taken by the AO only when TRC is not
drawn. Once, TRC is drawn, only TRO can take action u/s 226.
i. ATTACHMENT OF SALARY U/S 226(2):
If the assessee has any income chargeable under the head “salaries”, the
AO/TRO can send a notice of attachment to the payer of the salary and require
him to deposit the salary towards tax arrears of the assessee subject to the
exemptions from attachment laid down in section 60 of CPC.
ii. GARNISHEE PROCEEDINGS U/S 226(3):
Section 226(3) is widely used by AOs and TROs in the Department. Under this
section, AO/TRO can attach any sum due or likely to be due from a third party
to the assessee and require the third party to deposit the sum towards tax
arrears of the assessee. Such proceedings are described as garnishee
proceedings in common parlance and details are described below:
Garnishee notice can be issued from time to time by the AO/TRO to a third
party to realize arrears pending against an assessee
Single notice can be issued for arrears of various years or separate notices
can be issued
A copy of the notice shall be marked to the assessee for information
The notice can be issued to realize amounts which are already due or that
or likely to be due. This does not mean that amounts from unascertained future
obligations, which are non-existent at present, can be attached.
AO/TRO can revoke or amend the notice, if necessary
If any garnishee declares that no such sum is due to the assessee from him,
the declaration has to be made in the form of a statement on oath
AO/TRO shall issue a receipt to the garnishee for the amounts received from
him
The liability of the garnishee is personal in nature and in case of non-
compliance to the notice, the garnishee will be deemed to be an assessee in
default
Garnishee like a Bank or Post Office or Insurance Company cannot insist for
production of pass book or deposit receipt or policy or any other document for
the purpose of entry or endorsement or for any other purpose before making
the payment even if such procedure is prescribed before payment of money in
the normal course of business
Fixed deposits can be realized even before maturity as held by the
Karnataka High Court in the case of Vysya Bank Ltd, Global Trust Bank Ltd Vs
JCIT [241 ITR 178].
iii. APPLICATION BEFORE COURT U/S 226(4):

12. In cases where money belonging to a defaulter-assessee is lying in the custody
of a Court, the AO/TRO can apply to the Court of Law seeking release of the
money towards tax arrears and the court can release the same. In this regard,
it is worth while to mention here that the Court has no power to look into the
extent of the liability but has the power to determine that how much amount
can be released as held by the Supreme Court in the case of Harshad Shantilal
Mehta Vs Custodian [231 ITR 871].
iv. ATTACHMENT AND SALE OF MOVABLE PROPERTY U/S 226(5):
This sub-section enables the AO/TRO to recover arrears by distraint and sale of
movable property as per the procedure laid down in Schedule III of the I.T Act,
1961 when empowered by the CCIT/CIT through a general or special order.
Schedule III of the I.T Act states that the procedure for attachment and sale is
in the same manner as the procedure laid down in Schedule II of the I.T Act.
13. SOME OTHER MODES OF RECOVERY:
TRO can also put forward his claim before BIFR/DRT. TRO can also forward his
claim to liquidator of a company, wherever applicable. In the case of BIFR and
liquidator of a company, they on their won will give notice to the I.T
Department seeking details of claims pending. In case of a liquidator, if he fails
to seek the claims and settles the property without accounting for the claims of
the Department, he shall be held personally liable. DIT(Recovery) is the nodal
agency in case of applications pending before BIFR. In case of Private Ltd
companies, arrears can be realized from the personal assets of the Directors by
seeking recourse to section 179 of the I.T Act, 1961. In case of a firm, arrears
can be realized from the personal assets of the partners. Representative
assessees or agents are also liable to pay the arrears of the persons whom they
represent in the assessment proceedings. As per the provisions of section 227,
recovery can be effected through State Government whenever collection from a
particular area is assigned to the State Government. Tax in such case is to be
collected by the State Government in like manner employed for collection of
municipal tax. Tax arrears can also be realized from the foreign assets of the
assessee, if any, through agreements with foreign countries as provided in
section 228A of the I.T Act. However, the matter has to be referred to CBDT for
recovery. Similarly, upon receipt of reference from other countries by CBDT, tax
arrears of defaulters of a foreign country have to recovered and remitted to the
tax authorities of that country. Lastly, as per the saving clause in section 232,
tax arrears can also be realized through institution of civil suit.
14. PROSECUTION U/S 276:
Whenever any person fraudulently removes, conceals, transfers or delivers to
any other person; any property or interest therein; intending thereby to prevent
execution of recovery proceedings under Schedule II of the I.T Act, 1961, such
person shall be punishable with rigorous imprisonment up to 2 years and also
shall also be liable to fine.
15. WRITE OFF/SCALING DOWN OF ARREARS:
Write off/scaling down is a mechanism to reduce the arrears in the books of the
Department, wherever there is no chance for recovery. This is purely an internal
affair of the Department and the assessee is not involved at all. In fact, there is
no need to inform the assessee that the amounts are written off or scaled down.
The procedure is also only administrative in nature and there is no statutory
write off or scaling down. Chapter 13 of the Manual of Office Procedure 2003
contains detailed procedure on write off/ scaling down. Instruction nos. 7/2004,
14/2003, 16/2003 and 1740/1986 lay down the revised monetary limits and
powers of various departmental committees constituted for write off. There are

13. three methods of write off viz., regular, adhoc and summary. In terms of
sanctioning powers, committees are constituted at local level, sub-zonal or
regional level and zonal level.
i. SUMMARY PROCEDURE FOR WRITE OFF:
Small demands not exceeding Rs 1000/- in each case can be summarily written
off by the AO without any further enquiry when the amount is outstanding
for more than 5 years and
the amount does not relate to any live case;
upon write off, in the AD&CR it should be written as “ignored, as obviously
irrecoverable”.
ii. ADHOC PROCEDURE FOR WRITE OFF:
Demand up to Rs 5000/- can be written off by the AO under this procedure
when records and address of the assessee are not available for more than five
years immediately preceding the financial year in which write off is proposed. In
all such cases, the following procedure should be followed before write off.
AO should certify that records are not traceable;
Attempt to be made to fix responsibility for loss of records;
JCIT/Addl CIT should certify that no responsibility can be fixed for non-
availability of records;
Irrecoverability certificate must be obtained from the TRO for demands
above Rs 2000/- (TRO should certify that no TRC was pending with him or he
could not recover anything in last 5 years) and
Details like Name, Address, present whereabouts, amount of demand,
amount recovered by TRO, balance to be recovered should be noted Instruction
No. 14/2003 describes the revised monetary limits in case of adhoc write off.
iii. REGULAR PROCEDURE FOR WRITE OFF:
Regular write off procedure applies to any demand irrespective of the quantum.
The following conditions should be fulfilled before a case becomes eligible for
regular write off.
the demand should be more than three years old;
the arrear must be clearly irrecoverable;
assessee died/became insolvent/ is not traceable/ left India; or
company is under liquidation; or
firm is dissolved and business is discontinued;
assessee has no attachable assets;
all modes of recovery prescribed in Second Schedule to the I.T Act, 1961
including detention in prison failed;
In cases falling under the above category, the following steps must be taken
before write off.
it should be examined that whether adequate and timely steps for recovery
were taken or not;
a self explanatory note is to be prepared;
irrecoverability certificate needs to be obtained from the TRO and
if the power to sanction write off lies with authorities other than the AO,
Form B (Annexure I) (whose proforma is available in Chapter 13 of Manual of
Office Procedure 2003) should be prepared and proposal for write off should be
submitted to the JCIT/Addl CIT The table given below enlists the powers of
various authorities for sanctioning write off of Income Tax arrears (as per
Instruction no. 14/2003).

14. S Authority to Constitution Monetary Order of
No sanction of limits for Write off
write off committee, if write off (in to be
any Rs) passed by
1 Local Three Addl 0 - 5000 ITO/TRO
Committee CsIT
2 Local Three Addl 5001 - 25000 ACIT/DCIT
Committee CsIT
3 Local Three Addl 25001 - JCIT/Addl.
Committee CsIT 100000 CIT
4 CIT ---- 0 - 10000 CIT
5 Regional Three CsIT 100001 – CIT with
Committee 1000000 report to
next
authority
6 Zonal Three CCsIT 1000001 - CCIT with
Committee 2500000 report to
next
authority
7 Zonal Three CCsIT 2500001 - CCIT with
Committee 5000000 approval
of full
board
8 Zonal Three CCsIT Above CCIT with
Committee 5000000 approval
of full
board and
F.M
If the Addl CIT/JCIT of the concerned range is not a permanent member of the
local committee then he shall also be coopted when cases of his range are
considered. Similarly, CIT of the charge whose cases are under consideration
should be co-opted as member of the regional Committee, if he is not a
permanent member of the regional committee. The committees shall meet
atleast once a month and not only discuss the cases before them but also any
other cases that are under process for write off. Proposals to CBDT and FM
should be routed through the DIT (Recovery). As per Instruction nos. 1740 and
1394, every proposal for write-off the total amount of tax arrears should be
worked out after including interest chargeable for late payment of tax up to the
end of the month preceding the month in which the proposal is considered. This
also includes interest charged/chargeable by the TRO u/s 220(2). Instruction
no. 7/2004 specified corresponding limits for write-off for other direct taxes. As
per this instruction, regional committee can write off other tax arrears up to Rs
5 lakhs and Zonal committee can write off other tax arrears up to Rs 10 lakhs.
After order for write off is passed by the authorities mentioned above, AO
should ensure that arrear is actually struck off from AD&CR. He should also
intimate the TRO about the action. No communication is to be sent to the
assessee. In the order it shouldbe written that “the above write off will not lead
to release or waiver by Government of its claim but will be written off in the
Departmental books. The Government will have the right, at any time, during

15. the next 30 years from the date of the claim to recover the amount if it appears
to the Government that the defaulter has the assets or means to pay”.
16. STEPS TO PREVENT PERSONS WITH TAX ARREARS TO
LEAVE INDIA:
Lastly, it is worthwhile to mention about the provisions of section 230 of the Act
which enable the IT Authorities to prevent persons with tax arrears from leaving
India. A person who is not domiciled in India, who has come to India in
connection with business, profession or employment and who has income
derived from any source in India has to furnish an undertaking in Form 30A
from his employer/person through whom he is in receipt of income to the effect
that tax payable by the person not domiciled in India shall be paid by the
employer/person through income is received. Rule 42 of the I.T Rules, 1962
prescribes the CCITY/DGIT as the authority to deal with the declarations. Upon
receipt of the declaration, the prescribed authority shall be issue a no objection
certificate (NOC) in form no. 30B. CCIT/DGIT can also authorize other
authorities to issue such certificate. However, foreign tourists who visit India
need not obtain NOC when the purpose of his visit is as a tourist or any purpose
other than employment/business/profession. Firstly, whenever a person
domiciled in India wants to leave India, he has to furnish a declaration in Form
30C intimating his PAN number/declaration of not having PAN number, purpose
of visit outside India and estimated duration of stay outside India. Rule 42 of
the I.T Rules, 1962 prescribes the CCITY/DGIT as the authority to deal with the
declarations. Rule 43 of the I.T rules gives details of the forms. In certain cases
in respect of whom circumstances exist, which in the opinion of the Income Tax
authority (who after recording reasons, takes prior written approval of CCIT)
render it necessary for the person to obtain a clearance certificate. In all cases
of persons domiciled in India, the application/declaration has to be made by the
person to the jurisdictional AO. The application shall be filed in form no. 31 and
the clearance certificate shall be issued in form no. 33. As per Rule 44 of the I.T
Rules, any person leaving India shall produce the clearance certificate before
Customs Authority upon request. If any owners/charterer of ship or aircraft
allows a person without valid clearance certificate to leave India, he shall be
personally liable for the tax default of the person who left India. Notification
SRO 961 dated 25-05-1953 grants exemption to certain persons in furnishing
particulars. Lastly, it may be stated that during the earlier years, contractors
and other assessees used to apply for Income Tax Clearance Certificates for the
purpose of production before Bank or Tendering Authority etc. Through Circular
No. 2/2004, CBDT has directed to discontinue this practice w.e.f 01-01-2003
and instructed the AOs that there is no need to issue ITCC. It is also stated that
contractors and other assessees can quote their PAN number in tenders etc.
*************
Compiled by Shankar Bose
Inspector of Income-tax
MSTU, Puri