Court rules for petitioner, finding adjustment of demands under Income Tax Act unsustainable. Revenue ordered to refund amount.

The court ruled in favor of the petitioner, holding that the adjustment of demands under Section 245 of the Income Tax Act was unsustainable due to the failure to consider the petitioner's objections and the impact of stay orders under Section 220(6). The court directed the revenue to refund the adjusted amount along with interest and quashed the consequential orders demanding interest.

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Issues Involved:
1. Adjustment of demands under Section 245 of the Income Tax Act, 1961.
2. Validity of consequential orders demanding interest under Section 220(2) of the Act.
3. Compliance with procedural requirements under Section 245 of the Act.
4. Impact of stay orders under Section 220(6) of the Act on the adjustment of demands.

Issue-wise Detailed Analysis:

1. Adjustment of Demands under Section 245 of the Income Tax Act, 1961:
The petitioner challenged the adjustment of demands aggregating to Rs. 43 crores for the Assessment Years 2004-05, 2007-08, and 2008-09 from the refund of Rs. 129 crores due for the Assessment Year 2006-07. The court noted that Section 245 empowers the revenue to adjust refunds due to an assessee against any tax payable by him. However, the exercise of this power is discretionary and requires prior intimation to the assessee. The court emphasized that the giving of prior intimation is mandatory, as it allows the assessee to correct any errors or present objections. The court found that the Assessing Officer failed to consider the petitioner's objections before proceeding with the adjustment, rendering the decision-making process flawed and the adjustment unsustainable.

2. Validity of Consequential Orders Demanding Interest under Section 220(2) of the Act:
The petitioner also challenged the consequential orders dated 22 August 2013, which demanded interest on the delayed payment of the adjusted demands. The court held that since the adjustment itself was unsustainable, the consequential orders demanding interest were also invalid. The court directed the revenue to refund the amount retained/adjusted along with interest as per the Act.

3. Compliance with Procedural Requirements under Section 245 of the Act:
The court reiterated that the procedural requirement of giving prior intimation under Section 245 is mandatory. The purpose of this intimation is to enable the assessee to point out factual errors or further developments that may affect the proposed adjustment. The court found that the Assessing Officer did not consider the petitioner's objections, which included the fact that no demand was outstanding for the Assessment Year 2004-05 and that demands for the Assessment Years 2007-08 and 2008-09 had been stayed. The court emphasized that the revenue must apply its mind to the objections and record reasons for rejecting them before proceeding with the adjustment.

4. Impact of Stay Orders under Section 220(6) of the Act on the Adjustment of Demands:
The court examined whether the stay orders under Section 220(6) affected the adjustment of demands. It noted that stay orders prevent the revenue from recovering amounts that have been stayed, and such amounts are not considered "remaining payable" under the Act. The court held that the stay orders for the Assessment Years 2007-08 and 2008-09 were still in force, and therefore, the demands for these years were not payable. The court agreed with the Delhi High Court's view in Maruti Suzuki India Ltd. v. DCIT that recovery includes adjustment under Section 245, and an absolute stay order prevents such adjustment. The court concluded that the revenue should have either expedited the hearing of the appeals or sought to vary the stay orders before making any adjustment.

Conclusion:
The court ruled in favor of the petitioner, holding that the adjustment of demands under Section 245 was unsustainable due to the failure to consider the petitioner's objections and the impact of stay orders under Section 220(6). The court directed the revenue to refund the adjusted amount along with interest and quashed the consequential orders demanding interest. The rule was made absolute in terms of the petitioner's prayer clauses 'A' and 'B'.

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