2015 (7) TMI 366 - HC - Income Tax

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

Hindustan Unilever Limited Versus Deputy Commissioner of Income Tax-1 (1) And Others

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 ... Adjustment of refund due with demands outstanding - Unconditional stay granted under Section 220(6) of the Act - Discretionary power of adjustment - Adjustment depend upon the facts and circumstances of each case - Sanctity of order passed by an superior officer - Held that:- It is an admitted position that there is no demand outstanding/payable for Assessment year 2004-05. Thus no occasion to adjust any part of the refund due to the petitioner for Assessment year 2005-06 to meet a non existing demand for A.Y. 2004-05 can arise. Consequent demanding of interest under Section 220(2) of the Act as demanded by order dated 22 August 2013 for A.Y.2004-05 would not arise. Therefore in view of above agreed position the Revenue is directed to hand over the sum of ₹ 3.76 lakhs retained/adjusted out of the refund due for the alleged dues of A.Y.2004-05 to the petitioner along with interest in accordance with the Act. So also we set aside the impugned order dated 22 August 2013 being Exhibit P to the the petition demanding interest of ₹ 1.05 lakhs. For Assessment Year 2007-08 is concerned, the demand of ₹ 18 crores had been stayed by the order of Commissioner dated 22 March 2011 under Section 220(6) till the disposal of the petitioner's appeal before the CIT (Appeals). The appeals are still pending. Further, stay was granted in respect of the demands attributable to transfer pricing adjustment which was an issue of dispute even for the Assessment Year 2006-07 and was finally resolved in favour of the petitioner. It must be pointed out that the petitioner had made an application for stay to the Assessing Officer. In response to the petitioner's application for stay under Section 220(6) of the Act, to the Assessing officer, his superior viz. the Commissioner of Income Tax granted partial stay to the extent of the demand relating to transfer pricing adjustment. We are unable to understand how an order passed by an officer superior to the Assessing Officer granting stay would not be binding upon the Assessing Officer. In fact the Commissioner of Income Tax is the administrative head and does exercise jurisdiction over the entire Commissionerate. Thus, even today, the order Commissioner of Income Tax staying the demand of ₹ 17.98 crores is in force. For Assessment Year 2008-09 is concerned, the Assessing Officer by an order dated 9 March 2012 stayed the demand of ₹ 25 crores attributable to transfer pricing adjustment done in the assessment order till the disposal of the petitioner's appeal by the CIT(Appeals). These transfer pricing dispute are identical to the issue in A.Y. 2006-07 and the same are now resolved in favour of the petitioner by the order of the Tribunal. The appeals are still pending before the CIT (Appeals) and consequently the stay for the Assessment Year 2008-09 is in force even today. The power under Section 245 is discretionary. The orders of stay have to be honoured before adjustment of the demand out of refund is done by the Revenue. If the Assessing Officer did not accept the assessee's contention at the time of making the adjustment, the petitioner should have been informed as to why the objections of the assessee to the adjustment is not sustainable. Unless the Assessing Officer exercising power under Section 245 of the Act subjects himself to this discipline, he would be exercising his powers in an arbitrary manner. In these circumstances, the refund of ₹ 129 crores due to the petitioners is payable in its entirety and no adjustment of any demand for the Assessment Year 2007-08, 2008-09 and 2004-05 was permissible. This for the reason, that factually there was no due outstanding for the Assessment Year 2004-05 and the demand for the Assessment Years 2007-08 and 2008-09 had been stayed pending disposal of the petitioner's appeal before the CIT (Appeals). Consequently, Revenue is directed to hand over the balance amount of ₹ 52 crores out of ₹ 129 crores of refund due for A.Y.2006-07 to the petitioners. The petitioner is not an assessee in default under Section 220 of the Act, till such time as its appeals are decided. Consequently no occasion to charge interest at this stage under Section 220(2) of the Act can arise. Consequently, the orders dated 22 August 2013 for the Assessment Year 2004-05, 2007-08 and 2008-09 being Exhibit N, O and P are quashed and set aside. - Decided in favour of assessee. 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'.