Illegal Refund Adjustments under Income Tax Act: Court Orders Refunds, Emphasizes Compliance

The court deemed the adjustment of refunds without prior intimation under Section 245 of the Income Tax Act as illegal, referencing relevant case law. It found the adjustment of refunds exceeding the amount required for granting stay to be excessive and contrary to CBDT instructions. Recovery actions on demands stayed by Revenue Authorities were also considered illegal. The court directed the Income Tax Department to refund the excess amounts adjusted, with interest, and emphasized compliance with statutory provisions and CBDT instructions.

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Issues Involved:
1. Legality of the adjustment of refunds without prior intimation under Section 245 of the Income Tax Act.
2. Compliance with CBDT Instructions regarding stay of demand and adjustment of refunds.
3. Legality of recovery actions on demands stayed by Revenue Authorities.
4. Entitlement to refund of excess amounts adjusted by the Income Tax Department.

Detailed Analysis:

1. Legality of the adjustment of refunds without prior intimation under Section 245 of the Income Tax Act:

The petitioner, a limited company engaged in developing IT Parks, contested the adjustment of its refunds by the Income Tax Department without prior intimation under Section 245 of the Income Tax Act. The court noted that Section 245 mandates giving prior intimation to the assessee before making any adjustment of refunds against pending tax dues. The respondents admitted that no prior intimation was given before adjusting the refund for Assessment Year 2018-19 against the demands for Assessment Years 2017-18 and 2008-09, which was done by oversight. The court referenced the Andhra Pradesh High Court's decision in Japson Estates (P) Ltd. and the Delhi High Court's decision in Glaxo Smith Kline Asia P. Ltd., which emphasized the necessity of prior intimation to allow the assessee to raise objections. Consequently, the court deemed the adjustment made on 15.04.2020 without prior intimation as illegal.

2. Compliance with CBDT Instructions regarding stay of demand and adjustment of refunds:

The petitioner argued that per CBDT Instruction No.1914, they were required to deposit only 20% of the outstanding demand for the grant of stay. The court observed that the petitioner had complied with this requirement by depositing Rs. 80,00,000 and requesting the adjustment of the remaining 10% from the determined refunds. The court highlighted that the CBDT's Office Memorandum allows the adjustment of refunds only to the extent of the amount required for granting stay, subject to Section 245 provisions. Therefore, the adjustment of Rs. 1,30,45,813 against the outstanding demand for Assessment Year 2017-18, instead of Rs. 80,31,593, was deemed excessive and contrary to the CBDT instructions.

3. Legality of recovery actions on demands stayed by Revenue Authorities:

The petitioner contended that recovery of demands stayed by Revenue Authorities lacks legal sanction. The court referred to the Delhi High Court's ruling in Maruti Suzuki India Ltd., which held that once a stay of recovery is granted, it is improper for the Revenue to recover the money through adjustment of refunds. The court found that the adjustment of refunds for Assessment Year 2019-20 against the demands for Assessment Year 2017-18 was done after the stay was granted on 23.07.2020, making the adjustment on 24.07.2020 illegal. Additionally, the court noted that the respondents failed to provide a valid reason for adjusting the refunds before the expiry of the 30-day period granted to the petitioner to respond to the intimation under Section 245.

4. Entitlement to refund of excess amounts adjusted by the Income Tax Department:

The petitioner sought a refund of the excess amounts adjusted by the Income Tax Department. The court determined that the adjustment of Rs. 1,30,45,813 for Assessment Year 2017-18 and Rs. 55,92,520 for Assessment Year 2008-09, without prior intimation, was illegal. The court directed the respondents to refund Rs. 1,06,06,740 for Assessment Year 2018-19 and Rs. 6,25,70,390 for Assessment Year 2019-20, with interest at 15% per annum from the date of adjustment till the date of payment. The court also ordered the respondents to pay costs of Rs. 5,000 each for both writ petitions.

Conclusion:

The court allowed both writ petitions, directing the Income Tax Department to refund the excess amounts adjusted, with interest, and emphasized the necessity of compliance with statutory provisions and CBDT instructions regarding the adjustment of refunds and stay of demands.

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