2024 (3) TMI 773 - HC - Income Tax

Income-tax demand adjusted against refunds while s.220(6) stay request pending-action held unlawful; refund ordered after 20% deposit.

Adjustment of a disputed income-tax demand against refunds while a stay application under s. 220(6) remained pending was held arbitrary and unlawful. The ... Validity of pre-deposit requirement for stay under Section 220(6) - Discretion of Assessing Officer under Section 220(6) - Office Memorandum as administrative guidance not fetter - Principles for grant of interim stay - prima facie case, undue hardship and safeguarding revenue - Adjustment of refunds against disputed demand without consideration of pending stay application - Remand for fresh consideration of stay applicationValidity of pre-deposit requirement for stay under Section 220(6) - Office Memorandum as administrative guidance not fetter - Discretion of Assessing Officer under Section 220(6) - Whether the OM prescribing 20% (or 15%) deposit operates as a mandatory pre-condition to the exercise of power under Section 220(6) of the Income-tax Act. - HELD THAT: - The Court held that the OMs of 29 February 2016 and 31 July 2017 provide administrative guidance as to a standard rate (15% revised to 20%) but do not and cannot operate as an inflexible, mandatory pre-condition limiting the statutory discretion conferred by Section 220(6). The OM itself contemplates that the assessing officer may require a higher or lower amount depending on facts of a case and envisages referral to higher authorities where appropriate. The Supreme Court's decision in Principal Commissioner of Income Tax v. LG Electronics was cited to underscore that the administrative circular cannot fetter the quasi judicial discretion of the authority and that it remains open to the authority to direct a deposit of a lesser (or, in appropriate circumstances, greater) amount. The determinative legal principle applied is that the AO must exercise the discretion under Section 220(6) judicially, considering factors such as prima facie case, undue hardship and safeguarding the interests of the Revenue; the OM cannot be read as ousting that duty or prescribing an absolute rule of universal application. [Paras 11, 12, 13, 14, 16]The 20% (or 15%) referred to in the OMs is not an inviolable or mandatory pre-condition; the AO's discretion under Section 220(6) must be exercised judicially on the facts of each case.Adjustment of refunds against disputed demand without consideration of pending stay application - Remand for fresh consideration of stay application - Principles for grant of interim stay - prima facie case, undue hardship and safeguarding revenue - Whether the respondents were justified in adjusting the demand for AY 2018-19 against refunds for other years while the petitioner's application under Section 220(6) remained pending. - HELD THAT: - The Court found that on the dates when adjustments were made the petitioner's application under Section 220(6) had not been considered or disposed of. Proceeding to adjust the disputed demand against available refunds without attending to the pending stay application was arbitrary and unfair. The Court reiterated that applications for stay must be decided by applying recognised interim-relief principles - assessment of prima facie case, balance of convenience/undue hardship and protection of revenue - and that the OM does not licence summary denial of stay petitions or the mechanical insistence on the standard deposit without application of mind. Given the pending and unadjudicated stay petition, the respondents' action in effecting adjustments was held to be improper. [Paras 19, 20, 21]The adjustments effected while the stay application under Section 220(6) remained pending were arbitrary; the matter is remittted to the respondents for fresh consideration of the petitioner's Section 220(6) application in accordance with the Court's observations.Final Conclusion: Writ petition allowed. The respondents acted improperly in adjusting refunds against the disputed demand for AY 2018-19 while the petitioner's Section 220(6) application was pending. The matter is remitted to the respondents to decide the stay application afresh in accordance with the Court's directions (applying the statutory discretion under Section 220(6) and the principles identified), and the quantum of refund to be released shall follow that decision. Issues Involved:1. Adjustment of disputed tax demand against refunds due.2. Non-consideration of rectification and stay applications.3. Legality of adjustments without considering Section 220(6) application.4. Interpretation of Office Memorandum (OM) regarding stay of demand.Summary:Adjustment of Disputed Tax Demand Against Refunds Due:The petitioner challenged the adjustment of a disputed tax demand for AY 2018-19 against refunds due for AYs 2010-11, 2011-12, and 2020-21. The petitioner argued that this adjustment was made despite pending rectification and stay applications.Non-Consideration of Rectification and Stay Applications:The petitioner filed a Return of Income (ROI) for AY 2018-19, claiming a refund. Notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961 were issued, and an intimation under Section 143(1) indicated a refundable amount. However, subsequent assessments created a demand, leading the petitioner to appeal and file rectification and stay applications. The rectification application was rejected on grounds that the additions made were not mistakes apparent from the record.Legality of Adjustments Without Considering Section 220(6) Application:The petitioner argued that the adjustments were arbitrary and illegal as the stay application under Section 220(6) was not considered. The respondents adjusted the demand against refunds without attending to the stay application, which the petitioner claimed nullified the purpose of Section 220(6).Interpretation of Office Memorandum (OM) Regarding Stay of Demand:The petitioner contended that as per the Central Board of Direct Taxes (CBDT) OM dated 31 July 2017, the respondents could have required a deposit of 20% of the disputed demand. The respondents argued that the application for stay was not considered due to the absence of evidence of deposit. The court noted that the OMs do not mandate a 15% or 20% deposit as a pre-condition for grant of stay. The discretion vested in the Assessing Officer (AO) should not be viewed as cabined by the terms of the OM.Court's Decision:The court found that the respondents erred in assuming that the application for stay could not be entertained without a 20% pre-deposit. The court held that the respondents acted arbitrarily by adjusting the demand without considering the pending stay application. The court allowed the writ petition, remitting the matter to the respondents to consider the petitioner's application under Section 220(6) in accordance with the observations made. The issue of the amount of refund to be released will depend on the respondents' decision pursuant to the court's directions.