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 HC held that CBDT OMs prescribing 15%/20% deposit do not create an inflexible pre-condition for entertaining or granting stay; the AO must exercise discretion based on factors such as prima facie case, undue hardship, and likelihood of success, consistent with SC principles on "undue hardship." Since the stay application had neither been considered nor disposed of when the adjustment was made, the revenue acted on a misconceived premise and unfairly adjusted the demand against refunds. The writ petition was allowed, and the adjustment was set aside, directing refund processing after adjusting only 20% of the disputed demand.

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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.

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