Excess adjustment of refunds beyond 20% disputed tax held arbitrary; tax authority directed to promptly restore over-recovered amount

HC allowed the writ petition, holding that the assessing officer's recovery of more than 20% of the disputed tax demand, by adjusting it against admitted refunds for other assessment years while appeals were pending before CIT(A), was arbitrary and unsustainable in law. Relying on precedent, HC directed the respondent Income Tax Authority to refund the excess amount recovered over 20% from refunds relating to assessment years 2010-11 and 2017-18, which had been appropriated towards demands for assessment years 2011-12, 2012-13 and 2013-14. The refund is to be made within four weeks, after verification and opportunity of hearing if required.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, when statutory appeals are pending against assessment orders, the Income Tax Authority can recover more than 20% of the disputed demand by adjustment of admitted refunds relating to other assessment years under Section 245 of the Income Tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Power of the Income Tax Authority to recover more than 20% of disputed demand by adjusting refunds under Section 245 when appeals are pending

Legal framework (as discussed)

2.1 The Court considered the scope of recovery of tax demand under Section 245 of the Income Tax Act, 1961, in the context of pending statutory appeals before the Commissioner of Income Tax (Appeals), and relied upon its earlier decision in Graphite India Ltd. vs. Deputy Commissioner of Income Tax & Ors., reported in (2022) 448 ITR 292 (Cal).

Interpretation and reasoning

2.2 The Court recorded the following undisputed facts: (i) the assessee was admittedly entitled to refund for the assessment years 2010-11 and 2017-18; (ii) statutory appeals were pending before the Commissioner of Income Tax (Appeals) against assessment orders for assessment years 2011-12, 2012-13 and 2013-14, from which the disputed demands had arisen; and (iii) the amounts recovered by way of adjustment from the admitted refunds for assessment years 2010-11 and 2017-18, towards the demands for assessment years 2011-12, 2012-13 and 2013-14, were admittedly in excess of 20% of such disputed demands.

2.3 The Court noted the legal contention that, where appeals are pending against assessment orders, the Income Tax Authority, even while exercising power of adjustment under Section 245 from refunds of other assessment years, cannot recover more than 20% of the demand arising from such disputed assessments.

2.4 Applying the principles laid down in Graphite India Ltd. (supra) to the admitted facts, the Court held that recovery by way of adjustment of amounts exceeding 20% of the disputed demand, when the relevant assessment orders are under appeal, is impermissible and arbitrary.

Conclusions

2.5 The Court held that the action of the assessing officer in recovering, by way of adjustment from admitted refunds of other assessment years, amounts in excess of 20% of the demand arising from assessment orders against which appeals are pending before the Commissioner of Income Tax (Appeals) is arbitrary and not sustainable in law.

2.6 The Court directed the Income Tax Authority to refund the amount recovered in excess of 20% of the disputed demands from the refunds relating to assessment years 2010-11 and 2017-18, within four weeks from the date of communication of the order, subject to verification of the actual amounts recovered, after affording an opportunity of hearing to the assessee if required for clarification.

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