2025 (4) TMI 1242 - HC - Income Tax

Supreme Court Upholds Taxpayer Rights: Illegal Refund Adjustment Blocked, Appeal Process Safeguarded Under CBDT Circular

Kishore Mohanlal Dingra Versus The Assistant Commissioner of Income Tax Mumbai.

The SC ruled that adjusting a refund from AY 2014-15 against a demand for AY 2016-17 was illegal. Upon 20% demand payment and pending appeal, the balance ... Adjustment of refund against the demand - payment of 20% of the demand for assessment year 2016-17 by the Petitioner - HELD THAT:- There is no dispute that the Petitioner has made payment of 20% of the demand for assessment year 2016-17 and the appeal for the said assessment year is pending as of today. As per the CBDT Circular once payment of 20% of the demand is made, the balance demand would be stayed till the disposal of the appeal. Therefore, the adjustment of the refund for assessment year 2014-15 by the Respondent after the Petitioner has already paid 20% of the demand was not justified. This is contrary to their own Circular and the decision of this Court in the case of Mahesh Ganatra [2025 (2) TMI 1086 - BOMBAY HIGH COURT]. The Petitioner has raised this very specific ground in his reply to the proceedings u/s 245 of the Act and same has not been controverted. In our view, since the appeal for assessment year 2016-17 is pending and the Petitioner has made payment of 20%, the reasoning given by the Respondent that the balance demand has not been paid and therefore the adjustment is justified is erroneous and contrary to the decision of this Court. Thus, adjustment of refund arising out of proceedings for assessment year 2014-15 against the demand for assessment year 2016-17 is unjustified and illegal. Respondent is directed to refund the erroneous adjustment made of refund. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:Whether the adjustment of refund for assessment year 2014-15 against the demand for assessment year 2016-17 by the Respondent is justified.Whether the payment of 20% of the demand for assessment year 2016-17 by the Petitioner, coupled with the pendency of the appeal for that year, precludes the Respondent from adjusting the refund for 2014-15 against the said demand.Whether the Respondent's action is consistent with the relevant Circular issued by the Central Board of Direct Taxes (CBDT) and the judicial precedents, particularly the decision in Mahesh Mathuradas Ganatra Vs Centralised Processing Center & Ors.The appropriate remedy and directions to be issued in light of the above findings.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of Adjustment of Refund for AY 2014-15 against Demand for AY 2016-17Relevant Legal Framework and Precedents: The legal framework involves the provisions of the Income Tax Act relating to assessment orders, appeals, refunds, and adjustments under Section 245 of the Act. The CBDT Circular referenced by the parties provides procedural guidance that once 20% of the demand is paid, the balance demand is stayed pending appeal disposal. The Court also relied on the precedent set by the Bombay High Court in Mahesh Mathuradas Ganatra Vs Centralised Processing Center & Ors, where similar facts were considered.Court's Interpretation and Reasoning: The Court noted that the Petitioner had voluntarily paid 20% of the demand raised for assessment year 2016-17 and had filed an appeal which remains pending. According to the CBDT Circular, this payment triggers a stay on the balance demand until the appeal is disposed of. The Court found that the Respondent's adjustment of the refund for 2014-15 against the outstanding demand for 2016-17, despite the stay, was contrary to the Circular and the legal position established by the precedent.Key Evidence and Findings: The Petitioner received a partial refund for 2014-15, but the balance refund was adjusted against the demand for 2016-17. The Petitioner had paid 20% of the demand for 2016-17 and had challenged the demand via appeal. The appeal remains pending beyond six years. The Respondent did not dispute the pendency of the appeal or the 20% payment but justified the adjustment on the ground that the full demand was not paid.Application of Law to Facts: The Court applied the CBDT Circular and the precedent in Mahesh Ganatra to conclude that the adjustment was impermissible. The stay on the balance demand means the Respondent cannot appropriate refunds from other assessment years against it. The Respondent's reasoning that non-payment of the full demand justified adjustment was rejected as erroneous.Treatment of Competing Arguments: The Respondent's argument that the full demand was not paid and hence adjustment was justified was considered but found inconsistent with the Circular and judicial precedent. The Petitioner's reliance on the Circular and the prior decision was accepted as controlling.Conclusions: The adjustment of the refund for assessment year 2014-15 against the demand for 2016-17 was unjustified and illegal.Issue 2: Compliance with Procedural Requirements and Directions for Disposal of Pending AppealRelevant Legal Framework and Precedents: The Income Tax Act mandates timely disposal of appeals and provides for interim reliefs such as stay of demand upon partial payment. The Court also referenced the procedural requirement under Section 245 of the Act and the need for expeditious disposal of appeals.Court's Interpretation and Reasoning: The Court observed that the appeal for assessment year 2016-17 had been pending for over six years without disposal. It emphasized the necessity of resolving the appeal expeditiously to avoid prolonged uncertainty and unauthorized adjustments.Key Evidence and Findings: The appeal filed by the Petitioner is still pending despite lapse of significant time. The Petitioner had raised the issue of improper adjustment in response to proceedings under Section 245, which was not addressed by the Respondent.Application of Law to Facts: The Court directed the Commissioner of Income Tax (Appeal) to dispose of the appeal within four months from the date of uploading the order, underscoring the importance of timely adjudication.Treatment of Competing Arguments: No substantive opposition was raised by the Respondent regarding the direction for expeditious disposal.Conclusions: The Court mandated prompt disposal of the pending appeal to ensure finality and prevent recurrence of similar disputes.3. SIGNIFICANT HOLDINGSThe Court held:'The adjustment of refund arising out of proceedings for assessment year 2014-15 against the demand for assessment year 2016-17 is unjustified and illegal.''As per the CBDT Circular once payment of 20% of the demand is made, the balance demand would be stayed till the disposal of the appeal.''The reasoning given by the Respondent that the balance demand has not been paid and therefore the adjustment is justified is erroneous and contrary to the decision of this Court.''The Commissioner of Income Tax (Appeal) is directed to dispose of the appeal for assessment year 2016-17 as expeditiously possible and in any case within a period of four months from the date of uploading of this order.'Core principles established include the binding effect of the CBDT Circular on demand stay upon 20% payment and the illegality of adjusting refunds against stayed demands. The Court reaffirmed the principle that partial payment coupled with pending appeal suspends enforcement actions on the balance demand.Final determinations:The adjustment of refund for AY 2014-15 against demand for AY 2016-17 is set aside.The Respondent is directed to refund the amount wrongly adjusted within four weeks.The appeal for AY 2016-17 must be disposed of within four months.