Revenue department's refund adjustment against outstanding demand upheld despite assessee's failure to deposit required 20% pre-deposit for stay

Delhi HC held that the revenue department's adjustment of refund against outstanding demand was valid. The assessee failed to deposit required 20% pre-deposit (Rs. 69,05,933/-) for stay of disputed demand before CIT(A). Since the stay condition was not fulfilled, the entire demand remained outstanding and was properly recovered from the assessee's refund for a different assessment year. The court rejected the assessee's claim that such adjustment violated the Office Memorandum dated 31.07.2017.

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The core legal question considered by the Court is whether the Assessing Officer's adjustment of the refund due to the Assessee for Assessment Year (AY) 2014-15 against the outstanding disputed demand for AY 2016-17, including the statutory interest, was illegal and contrary to the Office Memorandum dated 31.07.2017 issued by the Central Board of Direct Taxes (CBDT).

Additional subsidiary issues relevant to this core question include:

• Whether the Assessee was entitled to a refund of the full amount determined for AY 2014-15 without adjustment for the disputed demand of AY 2016-17.
• Whether the instructions in the Office Memorandum regarding the requirement of payment of 20% of the disputed demand as a pre-condition for stay of demand before the Commissioner of Income Tax (Appeals) (CIT(A)) were complied with by the Assessee.
• The legality and applicability of set-off of refunds against outstanding demands under the Income Tax Act, 1961, particularly under Section 245.
• The effect of pending appeals and orders passed by the Income Tax Appellate Tribunal (ITAT) on the refund and demand adjustments.

Issue-wise Detailed Analysis

1. Legality of Adjustment of Refund for AY 2014-15 Against Demand for AY 2016-17

The relevant legal framework comprises Section 245 of the Income Tax Act, 1961, which empowers the Assessing Officer to adjust refunds against outstanding demands, and the CBDT's Office Memorandum dated 31.07.2017, which sets guidelines for granting stay of demand on payment of a specified percentage (originally 15%, later modified to 20%) of the disputed demand when the matter is pending before the CIT(A).

The Office Memorandum aims to standardize the quantum of lump sum payment required as a pre-condition for stay of demand, thereby reducing hardship to taxpayers. Paragraph 3 and 4(A) of the Memorandum clarify that where the outstanding demand is disputed before the CIT(A), stay of demand shall be granted on payment of 15% (modified to 20%) of the disputed demand.

The Court noted that while the Memorandum allows for adjustment of the specified percentage of disputed demand by utilizing refunds due to the Assessee, the Assessee must comply with the condition of payment/deposit of such amount to secure stay of demand.

In this case, the Assessee had a pending appeal before the CIT(A) challenging the demand for AY 2016-17. However, the Assessee had not deposited the requisite 20% of the disputed demand amounting to Rs. 69,05,933/- (after adjusting the amount already recovered from refunds of AY 2015-16). The Assessing Officer had explicitly communicated this shortfall and requested payment by letter dated 29.04.2019.

The Court emphasized that since the Assessee did not make the deposit or adjustment of the 20% amount at the relevant time, the condition precedent for stay of demand was not satisfied. Consequently, the entire disputed demand for AY 2016-17 remained outstanding and was lawfully recoverable.

The Assessing Officer's action to adjust the refund due for AY 2014-15 against the outstanding demand and interest for AY 2016-17 was therefore held to be consistent with the provisions of the Income Tax Act and the guidelines in the Office Memorandum.

2. Effect of Pending Appeals and Orders of the ITAT

The Assessee's appeal before the ITAT against the revision order dated 29.03.2019 under Section 263 of the Act was allowed, resulting in the setting aside of the revision and the fresh assessment order dated 13.12.2019 for AY 2014-15. Pursuant to this, the Assessing Officer issued an appeal effect order on 02.01.2024 admitting a refund of Rs. 8,24,34,656/- plus interest of Rs. 1,36,39,800/-, totaling Rs. 9,60,74,456/-.

However, the refund was adjusted partially against the confirmed demand for AY 2017-18 (Rs. 40,70,155/-) and fully against the disputed demand for AY 2016-17 along with interest, as discussed above. The Assessee did not dispute the adjustment against AY 2017-18 demand.

The Court found that the pendency of the appeal challenging the demand for AY 2016-17 did not preclude the Assessing Officer from adjusting the refund, particularly since the Assessee had not complied with the stay conditions. The ITAT's order had no bearing on the outstanding demand for AY 2016-17, which remained recoverable.

3. Application of the Office Memorandum and the Requirement of Deposit

The Office Memorandum dated 31.07.2017 was issued to streamline and standardize the process for granting stay of demand. The Court highlighted that the Memorandum's instructions are mandatory for securing stay and that the lump sum payment or adjustment of 20% of the disputed demand is a mandatory pre-condition.

In the present case, the Assessee's failure to deposit the shortfall of Rs. 69,05,933/- meant that the stay was not granted, and the demand remained outstanding. The Assessing Officer's adjustment of the refund to recover the entire disputed demand and interest was therefore lawful and in accordance with the Memorandum.

The Court rejected the Assessee's contention that the entire refund should have been released without adjustment, emphasizing that the Memorandum's guidelines must be followed strictly to avail the benefit of stay.

4. Treatment of Competing Arguments

The Assessee argued that only 20% of the disputed demand should have been adjusted against the refund for AY 2014-15, with the balance amount refundable. It also relied on the Office Memorandum to assert that recovery of the disputed demand must be stayed upon payment of 20% of the demand.

The Court acknowledged the Assessee's arguments but found them untenable since the Assessee had not complied with the condition of depositing the required 20% amount at the material time. The Assessing Officer's letter dated 29.04.2019 explicitly communicated this requirement and requested payment.

The Court also noted that the Assessee had already adjusted Rs. 29,27,619/- from refunds of AY 2015-16 towards the disputed demand, leaving a shortfall of Rs. 69,05,933/- which was not paid. Therefore, the Assessing Officer was justified in adjusting the entire outstanding demand and interest from the refund for AY 2014-15.

The Court further observed that the Assessee's appeal before the CIT(A) did not entitle it to avoid payment or adjustment of the disputed demand in the absence of compliance with the stay conditions.

5. Final Conclusions

The Court concluded that the Assessing Officer's adjustment of the refund due for AY 2014-15 against the full outstanding demand and interest for AY 2016-17 was not illegal or arbitrary. It was consistent with the statutory provisions and the CBDT's Office Memorandum dated 31.07.2017.

The Assessee's failure to deposit the requisite 20% of the disputed demand as a pre-condition for stay of demand disentitled it from claiming the refund without adjustment.

The petition was accordingly dismissed.

Significant Holdings

"It is clear from the language of the Office Memorandum that the instructions contained therein were issued to streamline the process of grant of stay and to standardize the quantum, lump sum payment required to be paid by the assessee 'as a pre-condition for stay of demand disputed before CIT(A)'."

"Since the Assessee had not fulfilled the condition for securing a stay of demand, the entire demand in respect of AY 2017-18 remained outstanding. The same has since been recovered from the refund due to the petitioner for AY 2014-15 that has arisen pursuant to the appeal effect order dated 02.01.2024."

"We are unable to accept that the adjustment of the amount is contrary to the Office Memorandum dated 31.07.2017 as claimed by the Assessee."

The Court established the core principle that the benefit of stay of demand under the CBDT's Office Memorandum is conditional upon the payment or adjustment of the specified percentage of the disputed demand. Non-compliance with this condition permits lawful adjustment of refunds against the entire outstanding demand and interest.

Ultimately, the Court upheld the Assessing Officer's authority under Section 245 of the Income Tax Act to adjust refunds against outstanding demands, subject to compliance with the procedural safeguards and conditions prescribed by the CBDT.

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