Refund ordered where tax recovery exceeded 20% of disputed demand, violating CBDT Office Memoranda under Section 220(6)

HC held that revenue is not entitled to recover or adjust more than 20% of the disputed tax demand from refunds of other assessment years in the absence of circumstances specified in the CBDT Office Memoranda. Finding no material to justify departure from the 20% ceiling and following earlier coordinate Bench decisions, HC directed the tax department to refund all sums recovered in excess of 20% of the disputed demand for AY 2018-19, after due verification, within eight weeks. HC also requested the CIT(A) to expedite and dispose of the pending statutory appeal at the earliest.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, during pendency of a first appeal, the Income Tax authorities can recover or adjust, from refunds of other assessment years, any amount in excess of 20% of the disputed demand pertaining to the relevant assessment year.

1.2 Whether the discretion under Section 220(6) of the Income Tax Act, 1961, read with the CBDT Office Memoranda dated 29.02.2016 and 31.07.2017, permits such recovery in the absence of the situations contemplated in paragraph 4B of the Office Memorandum dated 29.02.2016.

1.3 Whether reliance placed by the Revenue on the decision of another High Court regarding permissibility of full recovery in the absence of a 20% deposit is applicable to the present case.

1.4 What consequential directions are warranted regarding refund of amounts recovered in excess of 20% of the disputed demand and expeditious disposal of the pending appeal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Recovery/adjustment beyond 20% of disputed demand during pendency of appeal; scope of Section 220(6) and CBDT Office Memoranda

Legal framework (as discussed)

2.1 The Court considered Section 220(6) of the Income Tax Act, 1961, which vests discretion in the Assessing Officer not to treat the assessee as in default in respect of disputed tax demand ('stay of demand') while an appeal is pending before the first appellate authority.

2.2 The Court referred to the CBDT Office Memorandum dated 29.02.2016, as partially modified by Office Memorandum dated 31.07.2017, which instructs that where outstanding demand is disputed before the first appellate authority, the Assessing Officer shall grant stay of demand till disposal of the first appeal on payment of 20% of the disputed demand, except in situations covered by paragraph 4B of the Office Memorandum dated 29.02.2016.

2.3 The Court relied on earlier co-ordinate Bench decisions which held that recovery of any amount in excess of 20% of the disputed demand, by way of adjustment from admitted refunds of other assessment years, while an appeal against the relevant assessment order is pending, is unsustainable in law.

Interpretation and reasoning

2.4 The Court held that, given the CBDT instructions, the Assessing Officer is obliged to stay recovery of the balance demand upon payment of 20% of the disputed demand, save in the exceptional situations specified in paragraph 4B of the Office Memorandum dated 29.02.2016.

2.5 The Court reasoned that, if the Assessing Officer is so obliged to grant stay on such terms, it would be unfair for the Income Tax authorities to recover, during pendency of the appeal, any sum in excess of 20% of the disputed demand by adjusting refunds for other assessment years, in the absence of a demonstrated case falling within paragraph 4B.

2.6 The Court noted that the Revenue had not shown to its satisfaction that any of the situations mentioned in paragraph 4B of the Office Memorandum dated 29.02.2016 (as amended on 31.07.2017) existed in the present case.

2.7 The Court rejected the Revenue's contention that, unless the assessee deposits 20% of the disputed demand, recovery of the entire outstanding demand is per se permissible, in the face of the binding CBDT instructions and the earlier co-ordinate Bench decisions.

2.8 The Court expressly agreed with and followed the view taken by the co-ordinate Bench that adjustment of more than 20% of the disputed demand from refunds of other years, during pendency of appeal for the relevant year, cannot be sustained.

Conclusions

2.9 The Court concluded that the action of the Income Tax authorities in recovering/adjusting amounts in excess of 20% of the disputed demand, from refunds pertaining to other assessment years, while the appeal against the relevant assessment order was pending, is not sustainable in law in the absence of circumstances falling within paragraph 4B of the Office Memorandum dated 29.02.2016 (as amended).

Issue 3: Applicability of the decision of another High Court relied on by the Revenue

Interpretation and reasoning

2.10 The Court examined the cited decision of another High Court and noted that it was rendered in peculiar facts where: (i) a notice under Section 245 of the Income Tax Act, 1961 had been issued; (ii) the Assessing Officer had found that grant of stay was not permissible; and (iii) that Court had held, on those facts, that the adjustment made was not contrary to the Office Memorandum dated 31.07.2017.

2.11 The Court found that the factual matrix in the cited decision was materially different from the present case, since here there was no demonstration that the case fell within the exceptional situations under paragraph 4B of the Office Memorandum dated 29.02.2016 (as amended), and the Revenue's stand was instead premised on a general entitlement to recover the full demand absent a 20% deposit.

Conclusions

2.12 The Court held that the decision relied upon by the Revenue was not applicable to the facts of the present case and did not justify the impugned recovery in excess of 20% of the disputed demand.

Issue 4: Consequential relief and directions

Interpretation and reasoning

2.13 Having held the recovery beyond 20% to be unsustainable, the Court considered appropriate relief consistent with the approach adopted in the earlier co-ordinate Bench decision on the same legal issue.

2.14 The Court also took note that the first appeal against the assessment order had been pending since 2021, and deemed it appropriate to request expeditious disposal by the appellate authority.

Conclusions

2.15 The Court directed the Income Tax authorities to refund to the assessee the amount recovered in excess of 20% of the disputed demand (arising from the impugned notice of demand), which had been adjusted against refunds for assessment years 2020-21 to 2023-24, within eight weeks from the date of communication of the order, upon due verification of the actual amount recovered, and after affording an opportunity of hearing to the assessee for clarification, if required.

2.16 The Court requested the first appellate authority to expedite hearing and dispose of the pending appeal at the earliest possible.

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