Adjustment of income-tax refund against outstanding demand limited to 20% deposit; remainder refunded with interest.

Adjustment of income-tax refund against an outstanding demand requires statutory notice before set-off; where no reference was made to higher authority, only a proportionate adjustment equal to 20% of the earlier assessment demand was permissible, and the balance refund must be paid with interest. The retained 20% will remain subject to the pending appeal against the assessment for the earlier year, and the remaining demand is stayed until disposal of that appeal. The tribunal/counsel is requested to expedite the appeal before the Commissioner of Appeals within a short timeframe for final adjudication.

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Issues: (i) Whether, where the demand for an earlier assessment year is under appeal before the CIT (Appeals) and no reference has been made to the Administrative Principal Commissioner/Commissioner as per CBDT Office Memoranda, the Revenue could adjust the entire refund of a subsequent assessment year against the disputed demand or only retain 20% of the disputed demand.

Analysis: The assessment for the earlier year was under challenge before the CIT (Appeals) and the entirety of the later-year refund was adjusted against that disputed demand. The CBDT Office Memorandum dated 29th February 2016 and Office Memorandum dated 31st July 2017 set out the normal practice that, for obtaining a stay of a demand, 20% of the disputed demand is to be deposited; any requirement for a lump sum payment higher than 20% must be referred to and determined by the Administrative Principal Commissioner/Commissioner of Income Tax. In the present facts there was no reference made to the Administrative Principal Commissioner/Commissioner seeking a higher proportion to be retained. The factual dispute as to service of notices under Section 245 was not examined and the petition for refund of the entire adjusted amount was rejected on that basis. On the substantive issue of quantum of adjustment, in the absence of any referral to the Principal Commissioner/Commissioner as required by the Office Memoranda, only 20% of the disputed demand could lawfully be retained from the refund and the balance must be refunded subject to the outcome of the pending appeal.

Conclusion: Only 20% of the disputed demand (Rs. 1,03,46,296/-) may be retained by the Revenue; the balance of the refund for A.Y. 2023-24 shall be refunded to the Petitioner with interest in accordance with law within 30 days from the date of uploading of the order.

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