Refund adjustment against disputed tax demand is impermissible while stay proceedings and appeal remain pending.

Refund adjustment against a disputed income-tax demand was held impermissible while a stay application and appeal remained pending, because the demand had not attained finality and the assessee's statutory remedies were still alive. The court also treated the absence of effective prior opportunity and the pending proceedings under Section 220(6) as fatal to coercive recovery, and directed release of the refund with consequential interest under Section 244A. It further held that recovery should remain restrained until the stay application is decided, and the impugned adjustment was quashed.

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Issues: (i) Whether the Department can adjust a refund against a disputed demand when a stay application and appeal are pending; (ii) Whether such adjustment can be sustained when made without affording opportunity and in the face of the statutory safeguards governing refund adjustment.

Issue (i): Whether the Department can adjust a refund against a disputed demand when a stay application and appeal are pending.

Analysis: The adjustment was examined against the backdrop of the pending stay application and the pending appeal for the relevant assessment year, together with the departmental power under Section 245 of the Income-tax Act, 1961. The Court applied the earlier coordinate bench decisions holding that refund adjustment against a demand under challenge is impermissible where the demand has not attained finality and the assessee's statutory remedies remain pending.

Conclusion: The adjustment of the refund against the outstanding demand was not sustainable and was set aside.

Issue (ii): Whether such adjustment can be sustained when made without affording opportunity and in the face of the statutory safeguards governing refund adjustment.

Analysis: The Court considered the absence of effective prior hearing, the pendency of proceedings under Section 220(6) of the Income-tax Act, 1961, and the protective tenor of the departmental instruction governing recovery during pendency of dispute. It held that coercive recovery should not continue while the stay application remains undecided, and that the assessee was entitled to restoration of the refund with consequential interest under Section 244A of the Income-tax Act, 1961.

Conclusion: The refund had to be released and no coercive recovery could be taken until the stay application was disposed of.

Final Conclusion: The writ petition succeeded in substance, the impugned refund adjustment was quashed, the refund with interest was directed to be released, and recovery was restrained pending decision on the stay application and appeal.

Ratio Decidendi: Refund cannot be adjusted against a disputed income-tax demand that is subject to a pending stay application and appeal where the demand has not attained finality, and coercive recovery must await disposal of the stay request.

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