The Delhi High Court has ruled that 20% recovery on income tax demand which is in dispute shall be made on the crystallised tax liability and not on scaled down amount. Also, the same shall not exceed 20%. The court directed the income tax authorities to refund the excess amount recovered.
The petitioner/assessee filed a Return of Income (ROI) for AY 2021-22, declaring taxable income as Rs. 1,04,06,610. However, the Assessing Officer (AO) issued an assessment order on 19.12.2022, adding an amount of Rs. 146,72,96,789 to the declared income. This increased the petitioner’s aggregate tax liability to Rs. 44,10,05,569. After adjusting for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS), the net tax liability was reduced to Rs. 33,05,82,936.
Additionally, a refund of Rs. 14,11,32,594 for AY 2022-23 was adjusted against the tax demand for AY 2021-22. Therefore, the total adjusted amount against the tax liability was Rs. 25,15,55,227, which is 57.04% of the original tax liability.
The primary issue in dispute is the interpretation of the CBDT Office Memorandum, specifically regarding the recovery of taxes during the pendency of an appeal. The petitioner argues that the recovery exceeded 20% of the total tax demand, contrary to the Memorandum’s provision.
The respondents, on the other hand, contend that the Memorandum’s reference to “demand” is based on Section 156 of the Income Tax Act, which includes various components such as tax, interest, penalty, and fines. Hence, the demand should be calculated based on the notice of demand, which, in this case, is Rs. 44,10,05,569.
After a thorough examination of the facts and arguments presented, the bench of Justice Rajiv Shakdher and Justice Justice Girish Kathpalia determined that any amount recoverable, whether directly or indirectly, should fall within the stipulated 20% of the total tax liability, as indicated in the CBDT Memorandum. In this case, the amount already collected through TDS and TCS reduced the net tax liability to Rs. 33,05,82,936.
The court found that the argument that “demand” should be based on the notice of demand is not tenable. The true measure of the demand is the tax liability crystallized as per the assessment order, which is Rs. 44,10,05,569. Therefore, the recovery exceeding 20% of this amount was not justified.
The court directed the respondents/revenue to refund the excess amount collected after applying the 20% rate to the tax liability as per the assessment order, subject to necessary verifications. The refund will also include applicable interest.
In conclusion, the court has ruled in favour of the petitioner/assessee, finding that the recovery of taxes exceeded the permissible 20% limit specified in the CBDT Memorandum. The excess amount is to be refunded, factoring in the TDS and TCS already collected. The court directed that the refund, along with applicable interest, is to be processed within the next four weeks.
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