Income Tax Dept cannot Recover beyond 20% of Disputed Demand by Adjusting Refund: Calcutta HC [Read Order]
The Court examined whether the tax department could recover over 20% of a disputed demand while the assessment appeal was pending.
The Calcutta High Court has held that the tax authorities cannot recover more than 20% of a disputed demand by adjusting refunds for other assessment years while the statutory appeal against the assessment order is still pending, directing the department to refund the excess amount recovered.
In this matter, the petitioner Gaurav Enterprises challenged the recovery of a disputed demand for Assessment Year 2018-19, which arose from an assessment order passed under Section 143(3) read with Section 144B of the Income Tax Act,1961. The order generated a demand of ₹9,19,33,664, followed by a notice of demand dated April 17, 2021.
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The petitioner filed an appeal before the Commissioner of Income Tax (Appeals) under Section 246A of the Income Tax Act, 1961 and submitted a stay application under Section 220(6). However, while the stay application remained pending, theIncome Tax Department adjusted refunds for Assessment Years 2020-21 to 2023-24 and recovered ₹5,01,16,180, prompting the petitioner to approach the Court contending that such recovery exceeded the permissible limit of twenty percent of the disputed demand.
Represented by a panel of counsels, the petitioner argued that recovery beyond 20% of the disputed demand was contrary to the guidelines issued by the Central Board of Direct Taxes through Office Memoranda dated February 29, 2016 and July 31, 2017. It was submitted that the Court had already settled this issue in precedents, wherein it was held that the authorities cannot recover more than 20% of the disputed demand by adjusting refunds when the appeal against the assessment order is still pending.
On behalf of the respondents, a panel of counsels submitted that in the absence of a stay order, the department was legally entitled to recover the entire outstanding demand. It was argued that unless the petitioner deposited twenty percent of the disputed amount, there was no restriction on recovering the balance demand.
Justice Om Narayan Rai held that the department’s action could not be sustained. The Court observed that while Section 220(6) of the Income Tax Act, 1961 confers discretion upon the Assessing Officer in matters of treating an assessee as in default, such discretion must be exercised in accordance with the Central Board of Direct Taxes instructions.
These instructions mandate that stay of demand shall ordinarily be granted upon payment of 20% of the disputed amount, except where exceptional circumstances listed in paragraph 4B of the Office Memorandum exist. The Court noted that the respondents had failed to demonstrate the presence of any such exceptional circumstances.
Therefore, the bench directed the Income Tax Department to refund the amount recovered in excess of twenty percent of the disputed demand within eight weeks, after due verification. Additionally, the authorities were permitted to seek clarifications from the petitioner where necessary.
The Court also requested the Commissioner of Income Tax (Appeals), before whom the appeal has been pending since 2021, to expedite its disposal at the earliest.
