Recovery Beyond 20% of Disputed IT Demand Held Unfair During Appeal Stage: Calcutta HC Orders Refund [Read Order]

The Calcutta High Court, in a recent case, has affirmed the principle that recovery of a disputed tax demand during the pendency of an appeal cannot exceed 20% of the demand.

The case arose from a writ petition filed by Gaurav Enterprises challenging the Income Tax Department’s action of adjusting amounts far beyond the permissible limit from refunds due for other assessment years.

The facts of the case show that pursuant to an assessment order dated April 17, 2021, under Section 143(3) read with Section 144B of the Income Tax Act, 1961, a demand of ₹9.19 crore was raised against the petitioner for AY 2018‑19.

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The assessee filed an appeal before the Commissioner of Income Tax (Appeals) on August 3, 2021, under Section 246A.

 al, the assessee also sought a stay of demand. However, while the stay application remained pending, the Income Tax authorities proceeded to recover ₹5.01 crore by adjusting refunds due for AYs 2020‑21 to 2023‑24.

The petitioner argued that such recovery violated the binding instructions of the Central Board of Direct Taxes (CBDT), which, through Office Memoranda dated February 29, 2016 and July 31, 2017, directed that recovery during pendency of appeal should be limited to 20% of the disputed demand, except in exceptional situations.

Counsel relied on earlier Calcutta High Court rulings in Danieli India Limited v. ACIT (2023) and Graphite India Limited v. DCIT (2022), where similar excess recoveries were struck down.

The Revenue defended its action, contending that unless the assessee deposited 20% of the demand, recovery of the entire outstanding demand was permissible. It relied on a Delhi High Court ruling in Chemester Food Industry (P.) Ltd. (2025), where recovery beyond 20% was upheld in specific circumstances.

Justice Om Narayan Rai, after hearing both sides, held that recovery in excess of 20% of the disputed demand during the pendency of the appeal cannot be sustained in law, unless the exceptional situations outlined in paragraph 4B of the CBDT’s 2016 Office Memorandum apply.

The Court noted that no such circumstances were demonstrated by the Revenue in this case. It distinguished the Delhi High Court ruling, observing that it was based on peculiar facts involving Section 245 notices, which were not present here.

Accordingly, the Court directed the Income Tax authorities to refund the amount recovered in excess of 20% of the disputed demand within eight weeks, after due verification. It also permitted the authorities to afford an opportunity of hearing to the petitioner for clarification regarding the quantum of recovery.

Significantly, the Court recorded that the appeal before the Commissioner (Appeals) has been pending since 2021, and requested the appellate authority to expedite its disposal. The ruling thus not only grants immediate relief to the assessee but also underscores the need for timely adjudication of tax appeals to prevent prolonged uncertainty.

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