The Calcutta High Court has held that, although mere filing of an appeal against assessment does not automatically stay recovery and does not by itself prevent the assessee from being treated as in default, any adjustment of refund under Section 245 must strictly comply with the statutory requirement of prior intimation and meaningful opportunity to object; if the Revenue adjusts the refund before expiry of the time granted in the Section 245 intimation, such adjustment is contrary to law.
The Court also held that in exercising power affecting recovery during pendency of appeal, the Assessing Officer must act fairly, reasonably and in consonance with Section 220(6) principles and the CBDT instructions/office memoranda. Hence, adjustment or retention beyond 20% of disputed demand, without following that framework and without allowing the assessee to object, cannot be sustained.
The High Court therefore directed the Revenue to refund, within eight weeks, the amounts adjusted in excess of 20% of the disputed demand for AY 2018-19 pursuant to the November 2023 intimation. For computing such excess, the October 2022 adjustment was excluded because the challenge to that adjustment was not entertained on the ground of delay.
The petitioner was however denied interest because it approached the Court about two years after the November 2023 adjustment. The Commissioner (Appeals) was also requested to dispose of the pending appeal within two months, and the refund direction was made subject to the ultimate result of that appeal.
A Single Judge Bench of Justice Om Narayan Rai observed that the challenge to the 25 October 2022 adjustment was barred by delay, since it was brought more than three years later, with no explanation in the writ petition. As the claim was in the nature of a money claim, the Bench declined to interfere with that adjustment in writ jurisdiction, though it remained subject to the pending appeal.
As regards the 10/11 November 2023 adjustment, although there was no explanation for the delay of nearly two years, the Bench declined to reject the writ at the threshold because the case concerned allegedly illegal adjustment of refund against disputed demand; no third-party rights had intervened, and no prejudice would be caused to the Revenue merely by examining legality.
The Bench held that where no application under Section 220(6) is filed and no stay is granted, the Revenue is justified in proceeding with recovery of the outstanding demand despite pendency of appeal. However, such recovery must still conform to the Income-tax Act, including Section 245.
On Section 245, the Bench explained that the expression “after giving an intimation in writing” makes it explicit that the intimation must precede adjustment, and that the purpose of such intimation is to afford the assessee an opportunity to object. It is not a mere formality. Since adjustment entails civil consequences, the Revenue must act fairly and consistently with principles of natural justice, including examining objections before deciding whether adjustment should be made.
The Bench found that in the present case, Section 245 intimation dated 10 November 2023 allowed 21 days to respond, but the refund was adjusted the next day. This was held to be a clear breach of Section 245. Once the notice granted time to act, the petitioner’s right to object stood activated and could not be abruptly foreclosed.
The Bench further observed that while exercising discretion touching Section 220(6), the Assessing Officer must act fairly, reasonably and judiciously, keeping in view CBDT Instruction No. 1914 and the subsequent Office Memoranda. In cases where amounts exceeding 20% of the disputed demand are recovered during pendency of appeal, there must be special reasons for such course.
The Bench expressly disagreed, to a limited extent, with the observation in Rajendra Kumar that once an appeal is filed within time, the assessee will not be deemed to be in default. According to the Bench, mere filing of an appeal does not result in deemed stay or automatic protection from default; otherwise, Section 220(6) would be rendered meaningless.
However, the Bench rejected the Revenue’s argument based on the “Outstanding Demand” portal/User Manual and the note in the Section 143(1) intimation. It held that Section 143(1) adjustments and Section 245 adjustments operate in distinct fields, and failure to object on the portal earlier does not weaken the statutory right to object to a Section 245 intimation.
Briefly, the petitioner, a partnership firm, filed its return declaring total income of Rs. 1.16 crores. The scrutiny assessment was however made under Section 143(3) read with Section 144B, at Rs. 6.60 crores followed by a notice of demand. The petitioner filed an appeal under Section 246A which remained pending. Later, for AY 2021-22, the petitioner filed its return claiming refund of Rs. 7.59 lakhs. Although a refund of Rs. 7.58 lakhs were determined, on the same date an intimation under Section 245 was issued stating that the entire refund stood adjusted against demands for AYs 2009-10 and 2018-19.
For AY 2022-23, the petitioner filed its return claiming refund of Rs. 1.56 crores. Although by intimation under Section 143(1), refund of Rs. 1.64 was determined, a notice under Section 245 proposed adjustment of this refund against outstanding demands for AY 2016-17 and AY 2018-19, granting 21 days to respond; however, the entire refund was adjusted against AY 2018-19 demand on the very next day. The petitioner disputed the adjustment and sought release of Rs. 1.16 crores, alleged to have been recovered in excess of 20% of the disputed demand, along with stay of demand till disposal of appeal.
Appearances:
Abhratosh Majumdar, Sr. Adv., Saumya Kejriwal, Adv., Ananya Rath, Adv., Navin Mittal, Adv., and Debarghya Banerjee, Adv, for the Petitioner/ Taxpayer
Tarak Nath Jaiswal, Adv. and Madhu Jana, Adv, for the Respondent/ Revenue
