HC Restrains Excess Refund Adjustment During Pending Income Tax Appeal

The High Court on 4 May held that the Income Tax Department cannot adjust refunds against disputed tax demands in excess of the 20% threshold prescribed under CBDT guidelines when the appeal against the assessment is pending. A Single Bench observed that adjustment of refunds under Section 245 of the Income Tax Act, 1961 must be exercised in a manner consistent with the protection available to the assessee under Section 220(6) and cannot be used to bypass the stay mechanism. The High Court held that, “The action of the Revenue in adjusting the refunds on the very same day or immediately after issuance of notice under Section 245 defeated the very purpose of granting an opportunity to the assessee to object.”

The dispute arose after P.S. Srijan Height Developers, a partnership firm, received notices under Section 245 proposing adjustment of refunds relating to AYs 2021-22 and 2022-23 against outstanding demand for AY 2018-19, which was already under challenge before the appellate authority. Despite granting 21 days’ time to respond, the department proceeded to adjust the refunds almost immediately after issuing the notices.

Before the High Court, the assessee contended that the adjustments were contrary to the CBDT Office Memorandums dated 29.02.2016 and 31.07.2017, which restrict recovery during pendency of appeal to 20% of the disputed demand. It was further argued that the department’s action violated principles of natural justice, as no effective opportunity was granted to object to the proposed adjustments.

The Revenue submitted that powers under Section 245 permitted the adjustment of refunds against outstanding demands and that the petitioner had delayed challenging the earlier adjustment made in 2022.

The Court observed that the power under Section 245 cannot be exercised mechanically or in a manner that nullifies the safeguards available to an assessee during the pendency of an appeal. It held that the issuance of notice without waiting for the expiry of the response period amounted to a denial of a meaningful opportunity. The High Court Noted that, “An intimation under Section 245 cannot be treated as an empty formality when the statute itself contemplates an opportunity to the assessee before ad justment.”

While refusing to interfere with the earlier adjustment on the ground of delay and laches, the Court held that the later adjustment relating to AY 2022-23 was unsustainable to the extent it exceeded the 20% limit. Thus, the High Court directed the Revenue to refund the excess adjusted amount within eight weeks without interest and further directed the Commissioner (Appeals) to dispose of the pending appeal for AY 2018-19 within two months.

To Read Full Judgment, Download PDF Given Below.