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May 8, 2021

Bombay high court held that Income Tax Refund cannot be adjusted by more than 20% of Demand

Bombay high court held that Income Tax Refund cannot be adjusted by more than 20% of Demand

Fact of the case

Petitioner is an individual and proprietor of M/s. Shree Bal Developers and M/s. Shree Bal Land Developers. It refers to that income tax return of the petitioner for AY 2013-14 was selected for scrutiny and notices under sections 142(1) and 143(2) of the Income Tax Act, 1961 ( The Act / Income Tax Act ) had been issued to petitioner. Order in respect of the same had been passed on 31.03.2016 assessing income at Rs. 21,48,06,900/-. Tax dues were claimed to be to the tune of Rs. 6,13,48,390/-. Demand notice was accordingly issued. Petitioner preferred an appeal against the assessment order dated 31.03.2016. During its pendency, amount to the tune of Rs. 1,38,34,925/- has been collected by respondents adjusting refunds pertaining to AYs 2014-15, 2015-16 and 2016-17. Petitioner had applied for stay to recovery of demanded tax for the AY 2013-14. On 26.06.2018, the Assessing Officer had passed an order of stay to recovery of balance of tax due for the AY 2013-14, albeit, purporting to have reserved right to adjust refund arising against the demand.

Refund amounts Rs. 58,56,090/- and Rs. 71,92,970/- for assessment year 2018-19 and AY 2019-20 respectively as well are purportedly adjusted toward demand for AY 2013-14. Petitioner has made multiple representations to authorities for payment of refund amounts to petitioner. Petitioner has also raised grievance on online income tax portal. Respondent No. 1 has responded to with remark that under the stay order, right to adjust refunds towards recovery of demand for the AY 2013-14 has been reserved. The matter was even taken to the Principal Chief Commissioner of Income Tax, Mumbai. However, there has been no progress. Petitioner had once again made a specific request to grant a stay to recovery of demand for the AY 2013-14 with a direction to issue refund orders and pay amount to the petitioner along with interest. Similar request has been made in November, 2020. Since petitioner was not getting any response, petitioner was constrained to be before this Court.

Issue of the case

Petitioner before the court aggrieved by adjustment of refund amounts pertaining to Assessment Years ( for short ‘AY’ ) 2012-13, 2017-18, 2018-19 and 2019-20 against the demand of income tax for the AY 2013-14. It is contended that non-payment of refund to petitioner and its adjustment in recovery of demand for AY 2013-14 is absolutely arbitrary and illegal.

Observation of the court

The Bombay high court recently held that income tax (I-T) officers cannot adjust the refunds due to taxpayers against outstanding demands in excess of the limits laid down in instructions, circulars and guidelines issued by the Central Board of Direct Taxes (CBDT). he I-T returns for the financial year 2012-13 filed by Vrinda Sharad Bal, a proprietor of a land development firm, was selected for scrutiny. Consequent to this, a tax demand notice of Rs 6.1 crore was raised. The I-T officer adjusted the refunds due for three subsequent financial years. However, the refunds adjusted were more than 20% of the tax demand that had been raised—the limit prescribed under latest CBDT instructions.

In the petition, Bal highlighted the financial difficulties that businesses were facing due to the pandemic and lockdowns. It was also pointed out that CBDT’s office memorandum dated February 29, 2016, which deals with stay on demand, provides that the I-T officer can adjust refunds only to the extent of 20% of the tax demanded. The writ petition sought a refund of the excess amount that had been adjusted.

The HC held that the CBDT’s instructions issued from time to time need to be applied. It ruled that any amount adjusted from the refunds over and above the limits prescribed was to be returned to the taxpayer with applicable interest. Refunds arising in future would not be adjusted until the disposal of the appeal filed by the taxpayer for the financial year 2012-13, it added.


The High Court directed the department that the amount recovered from petitioner over and above the amount as per instructions, memoranda, circular towards demand of tax for the AY 2013-14 pending in appeal would be returned to the Petitioner with interest according to law and refunds of amounts over and above the amount as per instructions / guidelines may not be adjusted towards tax demand for AY 2013-14 till disposal of appeal.

Read the full order from below


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