AO's Actions in Breach of High Court Stay Order are Illegal; Refund Adjustment Invalid.

AO’s Actions in Breach of High Court Stay Order are Illegal; Refund Adjustment Invalid.

Issue

Can a tax authority (Assessing Officer) continue with reassessment proceedings or initiate recovery actions (like adjusting a refund) that are based on a notice and assessment order that have been explicitly stayed by a High Court?

Facts

The assessee filed a writ petition challenging a reassessment notice (Section 148), an order rejecting their objections, and the final assessment order dated 31-3-2022.
The High Court granted an ad-interim stay on the notice(s) and the assessment order, and explicitly restrained the Revenue from taking any further steps.
In direct violation of this stay order, the Assessing Officer (AO) did two things:
1. Treated the stayed notice under Section 148 as a new show-cause notice under Section 148A(b) (per the Ashish Agarwal new regime) and passed a fresh order under Section 148A(d).
2. Adjusted a refund due to the assessee for a subsequent assessment year against the tax demand arising from the stayed assessment order dated 31-3-2022.
The assessee challenged these actions as being illegal and in contempt of the court’s order.

Decision

The High Court ruled decisively in favour of the assessee.
It held that since the Revenue was restrained by a High Court order and injunction from taking “any further steps,” the AO could not have embarked on the journey of treating the stayed notice as a new notice under Section 148A(b) or passing any new order.
The court further held that since the operation of the assessment order was stayed, no recovery could have been initiated. The adjustment of the refund was an illegal recovery action.
The Revenue was directed to deposit the sum (which it had illegally adjusted) in the court.

Key Takeaways

Stay Order Means a Complete Stop: A High Court’s stay order and injunction restraining “any further steps” must be obeyed in its entirety. It halts all proceedings, including any procedural actions to continue the assessment under a different legal provision.
Stay of Order = Stay of Recovery: A stay on the operation of an assessment order automatically stays any recovery or collection based on the demand raised in that order.
Adjusting Refunds is an Act of Recovery: The act of adjusting a refund (even from a different year) against a stayed demand is a form of recovery. If the demand is stayed, such an adjustment is illegal and a violation of the court’s order.
Consequences of Breaching a Stay: When the tax authority acts in violation of a stay order, the court can nullify those actions and order the restoration of any funds recovered in defiance of its injunction.

HIGH COURT OF BOMBAY

Dominion Diamond (India) (P.) Ltd.

Assistant Commissioner of Income-tax

B. P. COLABAWALLA and AMIT S. JAMSANDEKAR, JJ.

WRIT PETITION NO. 1818 OF 2023

SEPTEMBER 23, 2025

J.D. Mistry, Sr. Adv. and Madhur Agrawal, Adv. for the Petitioner. Akhileshwar Sharma, Adv. for the Respondent.

ORDER

1. This Writ Petition was originally filed challenging (i) the Notice dated 31st March 2021 issued under Section 148; (ii) the impugned Orders dated 3rd March 2022 and 8th March 2023 rejecting the objections to the reasons for reopening the assessment; and (iii) the impugned Assessment Order dated 31st March 2022. In this Writ Petition, on 4th May 2022 an order was passed granting ad-interim relief in terms of prayer clause (d) which has undisputedly continued from time to time. For the sake of convenience, prayer clause (d) is reproduced here under :-

“d. that pending the hearing and final disposal of this petition the operation of the impugned notice under section 148 of the Act dated 31st March, 2021 (Exhibit D), the impugned orders dated 3rd March, 2022 (Exhibit L) and 8th March, 2022 (Exhibit N) passed by Respondent No. 2 and the impugned assessment order dated 31st March, 2022 (Exhibit U)passed by Respondent No. 2 be stayed and the Respondents, their successors in office, subordinates, servants and agents be restrained by an order and injunction of this Hon’ble Court from taking any further steps ;. “

(emphasis supplied)

2. Despite this ad-interim order, the Assessing Officer has proceeded to treat the Notice issued under Section 148 as a Show Cause Notice under Section 148A(b) on the basis of the Judgment of the Hon’ble Supreme Court in the case of UOI v. Ashish Agarwal 183 (SC). According to the Assessing Officer, though the notice was issued on 31st March 2021, the same was served upon the Petitioner on 1st April 2021 and therefore the new regime would apply which came into effect from 1st April 2021. It is on this basis that the Assessing Officer treated the notice under Section 148 as a Show Cause Notice under Section 148A(b) and thereafter has proceeded to pass the order under Section 148A(d) rejecting the objections of the Petitioner to the said Show Cause Notice. This is despite the fact that this court, by its order dated 4th May 2022 restrained the Respondents from “taking any further steps”.

3. In the affidavit-in-reply filed by the Revenue, it is stated that since the Notice under Section 148 is now treated as a Show Cause Notice under Section 148 A(b), the assessment order dated 31st March 2022 no longer survives and is given go-by by virtue of the decision of this court in the case of Emcure Pharmaceuticals Ltd. v. Asstt. CIT [WP No. 5293 of 2022, dated 5-5-2022].

4. Mr. Mistry, the learned senior Counsel appearing on behalf of the Petitioner, submitted that though the Petitioner does not accept that the Assessing Officer can proceed under the new regime, assuming for the sake of argument that the new regime did apply, and the assessment order dated 31st March 2022 is given a go-by, then, the Revenue could never have recovered any tax from the Petitioner under the assessment order dated 31st March 2022. Mr. Mistry submitted that admittedly, no assessment order has been passed against the Petitioner after passing of the order under Section 148A(d) of the IT Act. Despite aforesaid, the Revenue has been adjusting the refund for subsequent years towards the demand under assessment order dated 31st March 2022, which adjustment comes to Rs. 1,63,45,488/-. In this regard, Mr. Mistry placed on record the challan receipts generated by the Income Tax Department when the refund is adjusted towards the outstanding demand. Copies of these challans have also been given to Mr. Sharma, the learned advocate appearing on behalf of the Revenue. Mr. Mistry, therefore, submitted that in these circumstances, the Revenue be asked to refund the amount of Rs. 1,63,45,488/- to the Petitioner, or at the very least, the same be deposited in this court.

5. This relief sought by Mr. Mistry, was vehemently opposed by Mr. Sharma, the learned Counsel appearing on behalf of the Revenue. He submitted that according to the Assessing Officer, the aforesaid adjustment is not reflected in the summary report taken from the ITBA system. In such circumstances, he submitted that no relief be granted to the Petitioner.

6. We have heard the learned Counsel for the parties and also perused the papers and proceedings in the above Writ Petition. It is not in dispute before us that the ad-interim order passed on 4th May 2022 continues till date. We, therefore seriously doubt that the Assessing Officer could have embarked upon the journey to treat the Section 148 notice as a Show Cause Notice under Section 148 A(b) of the IT Act or proceeded to pass the order under Section 148A(d). We say this because by virtue of the ad-interim order not only were the impugned notices dated 31st March 2021, and 8th March 2022 stayed by this court, but even the assessment order dated 31st March 2022 was stayed. Further the Respondents, their successors in office, subordinates, servants and agents were restrained by an order and injunction from taking any further steps. Once this is the case, at least, prima facie, we are of the view that the Assessing Officer could not have embarked upon the journey of treating the notice issued under Section 148 as a Show Cause Notice under Section 148 A(b) of the IT Act or pass the order under Section 148 A(d).

7. Thankfully, no assessment order has been yet been passed by the Assessing Officer after passing the order under Section 148 A(d). We are therefore of the view that the Petitioner is certainly entitled to ad-interim relief in terms of prayer clause (d1) which reads thus :-

“d1. that pending the hearing and final disposal of this petition the Respondents, their successors in office, subordinates, servants and agents be restrained by an order and injunction of this Hon’ble Court from taking any steps pursuant to the passing of the order (Exhibit Y) dated 28th July, 2022 and the issue of the notice (Exhibit Z) dated 28th July, 2022.”

8. This will obviously be in addition to ad-interim relief in terms of prayer clause (d) granted by order dated 4th May 2022.

9. This now only leaves us to deal with the argument of Mr. Mistry as to whether the Income Tax Department ought to refund or, at the very least, deposit in this court the sum of Rs. 1,63,45,488/- which was adjusted by the Income Tax Department on the basis of the demand raised on the Petitioner pursuant to the impugned assessment order dated 31st March 2022.

10. We, after hearing the parties, are of the view that this amount should be deposited in this court. We say this for two reasons. Firstly, by order dated 4th May 2022, and which has undisputedly continued till date, the operation of the impugned assessment order was stayed. Once that order was stayed, no recovery pursuant thereto could have been initiated by the Income Tax Department. Secondly, it is also the case of the Revenue that the Revenue is proceeding under the new regime [which came into effect from 1st April 2021], and the impugned assessment order no longer survives and has to go. If this is the stand of the Revenue [which is refuted by the Petitioner] then we fail to understand how it could have adjusted the refund due to the Petitioner for subsequent years against the demand raised pursuant to the assessment order dated 31st March 2022. Hence, looking at it from any angle, we are at least prima facie of the view that this recovery could not have been made from the Petitioner. It is because of the foregoing reasons, that we are of the view that the Revenue ought to deposit the sum of Rs. 1,63,45,488/- in this court and which would then abide by further orders passed in this Writ Petition.

11. As far as the argument of Mr. Sharma regarding the fact that the aforesaid amount is not reflected in the ITBA system, as visible to the Assessing Officer, we find no force in the aforesaid argument. Mr. Mistry has in fact produced the challans generated by the Income Tax Department itself, when the refund for subsequent years has been adjusted towards the alleged outstanding demand. Once this is the case, merely because the Assessing Officer is unable to find the aforesaid adjustment in the ITBA system will not carry the case of the Revenue any further.

12. In view of the aforesaid discussion, we pass the following order :-

: ORDER:

There shall be ad-interim relief in terms of prayer clause d(1) reproduced earlier. This ad-interim order is in addition to the ad-interim order granted on 4th May 2022 in terms of prayer clause (d). The ad-interim order passed by us today in terms of prayer clauses (d) and d(1) shall continue until further orders.

In addition to the aforesaid, the Revenue shall deposit in this court the sum of Rs. 1,63,45,488/- by 10th October 2025.

13. Mr. Sharma has tendered the additional affidavit dated 23rd June 2025 on behalf of the Revenue. A copy of the same has already been served on the advocate for the Petitioner. The said additional affidavit is taken on record.

14. We now place the above Writ Petition on board for admission on 14th October 2025 at 03.00 p.m.

15. We put the parties to notice that we may dispose of this Writ Petition at that stage itself, time permitting.

16. This order will be digitally signed by the Private Secretary/Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.