Refund Adjustments vs. Stay of Demand: The 20% Rule Violation

By | March 12, 2026
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Refund Adjustments vs. Stay of Demand: The 20% Rule Violation

This ruling for AY 2005-06 and 2020-21 is a significant victory against “high-handed” recovery tactics. It clarifies that the Income Tax Department cannot override a judicial stay order by unilaterally adjusting refunds, and if they do, they must return the excess with interest.

The Legal Issue

Can the Revenue Department adjust a taxpayer’s entire refund against an outstanding demand when a Tribunal has already granted a stay of recovery subject to a 20% payment/adjustment?

Facts of the Case

  • The Stay Order (17-01-2025): The Tribunal granted a conditional stay on the recovery of the demand for AY 2020-21. Crucially, it directed that only 20% of the outstanding demand should be adjusted from the refund due for AY 2005-06.

  • The Violation (17-02-2025): Exactly one month later, while the stay was active, the Revenue ignored the 20% cap and adjusted the entire refund amount.

  • The Second Stay (09-01-2026): The Tribunal extended the stay on the same terms (20% adjustment) but failed to order the Department to pay back the excess money they had already “illegally” grabbed in February 2025.

  • The Appeal: The assessee challenged the Tribunal’s omission, seeking a refund of the excess ₹28.55 crores.

The Decision

The Court (Higher Authority) ruled in favour of the assessee:

  • Contempt of Stay: The action taken on 17-02-2025 was a direct violation of the Tribunal’s order dated 17-01-2025. Unless a stay order is vacated or amended, it is binding on the Revenue.

  • Illegal Recovery: Any recovery made in excess of the 20% limit specified by the Tribunal is “clearly illegal” and “bad in law.”

  • Tribunal’s Error: The Tribunal erred in its 2026 order by not “undoing the wrong.” Once it was proven that the Department over-adjusted the refund, the Tribunal was duty-bound to order an immediate refund of the excess.

  • Outcome: The Court ordered the Revenue to refund the excess ₹28.55 crores along with interest as per law (Section 244A).

Key Takeaways

  • The 20% Standard: Under CBDT guidelines and judicial practice, if an appeal is pending, recovery is generally restricted to 20% of the disputed demand.

  • Stay Order is Sacrosanct: A stay of demand under Section 254 (by the Tribunal) or Section 220(6) (by the AO) prevents the Department from using Section 245 to “set off” the full refund.

  • The “CPC Glitch” Defense: Revenue often claims excess adjustments happen automatically via the Centralized Processing Center (CPC). However, courts have repeatedly held that the Jurisdictional AO is responsible for ensuring the CPC system reflects the judicial stay orders.

  • Right to Interest: When the Department is forced to return an “illegal” adjustment, the taxpayer is entitled to interest. This acts as a compensatory measure for the period the taxpayer was deprived of their funds.

HIGH COURT OF BOMBAY
Piramal Finance Ltd.
v.
Deputy Commissioner of Income-tax*
B. P. COLABAWALLA and FIRDOSH P. POONIWALLA, JJ.
WRIT PETITION (L) NO. 3828 OF 2026
FEBRUARY  10, 2026
Madhur Agrawal, Adv. and J.D.Mistri, Sr. Adv. for the Petitioner. Ms.Dhanlaksmi S. Krishna Iyer, Adv. for the Respondent.
ORDER
1. Rule. Respondents waive service. With the consent of the parties, Rule made returnable forthwith and the Petition is heard finally.
2. The Petitioner has tendered draft amendments, which are taken on record and marked ‘X’ for identification. The amendment sought is to bring on record the interim order passed by the Tribunal by way of an order sheet, and a report submitted by the Respondents in response to the interim order, which was inadvertently left to be annexed to the Petition. Ms. Iyer, learned counsel appearing on behalf of the Respondents, has no objection to the amendments being allowed. Hence, amendment is allowed. To be carried out forthwith. Reverification is dispensed with.
3. By this Petition, the Petitioner has challenged (i) the action of the Respondents in adjusting the refund due to the Petitioner for the Assessment Year 2005-06 on February 17, 2025 in excess of the 20% of the demand for the Assessment Year 2020-21 in contravention of the Order dated January 17, 2025 passed by the Income-tax Appellate Tribunal (“the Tribunal”); and (ii) the Order dated January 09, 2026 passed by the Tribunal which failed to direct the Respondents to grant refund of the aforesaid excess adjustment.
4. The facts relevant for the purpose of this Petition are that a final Assessment Order dated July 22, 2024 was passed by the Assessing Officer for the Assessment Year 2020-21 assessing the total income of the Petitioner at Rs.584,23,47,150/- and raising a demand of Rs. 74,06,35,441/- on the Petitioner.
5. An Appeal was filed by the Petitioner before the Tribunal to challenge the said Assessment Order.
6. The Petitioner had also filed an Application dated August 12, 2024 before Respondent No. 1 (Assessing Officer) for stay of demand till the disposal of the Appeal by the Tribunal but the same was rejected by Respondent No. 1 vide his Order dated December 10, 2024.
7. The Petitioner, thereafter, filed an Application for stay of recovery of the outstanding demand before the Tribunal for Assessment Year 2020-21. The Tribunal, vide its Order dated January 17, 2025 granted a conditional stay to the Petitioner. The Tribunal, after noting that a refund of Rs. 43.36 crores was due to the Petitioner for Assessment Year 2005-06, directed that such refund should be adjusted to the extent of 20% of the outstanding demand for the Assessment Year 2020-21. Accordingly, the Tribunal concluded as under –
“3. Having considered rival submissions, we are of the view that at this stage, the merits of the additions made cannot be gone into, which can only be examined at the time of hearing of the appeal. However, after considering the prima facie case, balance of convenience and other relevant factors, we are inclined to grant conditional stay, with a direction to the Assessing Officer to adjust 20% of the outstanding demand out of the refund due of Rs 43.36 crores, pertaining to A.Y. 200506. Subject to the above, recovery of the balance outstanding demand shall be stayed for a period of 180 days from the date of this order or, till the disposal of the corresponding appeal fixed on 20.01.2025, whichever is earlier. In the event of any unnecessary adjournment being sought by the assessee, the stay granted shall be vacated.”
8. Despite the explicit terms of the Tribunal’s Order, the Respondents, vide three challans dated February 17, 2025 of Rs. 1,81,29,684/, Rs. 30,21,61,410/- and Rs. 11,33,62,234/-, adjusted the entire refund due to the Petitioner of Rs. 43,36,53,328/- for Assessment Year 200506, against the outstanding demand for the Assessment Year 2020-21.
9. We note that though the Petitioner had filed an Application dated May 05, 2025 before Respondent No. 1 seeking refund of Rs. 28,55,26,240/-, being the wrongful adjustment of the refund for Assessment Year 2005-06 in excess of 20% of the demand for the Assessment Year 202021, the said Application has not been acted upon by the said Respondent.
10. From the record we find that the Petitioner’s appeal was listed for hearing on January 20, 2025, March 20, 2025, May 14, 2025 and July 3, 2025, September 10, 2025, November 12, 2025 and January 22, 2026, and, on each occasion, the Respondents sought, and were granted, an adjournment by the Tribunal. As the Tribunal in its Order dated January 17, 2025 had granted a stay for 180 days, the Petitioner filed an Application dated July 03, 2025 for an extension of the stay of the demand for Assessment Year 2020-21 and sought a direction to the Respondents to refund the amount of Rs. 28,55,26,240/- along with applicable interest, which was wrongfully adjusted against the outstanding demand for the Assessment Year 2020-21.
11. On 25th July, 2025, when the stay application came up for hearing, the Tribunal, vide order sheet entry, passed an interim order directing the Departmental Representative appearing to obtain a report from Respondent No. 1 explaining as to under what circumstances the entire refund was adjusted against the current year’s demand despite clear directions of the Tribunal to adjust only 20% of the demand for Assessment Year 2020-21 against the refund due for Assessment Year 2005-06. Respondent No. 1, vide his Report dated August 04, 2025, stated that pursuant to the directions of the Tribunal, he had written an email to the Centralised Processing Centre, Bengaluru (Respondent No. 4) stating that “Only 20% of the refund due for assessment year 2005-06 may be adjusted against the demand for AY 2020-21, and the balance 80% refund must be issued to the Assessee”. Accordingly, Respondent No. 1 stated that he had complied with the directions of the Tribunal.
12. Thereafter, the matter came up for hearing before another bench of the Tribunal on August 29, 2025, and the Tribunal passed the impugned Order dated January 09, 2026, and held as under –
“6. We have carefully considered the rival submissions and perused the material on record. At the outset, we find that the factual matrix clearly establishes that the delay in disposal of the appeal cannot attributable to the assessee. On the contrary, the record reveals that on repeated occasion, the Revenue itself sought adjournment, primarily on the ground that instructions have been received not to argue matters involving the issue of limitation, particularly in light of the judgement of the Hon’ble Madras High Court in case of CIT v. Roca Bathroom Products Pvt. Ltd. reported in (2022) 445 ITR 537 and the subsequent developments flowing from the decision of the Tribunal in ACIT (International Taxation) v. Shelf Drilling Ron Tappmeyer Ltd. reported in (SC).
7. It is this very legal uncertainty, coupled with the Revenue’s repeated requests for adjournment, that constituted the foundational basis for grant of stay in the first instance. These circumstances continue to prevail even as on date. There is nothing on record to indicate any change in the factual or legal position so as to warrant a departure from the view earlier taken by the Tribunal. The considerations relating to prima facie case, balance of convenience, and avoidance of irreparable hardship therefore continue to operate in favour of the assessee.
8. As regards the grievance raised by the assessee concerning adjustment of refund beyond the extent permitted by the earlier stay order, we are conscious of the fact that the total demand involved is substantial and that a significant portion thereof has already been adjusted. However, at this stage, when the appeal is ripe for hearing, we are . of the considered view that issuance of a direction for immediate refund of the excess adjustment may not be appropriate. At the same time, it cannot be lost sight of that any further coercive action would upset the equilibrium sought to be maintained by the stay order and would defeat the very purpose for which the stay was granted.
9. In these circumstances, while extending the stay of recovery on the same terms and conditions as earlier granted, we deem it necessary, in the interest of justice and fair play, to ensure that the assessee is adequately protected from any coercive recovery during the pendency of the appeal. Accordingly, we direct the Assessing Officer to furnish a categorical and unconditional undertaking before this Tribunal that no coercive recovery proceedings whatsoever shall be initiated or continued against the assessee during the pendency of the appeal before the Tribunal.”
13. Mr. Mistri, the learned senior counsel appearing on behalf of the Petitioner, at the outset, submitted that the Tribunal had granted a stay of recovery of the demand for the Assessment Year 2020-21 vide its Order dated January 17, 2025, subject to adjustment of refund for Assessment Year 200506 only to the extent of 20% of the demand for Assessment Year 2020-21. Mr. Mistri submitted that admittedly the total demand for Assessment Year 2020-21 was Rs. 74,06,35,441/-, and therefore, 20% of the said amount would be Rs. 14,81,27,088/-. However, the Respondents, on February 17, 2025, adjusted the entire refund of Rs. 43,36,53,328/- against the demand for the Assessment Year 2020-21 in clear contravention of the Order of the Tribunal dated January 17, 2025. Mr. Mistri submitted that on February 17, 2025, the Order of the Tribunal was in operation, and therefore, the Respondents were required to comply with the same. Mr. Mistri further submitted that since the Tribunal had granted a stay on recovery of 80% of the demand for the Assessment Year 2020-21, any adjustment of refunds due in excess of Rs 14,81,27,088/-, was in contravention of the Order of the Tribunal.
14. Considering the aforesaid facts, Mr. Mistri submitted that the Tribunal, in the impugned Order, grossly erred in not directing the Respondents to refund the amount of Rs. 28,55,26,240/- along with interest as per law. Mr. Mistri submitted that the Tribunal, in paragraph 7 of the impugned Order, has held that consideration relating to a prima facie case, balance of convenience, and avoidance of irreparable hardship, continues to operate in favour of the Petitioner, and in paragraph 9 has further held that the stay of recovery of the outstanding demand is extended on the same terms and conditions as granted earlier. Mr. Mistri submitted that once the Tribunal had accepted that the stay is extended on similar terms, the Tribunal ought to have directed the Respondents to refund the amount of Rs. 28,55,26,240/- to the Petitioner along with interest as per law.
15. Per contra, Ms. Iyer, learned counsel appearing on behalf of the Respondents, submits that it is the Petitioner who, in the hearing for stay before the Tribunal on January 17, 2025, made a submission that the refund for Assessment Year 2005-06 may be adjusted to the extent of 20% of the demand for Assessment Year 2020-21, and therefore, the Petitioner cannot now seek a refund of amount adjusted in excess, against the demand for Assessment Year 2020-21.
16. We have heard both parties at length and also perused the documents filed by the parties in the present Petition.
17. We observe that the Tribunal, in its Order dated January 17, 2025, granted a conditional stay of recovery of the demand for Assessment Year 2020-21 of Rs. 74,06,35,441/-. The condition prescribed for the stay was that the refund of Rs. 43,36,53,328/- for Assessment Year 2005-06 should be adjusted only to the extent of 20% of the outstanding demand for Assessment Year 2020-21, and the balance demand, i.e. 80% of the demand for the Assessment Year 2020-21, is stayed for a period of 180 days or the disposal of the Appeal, whichever is earlier. Therefore, as per the Order of the Tribunal dated January 17, 2025, the demand for Assessment Year 2020-21 was recoverable only to the extent of Rs. 14,81,27,088/- from the refund due to the Petitioner for Assessment Year 2005-06, and the balance amount of Rs. 28,55,26,240/- was required to be refunded to the Petitioner. However, as can be seen from the challans produced in the Petition, the Respondents have adjusted the entire refund for Assessment Year 2005-06 of Rs. 43,36,53,328/- against the demand for Assessment Year 2020-21. The said action of the Respondents on February 17, 2025, has been taken during the operation of the Order of the Tribunal dated January 17, 2025. Further, it is not the case of the Revenue that the order of the Tribunal dated January 17, 2025 had been amended or vacated before February 17, 2025. Therefore, the action of the Respondents, being in violation of the said Order, is clearly illegal.
18. We are further of the view that in the aforesaid facts, the Tribunal has clearly erred (while passing the impugned Order dated January 09, 2026), in not directing the Respondents to refund the amount of Rs. 28,55,26,240/- along with interest as per law. We note that the Tribunal has not given any valid reason for refusing to direct the Respondents to refund the illegal adjustment of refund for the Assessment Year 2005-06 against the demand for the Assessment Year 2020-21, even though the Tribunal has accepted the fact that there has been no change in the legal and factual position and that the stay should be extended on the same terms as granted earlier. Hence, we set aside the impugned Order of the Tribunal to this limited extent and direct the Respondents to refund the amount of Rs. 28,55,26,240/- for Assessment Year 2005-06, along with interest as per law. The said refund shall be granted to the Petitioner within a period of three weeks from the date of uploading of this Order.
19. The impugned Order of the Tribunal dated January 09, 2026, in so far as its grants stay of recovery of the outstanding demand of the Assessment Year 2020-21, would continue to operate with the above modification.
20. Rule is accordingly made absolute in the aforementioned terms, and the Writ Petition is also disposed of in terms thereof. However, there shall be no order as to costs.
21. 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.