Department Cannot Adjust Existing Refunds Against a Disputed

Department Cannot Adjust Existing Refunds Against a Disputed Demand While a Stay Application and Appeal Remain Pending

Issue

Whether the Income Tax Department is legally permitted under Section 245 to adjust a tax refund due to an assessee for one year (AY 2021-22) against a disputed outstanding tax demand of a subsequent year (AY 2023-24), while an appeal before the CIT(A) and a stay application under Section 220(6) regarding that demand are actively pending.

Facts

The Refund: The assessee was legitimately owed a tax refund by the department for the Assessment Year (AY) 2021-22.
The Demand: A separate tax demand was raised against the assessee for the Assessment Year (AY) 2023-24.
Pending Actions: The assessee aggressively contested this demand by filing a regular appeal before the Commissioner of Income-tax (Appeals) [CIT(A)]. Simultaneously, a formal Stay Application under Section 220(6) was filed and remained pending for disposal before the Assessing Officer (AO).
The Adjustment: Ignoring the pending stay plea and appeal, the revenue department invoked Section 245 to unilaterally adjust and swallow the AY 2021-22 refund money to satisfy the disputed AY 2023-24 demand.
Legal Challenge: The assessee challenged this coercive recovery mechanism before the higher appellate forum/High Court, seeking a release of the locked-up refund.

Decision

Coercive Recovery Quashed: The Court/Tribunal held that the department cannot bypass judicial decorum. When a statutory stay application under Section 220(6) and a quantum appeal are pending, the underlying tax demand remains highly contested and vulnerable to reversal.
Arbitrary Exercise of Section 245: Section 245 is a discretionary tool that requires quasi-judicial fairness. Adjusting refunds against a demand that is currently under a stay review process constitutes an invalid and high-handed recovery tactic.
Refund Ordered with Interest: The adjustment executed by the department was officially quashed. The department was directed to immediately release the full refund due for AY 2021-22 to the assessee, along with statutory interest computed under Section 244A. The issue was decided in favour of the assessee.

Key Takeaways

1. Section 245 is Not an Automatic Extraction Tool

The power to set off refunds against outstanding tax due under Section 245 is not mechanical. The department must apply its mind and cannot aggressively collect a tax liability that is actively being disputed and awaiting a stay order.

2. Supremacy of Pending Stay Applications

Filing a stay application under Section 220(6) creates a procedural checkpoint. Until the Assessing Officer explicitly rejects or disposes of that stay application, the department must hold its recovery actions in abeyance, including recovery via refund adjustments.

3. Financial Indemnity Through Section 244A Interest

When the tax department wrongfully retains or misappropriates an undisputed refund to offset a disputed demand, they are liable to compensate the taxpayer by paying statutory interest under Section 244A from the date the refund became due until its actual release.

HIGH COURT OF CALCUTTA

Bothra Shipping Services (P.) Ltd.

Union of India^*

Smita Das De, J.

WPO No. 139 of 2026

MAY 12, 2026

Ms. Arati Agarwal and Ms. Rosy Banerjee, Advs. for the Petitioner. Taraknath Jaiswal, Adv. for the Respondent.

ORDER

1. The petitioner in the present case challenges inter alia, the adjustment of refund due for the Assessment Year 2021-22 against the outstanding demand for Assessment Year 2023-24.

2. Main grievance is that such adjustment has been made despite the fact that the Stay Application is pending before the Assessing Officer and an appeal is pending before the CITA for Assessment Year 2023-24. The issues involved herein are as follows:-

(i)

Whether the Department can adjust a refund against the disputed demand when a Stay Application and Appeal are pending.

(ii)

Whether such adjustment violates the principles of natural justice and statutory safeguard under the income Tax Act.

(iii)

The Learned counsel for the petitioner submits that the refund for Assessment Year 2021-22 has been determined and has become due to the petitioner. Without issuing any notice or affording any opportunity of hearing the respondents adjusted the said refund against the demand for Assessment Year 2023-24. It is further contended that for Assessment Year 2023-24 a Stay Application is pending before the Assessing Officer under Section 220(6) and an Appeal is also pending before the CITA, therefore, the demand for Assessment year 2023-24 is not final and cannot be enforced.

3. Reliance is placed upon CBDT Instruction No. 1914 dated 21.03.1996 and subsequent Circular which provides that no adjustment shall be made where stay application is pending or demand is not final. It is well settled proposition that an adjustment of refund against disputed demand during pendency of appeal is impermissible.

4. It is further submitted that adjustment without adjudication of Stay and Appeal causes financial prejudice and defeats the purpose of the statutory remedies. The learned counsel appearing for the petitioner places reliance upon two judgments of this Court which are respectively reproduced below:

(i)

Danieli India Ltd. v. Asstt. CIT, Central [W.P.O. No. 2294 of 2022, dated 1-9-2023]/2023 (9) TMI 1726 –CALCUTTA HIGH COURT.

“Considering the facts and circumstances of this case which appears from record and submission of the parties and decision in the case of Graphite India Ltd. (supra), this writ petition being WPO 2294 of 2022 is disposed of by holding that the action of the assessing officer recovering amount in excess of 20% of the demand arising out of relevant assessment orders against which Appeals are pending before CIT (Appeals) by way of adjustment from the admitted refund relating to other assessment years are arbitrary and not sustainable in law. Accordingly, the respondent Income Tax Authority concerned is directed to refund the amount in excess of 20% which has been recovered from the refund of assessment years 2010-11 and 2017-18 for recovery of the demand arising out of the assessment orders relating to assessment years 2011-12, 2012-13 and 2013-14 against which appeals are pending before the CIT (Appeals), within a period of four weeks from the date of communication of this order subject to verification of the actual amount recovered and for this purpose respondent Income Tax Authority concerned shall afford an opportunity of hearing to the petitioner if required for clarification in support of such claim.

With these observations and directions, this writ petition stands disposed of.”

(ii)

Gaurav Enterprises v. UOI [WPO No. 700 of 2025, dated 1-12-2025]/2025(12) TMI 624 – CALCUTTA HIGH COURT.

“15. As recorded hereinabove, the assertion of the revenue authorities is that unless the petitioner puts in a sum equivalent to 20% of the disputed demand, recovery of the entire outstanding demand is permissible. It has not been demonstrated before this Court to any degree of satisfaction that any such situation as mentioned in paragraph 4B of the Office Memorandum dated February 29, 2016 as amended by the officer memorandum dated July 31, 2017 exists in the case at hand. In such view of the matter, this Court is inclined to pass the same order as passed by the Co-ordinate Bench of this Court in the case of Danieli India Limited (supra) while relying on M/s. Graphite India Limited (supra).

16. Accordingly, the respondent Income Tax authorities are directed to refund to the petitioner the amount dated April 17, 2021 issued pursuant to the assessment order dated April 17, 2021 against which an appeal is pending), from the amounts refundable to the petitioner in respect of assessment years 2020-21 to 2023-24 within a period of eight weeks from the date of communication of this order upon due verification of the actual amount recovered thus far. The respondent Income Tax authorities shall be free to afford an opportunity of hearing to the petitioner for the purpose of any clarification in respect of the petitioner’s claim as regards the amount recovered.

17. it is submitted that the appeal that has been preferred before the CIT (Appeals) under Section 246A of the Income Tax Act, 1961 has been pending since 2021. In such view of the matter, the appellate authority being the respondent no. 6 herein is requested to expedite the hearing of the appeal and dispose of the same as early as possible.”

5. The learned counsel appearing for the respondent submits that under Section 245 the Assessing Officer is empowered to set off refund against any tax due under the Act.

6. It is further contended that pendency of a stay application or appeal does not automatically bar adjustment. The Assessing Officer has discretion to adjust after considering the facts. Since there is no order of Stay granted by the Assessing Officer for the Assessment Year 2023-24, the demand continues to be outstanding and recoverable.

7. The adjustment has been made after giving intimation through the CPC Portal and the petitioner has sufficient opportunity to file a rectification of Stay Application. Learned counsel appearing for the respondent relies upon a judgment Northern Coal Fields Ltd. v. Asstt. CIT (SC) which has subsequently travelled up to the Apex Court wherein it has been observed as follows:

” In the facts of this case, we are not inclined to interfere with the order of the High Court. However, after the adjustment of the tax in the next year, the balance amount, if any, should be refunded to the petitioner by the Income Tax Department. The Special Leave Petition is dismissed.

Pending applications(s), if any, stands disposed of accordingly.”

8. The respondents submit that adjustment under Section 245 is an administrative act. Unless mala fide or arbitrariness is shown the Court should not interfere as held in CIT v. Chhabil Dass Agarwal (SC)/(2014) 1 SCC 603 .

9. After hearing the rival contention of the parties upon perusing the records made available that the adjustment of refund for Assessment Year 2021-22 against the demand for Assessment Year 2023-24 is set aside and quashed in light of the judgment/order passed by the coordinate Bench of this Court in Danieli India Ltd. (supra) and Gaurav Enterprises (supra). Accordingly, respondent Nos. 2 and 3 are directed to release the refund for Assessment Year 2021-22 along with interest under Section 244A within six weeks from the date of communication of this order.

10. The Assessing Officer shall not take any coercive steps for recovery of demand for Assessment Year 2023-24 until the Stay Application is disposed of. The CITA is requested to dispose of the pending appeal in a time bound manner preferably within 8 weeks.

11. In view of the above the Writ Petition being WPO No. 139 of 2026 is disposed of without going into the merits of this case. No order as to costs.

12. Urgent photostat certified copy of this order, if applied for, be given to the learned counsel for the parties on usual undertakings.