Adjusting a current refund against an older tax demand despite

Adjusting a current refund against an older tax demand despite a subsisting stay is illegal.

Issue

Whether the Income Tax Department is legally justified in adjusting a valid tax refund determined for a subsequent year (AY 2025-26) against an outstanding, disputed tax demand of a prior year (AY 2018-19) for which an active interim stay of recovery under Section 220(6) is currently in force.

Facts

For Assessment Year 2018-19, the assessee was assessed under Section 147, which resulted in a disputed tax demand amounting to approximately ₹84.46 lakhs.
The assessee filed a formal appeal challenging this addition before the National Faceless Appeal Centre (NFAC).
Pending the disposal of this first appeal, the assessee moved an application seeking a stay of recovery under Section 220(6).
The Assessing Officer (AO) accepted the application and granted an active interim stay of recovery to the assessee until the disposal of the pending appeal.
Meanwhile, an automated intimation under Section 143(1) was issued for Assessment Year 2025-26, determining a legitimate tax refund of approximately ₹14.80 lakhs due to the assessee.
On January 27, 2026, despite the existence of the valid, subsisting stay order for AY 2018-19, the tax department adjusted the entire ₹14.80 lakhs refund against that older, stayed demand.

Decision

The tax department’s unilateral adjustment of the refund is declared illegal, high-handed, and arbitrary.
The Revenue cannot recover or adjust stayed amounts under the guise of an automated system processing routine.
The Revenue is strictly directed to release the entire refund of ₹14.80 lakhs to the assessee, along with statutory interest calculated under Section 244A, within a mandatory period of four weeks from the date of the order.

Key Takeaways

Stay Orders Bar All Forms of Recovery: A stay of recovery granted under Section 220(6) is absolute. It completely freezes the department’s power to collect the disputed tax. This protection covers not only active coercive measures (like bank attachments) but also passive actions like adjusting automated refunds from later financial years.
Systems Cannot Override Substantive Stay Orders: The Income Tax Department cannot hide behind automated Central Processing Centre (CPC) algorithms to justify unlawful tax collection. When a jurisdictional authority grants an administrative stay, the department must update its records to ensure that automated system adjustments do not bypass judicial or administrative orders.

HIGH COURT OF ORISSA

Saurav Chachra

Central Board of Direct Taxes (CBDT)^*

Harish Tandon, CJ.
and M.S. Raman, J.

WP(C) No. 9306 of 2026

APRIL 16, 2026

Chitrasen Parida, Adv. for the Petitioner. Subash Chandra Mohanty, Sr. Standing Counsel for the Respondent.

ORDER

1. Challenging the arbitrary, illegal and irrational action of the opposite parties in adjusting the refund due amounting to Rs.14,80,270/- for the Assessment Year 2025-26 on 27^th January, 2026 against the disputed tax demand of Rs.84,46,855/- for the Assessment year 2018-19 during subsistence of order of stay of recovery under Section 220(6) of the Income Tax Act, 1961, the petitioner has approached this Court by way of filing this writ petition invoking provisions of Articles 226 & 227 of the Constitution of India with the following prayer(s):

“In view of the above circumstances, it is most respectfully prayed that this Hon’ble Court may graciously be pleased to:

(a)

Admit the Writ application;

(b)

Issue a writ in the nature of mandamus/certiorari or any other appropriate writ, directing the Opposite Party No.3 to release refund due to the petitioner vide Intimation u/s. 143(1) of the Income Tax Act, 1961 dated 12.12.2025 under Annexure-8 along with interest u/s 244A of the Act from the date the same is due till the date of actual payment in the ends of justice;

(c)

Issue a writ in the nature of certiorari or any other appropriate writ, quashing the adjustment of refund for A.Y. 2025-26 amounting to Rs.14,80,270/- against the demand for A.Y. 2018-19 in the ends of justice;

(d)

Pass such further or other order/direction as this Hon’ble Court may deem fit and proper.

And for this act of kindness, the petitioner as in duty bound shall ever pray.”

2. The petitioner, was assessed under Section 147 of the Income Tax Act, 1961 (for short, “the IT Act”) for the Assessment Year 2018-19 by the Assistant Commissioner of Income Tax, Central Circle, Sambalpur-opposite party No.2 vide order dated 29^th March, 2023, against which the petitioner filed an appeal under Section 246A of the IT Act before the National Faceless Appeal Centre (NFAC)-opposite party No.4. While the matter was pending, the petitioner filed an application dated 23^rd December, 2024 before the opposite party No.2 for stay of recovery of the outstanding demand amounting to Rs.84,46,855/- till the disposal of the said appeal.

2.1. The Opposite party No.2 vide order dated 26^th December, 2024 passed under Section 220(6) of the IT Act directing the petitioner to deposit 20% of the outstanding tax demand as a condition for grant of stay, which could not deposited by the petitioner. Therefore, the petitioner filed an application for waiver, which was considered and vide order dated 12^th January, 2026 under Section 220(6), the opposite party No.2 passed an interim order directing stay of recovery of the demand in connection with the assessment under Section 147 of the IT Act till the disposal of first appeal.

2.2. While the matter stood thus and the appeal is still pending before the Appellate Authority, the Assessing Authority issued intimation order dated 12^th December, 2025 under Section 143(1) of the IT Act for the Assessment Year 2025-26, wherein the refund to the tune of Rs.14,80,270/- was directed to be paid.

3. Learned counsel appearing for the petitioner submitted that the authority concerned overreached the order restraining to proceed with coercive measure for the balance tax demand pertaining to Assessment Year 2018-19 and adjusted the refund flowed with respect to the Assessment Year 2025-26 against the disputed demand for the assessment year 2018-19. It is contended that such action of the authority is not only reproachable, but also is in blatant violation of the principles of natural justice.

4. At this stage, learned Senior Standing Counsel appearing for the opposite parties did not dispute the factual position as narrated in the writ petition. He conceded that the refund to the tune of Rs.14,80,270/- flown for the assessment year 2025-26 has been adjusted against the demand for the assessment year 2018-19, notwithstanding the fact that the Assessing Authority invoked under Section 220(6) of the IT Act granting stay of recovery of demand pertaining to the assessment year 2018-19.

5. Heard learned counsel appearing for the petitioner and learned Senior Standing Counsel appearing for the opposite parties-Department.

6. On perusal of record, it is revealed that upon deposit of Rs.14,80,270/-, the authority at Central Circle, Sambalpur vide order dated 12^th January, 2026 invoked power under Section 127(6) of the IT Act and passed the following order:

“In view of the above facts, stay is hereby granted to the assesse for disputed demand for AY 2018-19 on the following conditions:

(i)

The assesse will cooperate in the early disposal of appeal failing which the stay order will be cancelled.

(ii)

This stay order will be reviewed after expiry of six months or if the assesse did not cooperate in the early disposal of appeal.

Accordingly, the petition filed u/s 220(6) of the Act dated 18/12/2025 in respect of the demand raised u/s 147 of the Act is disposed hereby granting stay of demand in dispute till disposal of the First Appeal on the aforementioned conditions.”

6.1. An intimation order dated 12^th December, 2025 under Section 143 was issued indicating refund of Rs.14,80,270/- pertaining to Assessment Year 2025-26. It is the submissions contained in the instant writ petition that the said amount of refund has been adjusted vide Challan Receipt No.11045, dated 27^th January, 2026 against the balance demand pertaining to the Assessment Year 2018-19 notwithstanding the fact that the authority concerned granted stay of recovery during the pendency of finalization of the appeal invoking power under Section 220(6) of the IT Act.

7. This Court finds force in the submission of Sri Chitrasen Parida, learned Advocate that such an action of the authorities is illegal and arbitrary and such recourse of the authorities are held to be perfunctory. In view of such, this Court is in exercise of power under Article 226 of the Constitution of India, directs the opposite parties to release the refund dues to the petitioner as computed vide intimation order dated 12^th December, 2025 under Section 143 (Annexure-8) along with interest under Section 244A of the IT Act within a period of four weeks from date.

8. With the aforesaid observation and direction, the writ petition along with pending Interlocutory Application(s), if any, stands disposed of.