Refund Mandatory Upon Appeal Allowing Assessee: Tax Authorities Must Return Recovered Amount When Demand is Set Aside

Issue:

Whether, upon an appeal being allowed and the demand raised in a reassessment order being set aside, it is obligatory for the tax authorities to refund the amount recovered from the assessee towards the discharge of that demand, even if the appeal was allowed during the pendency of the appeal itself.

Facts:

For the assessment year 2016-17, the Assessing Officer (AO) treated a cash deposit made by the assessee-society in a bank account as unexplained, making an addition under Section 69A of the Income-tax Act, 1961. Subsequently, reassessment proceedings were initiated, and a demand was raised against the assessee. During the pendency of the appeal before the Commissioner (Appeals), the Assessing Officer recovered a certain amount from the assessee towards the discharge of the demand raised in the reassessment order. Later, the Commissioner (Appeals) set aside the entire demand that had been raised. Despite the appeal being allowed and the demand being cancelled, the Assessing Officer had not refunded the amount that was recovered during the pendency of the appeal.

Decision:

Yes, the court held that upon the disposal of the appeal and the demand raised in the assessment order being set aside, it was obligatory on the part of the tax authorities to refund the amount recovered towards the discharge of the demand raised in the reassessment order. The decision was in favor of the assessee.

Key Takeaways:

Obligation to Refund upon Appeal Success: When an appellate authority (like the Commissioner (Appeals)) sets aside a demand, any amount collected by the tax department against that demand becomes an excess recovery. The department is legally obligated to refund this amount to the assessee.
Consequence of Demand Being Set Aside: The moment the demand is set aside, its legal basis vanishes. Any amount recovered on the strength of that demand becomes recoverable by the taxpayer.
Section 241 and Provisional Withholding: While Section 241 allows the Assessing Officer to withhold a refund in certain cases if an appeal is pending from the Commissioner (Appeals) decision, this power is prospective and is only exercised if the revenue challenges the appellate order. It does not apply to situations where the demand itself has been entirely set aside by the appellate authority.
Principle of Unjust Enrichment: The department cannot retain money collected based on a demand that has been declared invalid by a higher authority.
Prompt Refunds: This case emphasizes the principle that refunds due to assessees, especially when a demand is overturned, should be processed promptly by the tax authorities.

HIGH COURT OF ORISSA

Puri Commercial Co-operative Society

Income-tax Officer

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

W.P.(C) No.11636 of 2025

MAY 14, 2025

Rudra Prasad Kar, Sr. Adv. and Pranaya Kumar Mishra, Adv. for the Petitioner. Subash Chandra Mohanty, Sr. Standing Counsel and Avinash Kedia, Jr. Standing Counsel for the Respondent.

ORDER

1. This matter is taken up through Hybrid mode.

2. By way of instant writ petition, the petitioner has questioned the rejection of refund of recovered amount during the pendency of the appeal by order dated 22.01.2025 with respect to assessment year 201617 (corresponding to financial year 2015-16).

3. The petitioner, registered Co-operative Society, engaged in facilitating credit services and collection of deposit and giving loans exclusively to its members, has been assessed to tax treating cash deposit of Rs.2,10,44,000/- in the Allahabad Bank Account as unexplained during the financial year 2015-16 relating to assessment order 2016-17. Assessment was undertaken under Section 147 by issue of notice under Section 148 of the Income Tax Act („I.T. Act’, for short). Treating the entire aforesaid deposit as unexplained cash under Section 69A of the I.T. Act, reassessment proceeding was concluded under Section 147 read with Section 144 and 144 B raising a demand to the tune of Rs.3,49,57,935/-.

4. Aggrieved thereby, the petitioner preferred appeal before the Commissioner of Income Tax (Appeals) which was transferred to National Faceless Appeal Centre (“NFAC”, abbreviated).

5. During pendency of the appeal, the Income Tax Officer initiated recovery proceeding and issue notice of attachment under Section 226(3) of the I.T. Act to the bankers of the petitioner-Society and accordingly, on the instruction of the Income Tax Officer, the bankers had to issue demand draft of Rs.63,92,435/- on 03.01.2025 in favour of the Department.

6. The appeal before the Commissioner of Income Tax (Appeals), NFAC came to be allowed vide order dated 24.02.2025 under Section 250 of the I.T. Act.

7. Despite appeal being allowed, the opposite parties having not refunded the amount so recovered during the pendency of appeal, the petitioner challenging the order of rejection vide Annexure-9 has come up before this Court by way of filing the present writ application.

8. Sri Rudra Prasad Kar, learned Senior Counsel assisted by Mr. Pranaya Kumar Mishra, learned Advocate for the petitioner submitted that notwithstanding stay of demand was granted by the Competent Authority during the pendency of appeal the Income Tax Officer proceeded with the recovery of tax demanded in the assessment order under Section 147. Citing circular issued by Central Board of Direct Taxes (CBDT) to be followed by the Assessing Officer for the purpose of invocation of Section 220 of the I.T. Act, though application was made with prayer to refund the amount so recovered beyond 20% of the demand, the said authority in clear violation of the same rejected the request for refund of recovered amount without taking into account order of stay granted by the Principal Commissioner of Income Tax, Bhubaneswar-I by order dated 22.01.2025. He submitted that during pendency of appeal in consideration of application for stay of demand, the Principal Commissioner of Income Tax, Bhubaneswar-I directed the Assessing Officer to lift attachment by granting full stay of demand till disposal of appeal pending before the Commissioner of Income Tax (Appeals). By order dated 21.01.2025, the Income Tax Officer defied such order.

8.1. He forcefully submitted that even after the Commissioner of Income Tax (Appeals) has set aside the demand raised in the assessment framed under Section 147 vide order dated 24.02.2025 passed under Section 250 of the I.T. Act, the petitioner is still deprived of utilizing the legitimate money which has been kept under the custody of ITO.

9. Mr. Subash Chandra Mohanty, learned Senior Standing Counsel along with Mr. Avinash Kedia, learned Junior Standing Counsel would submit that the petitioner is liable to be relegated to approach the Income Tax Officer/Assessing Officer for doing the needful and for the said purpose the petitioner after getting relief in the appeal should have filed application for refund afresh. It is submitted that the application for refund of recovered amount which was pursued during the pendency of appeal has already been disposed of, which forms part of writ petition vide Annexure-9. Therefore, he fervently insisted to dismiss the writ petition granting liberty to the petitioner to approach the appropriate authority.

10. Perusal of the record and having diligently considered the rival contention and submission of the parties, on a query from this Court, the learned Senior Standing Counsel was unable to refer to any provision of the Income Tax Act and Rules framed thereunder for the petitioner to approach the Assessing Officer grant of refund of recovered amount during the pendency of appeal after the petitioner came out successful in the appeal. Therefore, this Court accedes to the submission at the Bar that upon disposal of appeal, the demand raised in the assessment order dated 29.03.2022 passed under Section 147 of the I.T. Act being set aside, it is obligatory on the part of the authority concerned to refund the amount to the petitioner. Therefore, this Court accepting writ petition of the petitioner-Society, directs the opposite parties to refund the amount recovered towards discharge of demand as raised in the aforesaid reassessment order within a period of seven days hence, failing which the amount so withheld, shall carry interest at the rate of 6% per annum from the date of recovery till the date of actual restoration/refund.

11. With the aforesaid observation and direction, the writ petition stands disposed of. All the pending interlocutory applications, if any, shall be disposed of accordingly.