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Direct Tax Alert - Amount adjusted in excess of 20% of demand to be refunded

07 May 2021


Where the taxpayer is aggrieved with the order passed by the tax officer, the Income-tax Act, 1961 (IT Act) provides for an appeal mechanism. As per this mechanism, against the order passed by the Tax Officer, an appeal can be filed before the First Appellate Authority. Considering that the appellate forum could grant relief to the taxpayer and that it could take some time before the ruling is given, the income-tax regulation contains the scope of staying the demand by paying certain portion of the demand. In this regard, the Central Board of Direct Taxes (CBDT) has issued various instructions laying down the criteria, subject to which the tax officer can permit staying of the demand. As per the latest Instruction issued, the taxpayer needs to pay 20% of the demand and the balance amount can be kept in abeyance.

Section 245 of the IT Act provides for adjustment of tax refund in one year against the demand for another year(s). As per this section, the tax officer shall give a notice to the taxpayer before carrying out such an adjustment. Generally, the tax officers are inclined to adjust the entire refund against the outstanding demand. In this regard, recently, the Bombay High Court1 had an occasion to examine this issue i.e., whether the refund adjustment should be restricted to 20% of the outstanding demand or not.

We, at BDO in India, have summarised the ruling of High Court and provided our comments on the impact of this decision hereunder:

Facts of the case

For the fiscal year (FY) 2012-13, the Tax Officer passed an order under section 143(3) of the IT Act raising a demand of INR 61.34mn on 31 March 2016. While the taxpayer filed an appeal before the First Appellate Authority, it applied for stay on the proceedings to recover the demand. During the pendency of appeal, the Tax Officer adjusted the tax refunds of the FY 2013-14, FY 2014-15 and FY 2015-16 aggregating to INR 13.83mn (i.e., 22.55%). On 26 June 2018, the Tax Officer had passed an order of stay to recover the balance tax demand, albeit, purporting to have reserved right to adjust refund arising against the demand.

The refunds for FY 2017-18 and FY 2018-19 aggregating to INR 13.04mn were purportedly adjusted against the demand for FY 2012-13. The taxpayer made multiple representation to the Revenue Authorities for refund of excess amount. The matter was even taken to the Principal Chief Commissioner of Income Tax, Mumbai. In November 2020, the taxpayer made a specific request to grant a stay to recovery of demand with a direction to issue refund order and pay amount along with interest. However, as the taxpayer did not receive any response, he filed a writ of Certiorari2 in the High Court of Bombay.

Before the High Court (HC), the taxpayer requested that condition in the stay order dated 26 June 2018 be declared void, without jurisdiction and illegal. The taxpayer sought writ of Certiorari to quash the impugned refund orders to the extent they seek adjustment against demand for FY 2012-13. The taxpayer contended that right to adjust refund is restricted to the extent of 20% of the demand amount and referred to the following:

  • Instruction No 1914 of 2 February 1993 prescribing the Tax Officer to grant stay of demand reserving right to adjust refunds arising.
  • Office Memorandum dated 29 February 2016, inter-alia, reserving right to adjust refunds arising against demand is restricted to the extent of the amount required for granting stay and subject to section 245 of the IT Act.
  • Office Memorandum dated 31 July 2017 modifies amount upwardly from 15% to 20% required for granting stay.

The taxpayer submitted that having regard to the above, right to adjust refund is restricted to the extent of 20% of demand whereas the revenue has adjusted more than 20% of demand which is absolutely arbitrary and against the guidelines and memorandum issued from time to time. The taxpayer also referred to section 220(6) of the IT Act and contented that he is not a defaulter. Further reliance was placed on:

  • Punjab & Haryana HC decision in the case of Jindal Steel and Power3, wherein it was observed that power to adjust refund against demand is limited and Tax Officer is not supposed to act contrary to the instructions by the CBDT.
  • Bombay HC decision in the case of Andrew Telecommunications4 wherein it appears to have been considered that refund could be adjusted only to the extent of 15% and order adjusting refund over and above said amount was liable to be quashed.
  • Supreme Court decision in the case of Indian Oil Corporation5 wherein it was observed that nature of circulars issued by CBDT is binding and that Revenue is bound by the same and cannot be allowed to plead those being not valid or are contrary to the terms of the statute.

Revenue Authorities responded that instructions have been properly followed by the Tax Officer. As a matter of principle, every demand should be recovered as soon as it becomes due and demand kept in abeyance for valid reasons only, is in accordance with the guidelines. Instruction No 1914 dated 21 March 1996 is regarding procedure for recovery of outstanding demand. The subsequent office memorandum are partial modifications. The taxpayer responded to the affidavit-in-reply by a re-joinder that there is an obligation cast upon Tax Officer to grant stay having regard to Office Memorandum dated 29 February 2016. Further, the Revenue Authority referred to Centralised Processing of Return of Income Scheme, 2011 (the Scheme) and submitted that having regard to provisions of the Scheme, the action of the Tax Officer in adjusting refunds would not be un-natural. Clause 10 of the Scheme refers to set-off of refund arising from the processing of return against tax remaining payable by using details of outstanding demand as uploaded on the system by the Tax Officer.

High Court ruling

The HC observed that the Scheme will have to be taken into account along with the provisions of the IT Act and would take within its fold instructions issued by CBDT from time to time.  Set-off of refund under the clause is to be done by using details of income tax demand lying against the person uploaded on to the system. The exercise of power to have set off/adjustment of refund is regulated by legislative provisions and instructions. The details referred to in the clause would have to correspond to the provisions and instructions operating. Function under the clause would be circumscribed by them and it would be incongruous to consider that uploading referred to in Clause 10 of the Scheme would mean all refunds arising are liable to be adjusted against the tax demands irrespective of orders thereon by the authorities and/or subsisting instructions and provisions applicable.

Thus, the HC held that amount recovered from taxpayer over and above the amount as per instructions, memorandum and circular towards demand of tax for FY 2012-13 pending in appeal should be returned to the taxpayer with interest according to law and refunds of amounts over and above the amount as per instructions/guidelines may not be adjusted towards tax demand till disposal of appeal.

BDO comments

This is a welcome ruling. It is pertinent to note that following clause of Para E of the Office Memorandum dated 29 February 2016:

(E) In granting stay, the Assessing Officer may impose such conditions as he may think fit. He may, inter alia,-

(i) ……;

(ii) ……;

(iii) reserve the right to adjust refunds arising, if any, against the demand, to the extent of the amount required for granting stay and subject to the provisions of section 245.


Thus, on reading of this clause of the Office Memorandum, it appears that the refund to the tune of 20% of the demand can only be adjusted. This Ruling will substantiate this view further.

With COVID-19 induced lockdowns, many businesses are facing a cash crunch. This Ruling will help all such taxpayers whose refund is in excess of 20% of tax demanded.

Further, one also needs to evaluate the impact of this Ruling in a situation where the entire tax demand has been paid.

1Vrinda Sharad Bal vs ITO [Writ Petition (L) No 7231 of 2020] (Bombay High Court)

2a writ or order by which a higher court reviews a case tried in a lower court.

3Jindal Steel and Power Ltd vs PCIT  [2017] 391 ITR 42

4M/s Andrew Telecommunications India Pvt Ltd vs PCIT  295 CTR 557

5Commissioner of Customs vs Indian Oil Corporation Ltd 267 ITR 272