Facts of the Case

The petitioner, Huawei Telecommunications India Company Private Limited, filed a writ petition challenging the rectified intimation dated 07.07.2022 issued under Section 143(1) of the Income-tax Act, 1961, whereby a refund of ₹19,37,43,880 due for Assessment Year 2020–21 was adjusted against outstanding demands for Assessment Years 2016–17, 2017–18 and 2018–19. The petitioner also sought refund of the adjusted amount along with applicable interest.

The petitioner contended that the demands for AYs 2017–18 and 2018–19 were stayed by orders of the Income Tax Appellate Tribunal and that therefore the Revenue could not adjust refunds against such stayed demands. The ITAT had passed a conditional stay order on 23.09.2022 directing partial payment and staying recovery of the balance demand. Similar interim protection existed in respect of AY 2016–17 through repeated orders restraining coercive recovery.

Issues Involved

Whether adjustment of refund against outstanding demands during subsistence of ITAT stay orders amounts to impermissible recovery, whether such adjustment constitutes a coercive measure, and whether the Revenue can effect adjustment without issuing prior notice under Section 245 of the Income-tax Act.

Petitioner’s Arguments

The petitioner argued that adjustment of refund is a mode of recovery and cannot be undertaken when recovery of demand has been stayed by the ITAT. It was contended that the stay orders interdicted the Revenue from effecting any recovery, including by way of adjustment.

The petitioner further submitted that no prior intimation or notice under Section 245 was issued before making the adjustment, rendering the action illegal. Reliance was placed on decisions of the Delhi High Court in Lease Plan India and Vijay Singh Kadan, and on the Punjab and Haryana High Court judgment in Kulbhushan Goyal, to submit that adjustment of refund amounts to a coercive step.

Respondents’ Arguments

The Revenue contended that there is a distinction between coercive recovery and adjustment of refunds, and that an order restraining coercive recovery does not automatically bar adjustment under Section 245. Reliance was placed on the Delhi High Court judgment in Maruti Suzuki India Limited to argue that unless there is an absolute stay on recovery, refund adjustment is permissible.

With respect to AY 2016–17, it was argued that the ITAT had only restrained coercive recovery and had not granted a blanket stay against adjustment of refunds.

Court Order / Findings

The Delhi High Court held that adjustment of refunds against outstanding demands during the subsistence of stay orders was impermissible. The Court reiterated that recovery includes adjustment of refunds and relied on its earlier judgment in Lease Plan India, which held that adjustment of refund violates both stay orders and the mandate of Section 245.

The Court examined the ITAT orders and held that, in the facts of the case, the interim directions restraining recovery were intended to interdict the Revenue from taking any recovery steps in the meanwhile. The Court further held that even assuming ambiguity in the stay orders, the Revenue ought to have sought clarification rather than proceed to adjust refunds.

The Court also held that adjustment of refunds without issuing prior notice or intimation under Section 245 was independently illegal. Relying on Vijay Singh Kadan and Kshipra Jatana, the Court reiterated that issuance of a post-facto notice cannot cure the defect of non-compliance with Section 245.

Important Clarification

The Court clarified that adjustment of refunds constitutes a mode of recovery and, depending on the nature of the stay order, may amount to a coercive measure. Where recovery is stayed or restrained, the Revenue must either respect the stay in letter and spirit or seek clarification from the appellate authority. Further, compliance with Section 245 by issuing prior notice is mandatory and non-negotiable.

 

 

Final Outcome

The writ petition was allowed. The Delhi High Court set aside the adjustment of refunds for Assessment Year 2020–21 against the outstanding demands for Assessment Years 2016–17, 2017–18 and 2018–19, and directed the Revenue to refund the adjusted amount along with applicable interest as expeditiously as possible, preferably within eight weeks.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769686314_HUAWEITELECOMMUNICATIONSINDIACOMPANYPRIVATELIMITEDVsASSISTANTCOMMISSIONEROFINCOMETAXCENTRALCIRCLE2ANR..pdf

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