Facts of the Case

The Income Tax Appellate Tribunal (ITAT), by its order dated 23.09.2008, decided appeals relating to Assessment Years 2002-03 and 2003-04 in favour of the assessee. Consequently, substantial refund amounts became payable to the assessee for the said assessment years.

Subsequently, the Assessing Officer passed an assessment order dated 29.12.2008 under Section 143(3) of the Income-tax Act for Assessment Year 2005-06, creating a tax demand along with interest liability.

Thereafter, the Assessing Officer issued a show cause notice proposing adjustment of the refundable amounts pertaining to Assessment Years 2002-03 and 2003-04 against the outstanding demand for Assessment Year 2005-06. The proposal was ultimately confirmed through an order dated 09.03.2009.

Aggrieved by the adjustment order, the assessee approached the Delhi High Court by way of a writ petition.

Issues Involved

  1. Whether refund amounts arising from earlier assessment years could be adjusted against a subsequent assessment year's demand when the assessment order creating such demand was under challenge in appeal.
  2. Whether the Assessing Officer was justified in adjusting the refund amount before consideration of the assessee’s stay application against the assessment demand.
  3. Whether interference under Article 226 of the Constitution was warranted against the adjustment order.

Petitioner’s Arguments

The petitioner contended that:

  • The Assessing Officer had ignored the favourable ITAT order dated 23.09.2008 relating to Assessment Years 2002-03 and 2003-04 while framing the assessment for Assessment Year 2005-06.
  • The demand raised for Assessment Year 2005-06 was legally unsustainable and had already been challenged before the appellate authority.
  • A stay application was proposed to be filed in the pending appeal and there was a strong likelihood of obtaining interim protection.
  • The refund amounts payable to the petitioner could not legally be adjusted against the disputed demand.
  • The order confirming adjustment was a non-speaking order and failed to adequately consider the merits of the assessee’s objections.

Respondent’s Arguments

The Revenue justified the adjustment of refunds against the outstanding demand raised pursuant to the assessment order for Assessment Year 2005-06 and defended the action taken by the Assessing Officer in accordance with the demand existing on record.

Court Findings

The Delhi High Court observed that the petitioner had already filed an appeal against the assessment order for Assessment Year 2005-06 and was entitled to pursue a stay application before the Commissioner of Income Tax (Appeals).

The Court held that the appropriate course for the petitioner was to seek stay of the demand before the appellate authority.

The Court further clarified that:

  • If no stay was granted against the demand for Assessment Year 2005-06, the adjustment order dated 09.03.2009 would not call for interference.
  • If the CIT(A) or any higher appellate authority granted stay against the demand, the refund amounts relating to Assessment Years 2002-03 and 2003-04 would be required to be released to the assessee.

Accordingly, the Court refrained from examining the merits of the assessment and left the matter to be considered by the appellate authority.

Court Order

  • The writ petition was disposed of.
  • Liberty was granted to the petitioner to pursue a stay application before the CIT(A).
  • The appellate authority was directed to consider all contentions of the petitioner, including reliance upon the ITAT order.
  • In the event stay was granted, the refundable amounts for Assessment Years 2002-03 and 2003-04 were to be released to the assessee.
  • The Court expressly stated that it had not expressed any opinion on the merits of the assessment dispute.

Important Clarification

The judgment emphasizes that where an assessment demand is under challenge before the appellate authority, the appropriate remedy for an assessee is to seek a stay of recovery proceedings. The High Court ordinarily will not interfere with adjustment of refunds when a statutory appellate remedy and stay mechanism are available. However, if a competent appellate authority grants stay of the demand, the Revenue cannot continue withholding refundable amounts merely on the basis of the disputed demand.

Sections Involved

  • Section 143(3) of the Income-tax Act, 1961
  • Provisions relating to adjustment/set-off of refunds against outstanding tax demand under the Income-tax Act, 1961
  • Appellate remedies before Commissioner of Income Tax (Appeals) [CIT(A)]

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:6578-DB/AKS14072009CW100852009_160455.pdf

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