Facts of the Case

The petitioner, Dr. Priya Narula, filed a writ petition seeking refund of ₹2,87,520/- which had been recovered by the Income Tax Department in excess of 20% of the disputed tax demand for Assessment Year 2017–18.

The excess amount was adjusted against refunds due to the petitioner for subsequent Assessment Years 2020–21 and 2021–22.

The petitioner had already deposited 20% of the disputed demand (₹2,23,150/- out of ₹11,15,733/-) in compliance with the stay order. Despite this, the department proceeded to recover additional amounts beyond the prescribed limit.

Issues Involved

  1. Whether the Income Tax Department can recover more than 20% of the disputed tax demand during pendency of appeal.
  2. Whether adjustment of refunds beyond the prescribed 20% violates CBDT Office Memorandums.
  3. Whether such excess recovery is liable to be refunded to the assessee.

Relevant Legal Provisions

  • Section 220(6), Income Tax Act, 1961 – Stay of demand during pendency of appeal
  • Section 245, Income Tax Act, 1961 – Adjustment of refunds
  • CBDT Office Memorandum dated 29.02.2016
  • CBDT Office Memorandum dated 31.07.2017 / 25.08.2017

Petitioner’s Arguments

  • The petitioner argued that once 20% of the disputed demand is paid, the Assessing Officer must grant stay on recovery of the remaining demand.
  • Recovery beyond 20% is permissible only in exceptional cases with recorded reasons.
  • The department violated CBDT guidelines by adjusting refunds beyond the permissible limit.
  • The action of recovering 25% of the demand was arbitrary and illegal.

Respondent’s Arguments

  • The respondents did not substantially dispute the legal position.
  • It was admitted that the issue was already covered by precedent of the Delhi High Court.

Court’s Findings / Judgment

The Delhi High Court held:

  • The CBDT Office Memorandums clearly mandate that only 20% of the disputed tax demand can be recovered during pendency of appeal, unless special reasons are recorded.
  • No justification or reasons were provided by the department for recovering more than 20%.
  • Reliance was placed on the judgment in Skyline Engineering Contracts (India) Pvt. Ltd. v. DCIT, where similar principles were laid down.

The Court ruled that:

  • Recovery beyond 20% is unsustainable in law.
  • The petitioner is entitled to refund of excess amount recovered.

Court Order

  • The respondents were directed to verify the facts and refund the excess amount recovered beyond 20% within four weeks.
  • The department was restrained from making any further recovery during the pendency of the appeal before CIT(A).

Important Clarifications

  • The 20% rule is binding unless exceptional circumstances exist.
  • Any deviation must be supported by specific recorded reasons.
  • Adjustment of refunds under Section 245 cannot bypass protections under Section 220(6).
  • CBDT circulars are binding on tax authorities.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:441-DB/MMH03022022CW19242022_224847.pdf

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