Facts of the Case

The Petitioner, M/s Afflatus International, filed a writ petition seeking a direction for refund of excess tax amounting to ₹1,43,23,653 for Assessment Year (AY) 2020–21 and ₹53,85,886 for AY 2018–19.

The grievance arose due to the Respondents’ action of recovering 100% of the disputed tax demand for AY 2017–18 by adjusting refunds due for subsequent years under Section 143(1) of the Income Tax Act, 1961.

The Petitioner contended that such recovery was made despite a pending appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] along with an application for stay of demand.

Issues Involved

  1. Whether the Income Tax Department can recover 100% of disputed tax demand by adjusting refunds without granting stay during pendency of appeal.
  2. Whether adjustment of refund without prior notice violates mandatory provisions under Section 245 of the Income Tax Act, 1961.
  3. Whether such recovery is contrary to CBDT Office Memorandum dated 31 July 2017 prescribing recovery of only 20% of disputed demand.

Petitioner’s Arguments

  • The Respondents arbitrarily recovered the entire disputed tax demand for AY 2017–18.
  • Adjustment of refunds was done without issuing prior notice as mandated under Section 245 of the Income Tax Act, 1961.
  • The recovery violated CBDT Office Memorandum dated 31 July 2017, which restricts recovery to 20% of disputed demand when an appeal is pending before CIT(A).
  • The action caused undue financial hardship and was legally unsustainable.

Respondent’s Arguments

  • The Respondents, upon instructions, submitted before the Court that the excess amount recovered beyond 20% of the disputed demand would be refunded.
  • It was assured that such refund would be processed within eight weeks in compliance with the CBDT guidelines.

Court’s Findings / Order

  • The Delhi High Court accepted the undertaking given by the Respondents.
  • It directed that the excess amount recovered beyond 20% of the disputed demand be refunded to the Petitioner within eight weeks.
  • The Court held the Respondents bound by their statement and disposed of the writ petition as satisfied.

Important Clarification

  • Recovery of disputed tax demand during pendency of appeal must adhere to CBDT guidelines.
  • Only up to 20% of the disputed demand can ordinarily be recovered.
  • Adjustment of refund without prior notice under Section 245 is procedurally improper.
  • The judgment reinforces taxpayer protection against arbitrary recovery practices.

Sections Involved

  • Section 143(1) – Processing of Return
  • Section 143(3) – Assessment
  • Section 245 – Set-off of Refunds against Tax Remaining Payable
  • CBDT Office Memorandum dated 31 July 2017 (Administrative Instruction on Recovery of Demand)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:3868-DB/MMH29112021CW134532021_162220.pdf

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