Facts of the Case

The Petitioner, Eko India Financial Services Private Limited, filed a writ petition challenging the action of the Income Tax Department wherein the entire refund for Assessment Year (AY) 2019–20 was adjusted against the disputed demand for AY 2017–18 under Section 245 of the Income Tax Act, 1961.

The Petitioner contended that:

  • The adjustment exceeded 20% of the disputed demand, contrary to CBDT guidelines.
  • The appeal against the demand for AY 2017–18 was pending before the Commissioner of Income Tax (Appeals) under the Faceless Appeal Scheme.
  • Multiple representations were made to the authorities seeking correction, but no relief was granted.

Issues Involved

  1. Whether the Revenue can adjust refund exceeding 20% of disputed demand during pendency of appeal?
  2. Whether the action under Section 245 without recording reasons for higher recovery is valid?
  3. Whether CBDT Office Memorandum dated 29.02.2016 (as amended on 25.08.2017) is binding on the Department?

Petitioner’s Arguments

  • CBDT guidelines mandate that only 20% of disputed demand can be recovered where appeal is pending.
  • Adjustment of entire refund is arbitrary, excessive, and contrary to law.
  • No reasons were recorded by the Assessing Officer to justify recovery beyond 20%.
  • Reliance placed on administrative instructions which are binding on tax authorities.

Respondent’s Arguments

  • The Department argued that recovery beyond 20% is permissible under para 4(B) of CBDT Office Memorandum, where circumstances justify higher demand.
  • It was contended that discretion lies with the Assessing Officer under Section 245.
  • The Department also submitted that subsequent order of the Principal Commissioner granting stay rendered the petition infructuous.

Court’s Findings / Order

The Delhi High Court held:

  • CBDT guidelines are binding, and deviation requires specific reasons.
  • Recovery exceeding 20% of disputed demand without justification is unsustainable.
  • The Department failed to provide reasons under para 4(B) for higher recovery.
  • Authorities cannot supplement reasons later through affidavits.
  • The Government must follow its own policies and standards.

Final Directions:

  • The Respondent was directed to refund the amount recovered beyond 20% of disputed demand within four weeks.
  • Relief regarding stay was not granted as it had already been addressed by the Principal Commissioner.

Important Clarifications

  • 20% recovery rule is the norm, not merely advisory.
  • Higher recovery is permissible only with recorded reasons.
  • Administrative circulars (CBDT instructions) are binding on tax authorities.
  • Section 245 cannot be used arbitrarily to recover excessive amounts.

Sections Involved

  • Section 245 – Adjustment of Refund against Demand
  • Section 220(6) – Stay of Demand
  • Section 220(3) – Extension of Time / Installments
  • CBDT Office Memorandum dated 29.02.2016 & 25.08.2017

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:2295-DB/MMH03082021CW58192021_071240.pdf


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