Facts of the Case

The petitioner filed its income tax return for Assessment Year 2005–06 declaring a business loss. Assessment under Section 143(3) of the Income Tax Act was completed subsequently. Thereafter, the Revenue initiated reassessment proceedings by issuing notice under Section 148.

The petitioner challenged the reassessment proceedings before the High Court, and the Court directed that although reassessment proceedings could continue and be finalized, the same should not be given effect to without leave of the Court.

Subsequently, reassessment proceedings resulted in a substantial tax demand against the petitioner. The Revenue adjusted refund amounts due to the petitioner for the relevant year and other assessment years against such demand under Section 245 of the Income Tax Act.

The petitioner challenged the adjustment on the grounds that:

  1. The demand itself could not be enforced because of the High Court's stay order.
  2. No written prior notice had been issued before adjustment of refunds.

Issues Involved

  1. Whether adjustment of refunds under Section 245 amounts to "recovery" of tax demand.
  2. Whether the Revenue can adjust refunds despite an order restraining enforcement of reassessment proceedings.
  3. Whether issuance of prior written intimation under Section 245 is mandatory before adjusting refunds against outstanding tax demands.

Petitioner’s Arguments

The petitioner contended that:

  • The reassessment proceedings were without jurisdiction and had been initiated merely on a change of opinion.
  • The High Court had specifically restrained implementation of reassessment proceedings without obtaining leave from the Court.
  • Adjustment of refunds under Section 245 constituted a mode of recovery and therefore violated the High Court’s interim protection.
  • The Revenue failed to provide mandatory prior written intimation before adjustment of refunds.
  • Such action violated statutory requirements under Section 245.

The petitioner relied upon:

  • GKN Driveshafts India Ltd. v. ITO
  • Maruti Suzuki India Ltd. v. Deputy Commissioner of Income Tax

Respondent’s Arguments

The Revenue contended that:

  • Reassessment proceedings had been finalized pursuant to the Court's directions.
  • No coercive recovery measures had been adopted against the petitioner.
  • Mere withholding or adjustment of refunds did not amount to enforcement of demand.
  • Release of large refund amounts would prejudice Revenue interests considering substantial tax dues outstanding.

Court Order / Findings

The High Court held:

Adjustment under Section 245 amounts to "Recovery"

The Court observed that recovery can take various forms and is not restricted only to coercive recovery measures. Adjustment of refunds under Section 245 is also a mode of recovery.

Therefore, when the Court had directed that reassessment proceedings should not be given effect without leave, such restraint also extended to refund adjustments.

Mandatory requirement of prior notice under Section 245

The Court further held that:

  • Prior written intimation under Section 245 is mandatory.
  • The assessee must be informed before adjustment is made.
  • The assessee should be given an opportunity to respond.

The Revenue had failed to comply with these mandatory procedural safeguards.

Consequently, the refund adjustment made by the Revenue was declared unsustainable and was set aside.

Important Clarification

The Court clarified that:

  • "Recovery" includes adjustment of refunds and is not confined only to coercive methods such as attachment or recovery proceedings.
  • Revenue authorities cannot circumvent judicial stay orders through indirect recovery methods.
  • Compliance with judicial orders must be in both letter and spirit.
  • Prior written notice under Section 245 is mandatory before any adjustment of refund against outstanding demand.

Sections Involved

Income Tax Act, 1961

  • Section 245 – Set-off of refunds against tax remaining payable
  • Section 148 – Income escaping assessment/Reassessment notice
  • Section 143(3) – Assessment proceedings
  • Section 221 – Penalty for default in payment of tax demand

Constitution of India

  • Article 226 – Writ jurisdiction of High Court

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:5280-DB/SRB28082012CW27732012.pdf

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