Calcutta High Court bars adjustment of income tax refund against disputed demand during pending stay and appeal

Background and context

The Calcutta High Court, in the case of Bothra Shipping Services Pvt. Ltd. Vs Union of India And Ors., examined whether the Income Tax Department was justified in unilaterally adjusting an income tax refund for Assessment Year 2021-22 against a disputed tax demand for Assessment Year 2023-24, when:

  • An appeal against the Assessment Year 2023-24 assessment order was already pending before the CIT(A), and
  • A stay application under Section 220(6) was still awaiting disposal by the Assessing Officer.

The writ petition focused on the legality of this adjustment, the violation of procedural safeguards, and the disregard of CBDT instructions and earlier binding precedents of the same High Court.

The High Court crystallised the controversy into the following core issues:

  1. Can the Department lawfully adjust a refund against a disputed tax demand when:

    • a stay application is pending under Section 220(6), and
    • an appeal is pending before the CIT(A)?

  2. Does such an adjustment, without prior notice or hearing, offend:

    • the principles of natural justice, and
    • the statutory protections built into the Income Tax Act 1961?

  3. How do CBDT Instruction No. 1914 and subsequent circulars, as well as earlier Calcutta High Court judgments, constrain the Department’s powers under Section 245?

Assessee’s contentions

Refund for AY 2021-22 had already crystallised

The assessee argued that:

  • The refund for Assessment Year 2021-22 had been duly determined under the Act.

  • Consequently, that amount had legally accrued to the assessee as a refundable sum.

  • The Department, however, adjusted this refund against the outstanding demand for Assessment Year 2023-24:

    • without issuing any prior notice, and
    • without granting an opportunity of personal hearing.

This, according to the assessee, amounted to a direct breach of natural justice.

Demand for AY 2023-24 was disputed and not final

The assessee submitted that for Assessment Year 2023-24:

  • A stay application under Section 220(6) was pending before the Assessing Officer; and
  • An appeal was already instituted before the CIT(A) under the appellate provisions of the Income Tax Act 1961.

On this basis, it was contended that:

  • The demand for Assessment Year 2023-24 had not attained finality.
  • Enforcement of such a non-final and disputed demand, by appropriating a refund of another year, was impermissible.

Reliance on CBDT Instruction No. 1914 and subsequent circulars

The assessee placed strong reliance on:

  • CBDT Instruction No. 1914 dated 21.03.1996, and
  • The follow-up circulars and office memoranda that govern recovery and adjustment of tax dues.

As per the assessee:

  • These instructions specifically prescribe that no coercive recovery or adjustment should be made where:
    • a stay application is pending, or
    • the tax demand is still the subject of a live appellate or stay process and is therefore not final.

The assessee emphasised the well-established view that set-off of refunds against disputed demands during pendency of appeals runs contrary to these instructions and the scheme of the Act.

Reliance on earlier Calcutta High Court decisions

The assessee referred to two important earlier decisions of the Calcutta High Court:

  1. DANIELI INDIA LIMITED Versus THE ASST. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 2 (2), KOLKATA reported in 2023 (9) TMI 1726 – CALCUTTA HIGH COURT

    In this decision, the Court held that: