Calcutta HC Rules Revenue Cannot Adjust Refunds Beyond 20% of Disputed Demand Without Following Due Process Under Section 245

Case Overview

P. S. Srijan Height Developers Vs ACIT (Calcutta High Court)

The Calcutta High Court recently adjudicated a significant writ petition filed under Article 226 of the Constitution of India, wherein the petitioner — a partnership firm — challenged the recovery of disputed tax demand for Assessment Year 2018-19 through refund adjustments carried out under Section 245 of the Income Tax Act, 1961. The central grievance was that refunds totalling Rs. 1,16,96,443/- were adjusted against the disputed demand, far exceeding the permissible threshold of 20%, while an appeal against the assessment order remained pending before the appellate authority.

Background Facts of the Case

The petitioner, a partnership firm, had filed its income tax return for AY 2018-19 on October 15, 2018, declaring total income of Rs. 1,16,24,230/-. The case was selected for scrutiny and, following the assessment proceedings, an order dated September 11, 2021 was passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961, reassessing the total income at Rs. 6,60,76,120/-. A corresponding demand notice was issued on the same date.

Aggrieved by the enhanced assessment, the petitioner preferred an appeal under Section 246A of the Income Tax Act, 1961 on September 22, 2021. This appeal remained pending throughout the period relevant to the dispute.

Refund Adjustments in Question

First Adjustment — AY 2021-22:

The petitioner filed its return for AY 2021-22 on March 15, 2022, declaring income of Rs. 4,85,23,350/- and claiming a refund of Rs. 7,59,274/-. Upon processing, a refund of Rs. 7,58,210/- was determined on October 25, 2022. On that very same date, an intimation was issued under Section 245 of the Income Tax Act, 1961, simultaneously adjusting the entire refund against demands for AY 2009-10 and AY 2018-19 — without allowing any opportunity to respond.

Second Adjustment — AY 2022-23:

The petitioner filed its return for AY 2022-23 on December 31, 2022, declaring income of Rs. 2,54,61,800/- and claiming a refund of Rs. 1,56,22,708/-. After processing, refund of Rs. 1,64,03,820/- was determined vide intimation dated September 27, 2023 under Section 143(1) of the Income Tax Act, 1961.

Subsequently, a notice dated November 10, 2023 under Section 245 of the Income Tax Act, 1961 was issued proposing adjustment of the said refund against outstanding demands of Rs. 37,740/- for AY 2016-17 and Rs. 2,63,64,130/- for AY 2018-19, with a 21-day window provided to the petitioner to raise objections. However, the entire refund of Rs. 1,64,03,820/- was adjusted on the very next day, i.e., November 11, 2023 — rendering the 21-day response period completely illusory.

The petitioner raised objections through letters dated January 8, 2025 and September 2, 2025, requesting release of the amount adjusted in excess of 20% of the disputed demand and seeking stay of the demand pending disposal of the appeal. Both communications went unheeded, prompting the filing of the present writ petition in October 2025.

Arguments Raised by the Petitioner

Senior Advocate Mr. Majumder, appearing on behalf of the petitioner, advanced the following contentions:

  • **CBDT Instructions restrict recovery beyond 20%😗* In terms of Instruction No. 1914 dated February 02, 1993, as partially modified by Office Memorandum F. No. 404/72/93-ITCC dated February 29, 2016, further revised by Office Memoranda dated July 31, 2017 and August 25, 2017, the Revenue is precluded from recovering any amount exceeding 20% of the disputed demand once an appeal has been filed against the assessment order giving rise to such demand.

  • Referral mechanism for excess recovery: If the Assessing Officer was of the view that payment beyond 20% was warranted, the prescribed procedure required referral to the administrative Pr. CIT/CIT who would then determine the quantum of payment required to stay recovery of the balance sum.

  • **Mandatory procedure under Section 245😗* Any adjustment of refunds must be preceded by prior intimation and disposal of the assessee's objections thereto, as mandated under Section 245 of the Income Tax Act, 1961. Reliance was placed on CBDT's Instruction No.12/2013 [F.No.312/55/2013-OT] dated September 09, 2013, which followed the directions of the Delhi High Court in Court On Its Own Motion vs. Union of India.