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Adjustment of Refunds not to be used to cover Demand on covered issues

CLR Editorial Note: In this case, the assessee, a Bank was issued an an assessment order u/s 143(3) by the Assessing Officer and a demand of Rs. 1719 crores was raised. The recovery of demand was made under the following grounds:

(i) Disallowance of broken period interest;

(ii) Disallowance of amortization of premium, and

(iii) Disallowance of exemption on dividend income from the mutual fund units.

The assessee filed a stay application under these circumstances. In response to the assessee™s stay application, the Assessing Officer accepted that demand of Rs. 1370 crores had to be kept in abeyance as they were covered in favour of the assessee by appellate orders for earlier years. However, he still held that the said demand had to be adjusted against refunds of Rs. 560 crores determined for earlier years. He demanded that the balance demand of Rs. 377 crores on the other issues be paid by the assessee.

The assessee filed a Writ Petition to challenge the adjustment of refunds against the demand on covered issues and the non-grant of stay on the other issues. The Hon’ble High Court in its decision, held:

The manner in which and the ground on which an adjustment of the refund was made is arbitrary and contrary to law. The stay order states that the assessee would not be treated as an assessee in default in respect of covered issues. Yet the department has proceeded to adjust the refund due and payable to the assessee merely on the ground that the department™s appeal is pending. The adjustment of a refund is a mode of effecting recovery. Once an issue has been covered in favour of the assessee in respect of another assessment year on the same point, it was wholly arbitrary on the part of the department to proceed to make an adjustment of the refund. If the adjustment was not made, there can be no manner of doubt that the assessee would have been entitled to a stay on the recovery of the demand. The demand cannot be adjusted by the department in this manner merely because it is in possession of the funds belonging to the assessee to which the assessee is legitimately entitled to and has been granted a refund. The making of an adjustment in these facts is totally arbitrary and contrary to law. As regards the other issues, the assessee has made out a strong prima facie case for a stay of the recovery of the demand. As the action of the department in adjusting the refunds due to the assessee was contrary to law, the interests of justice would be served if the department is permitted to make an adjustment to an extent of Rs.60 crores and refund the balance with interest.

Furthermore said in the case file……

In this case Assessee has made out a strong prima facie case for a stay of the recovery of the demand in respect of the aforesaid three items viz.; (i) Disallowance of broken period interest; (ii) Disallowance of amortization of premium, and (iii) Disallowance of exemption on dividend income from the mutual fund units. The recovery of the demand on these three heads has to be stayed in view of a strong prima facie case being made out. The balance due and payable by the assessee would work out to Rs.159.49 crores. The assessee has under cover of its letter dated 28 March 2013 paid an amount of Rs.100 crores under protest.

On these facts and for the reasons we have adduced earlier, we hold that the action of the department in adjusting the refunds due to the assessee in the amount of Rs.49.56 crores for Assessment Year 2008-09 and Rs.518.30 crores for Assessment Year 2009-10 was contrary to law. To recapitulate, the impugned order accepts the position that the assessee is covered by the decision of the Commissioner of Income-tax (Appeals) and hence directs that the assessee shall not be treated as assessee in default while at the same time making an adjustment of the refund.

In the circumstances, we are of the view that the interests of justice would be served if the department is permitted to make an adjustment to an extent of Rs.60 crores. The balance which is refundable, for Assessment Years 2008-09 and 2009-10 shall be refunded together with interest as admissible in accordance with law within a period of three weeks from the date on which an authenticated copy of this order is produced on the record.

Rule is made absolute in the aforesaid terms. There shall be no order as to costs.

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The full case file is available for download

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