Sections of Income Tax Act, 1961 Covered in article
220-When tax payable and when assessee deemed in default
245-Set off of refunds against tax remaining payable
222-Certificate to tax recovery officer
223-Tax recovery officer by whom recovery is to be effected
Articles of Constitution of India
Article 14-Equality before law
Article 19-Protection of certain rights regarding freedom of speech etc.
Article 265-Taxes not to be imposed save by authority of law
Whenever a demand is raised by the Income tax department in an assessment under the Income Tax Act, the assessee has to pay the same. If the assessee disagrees with the demand he may file an appeal to the CIT (Appeals) against the demand raised on him. Many a times it has been seen that huge demands are raised on unjustified grounds. In such a case the assessee can file an appeal to the CIT (Appeals) and obtain a stay of demand for the demand raised by the department. It is general practice that department insists on payment of 20 percent of the outstanding demand up to the first stage of appeal before granting stay. Section 220(6) gives a right to the assessee to get stay of demand which gives discretionary powers to the assessing officer granting stay. When this stay is granted the assessee is out of definition of assessee in default till the disposal of appeal by CIT (Appeals) or till the tenure of stay order.
In case any demand is unpaid by the assessee i.e. in case where the assessee becomes an assessee in default , the demand amount can be recovered from the assessee under recovery modes specified under section 222 and 223 of the Income Tax Act. Section 245 gives authority to the department to adjust the refunds due to the assessee from the outstanding demand of the assessee after giving an intimation in writing to such person of the action proposed to be taken under this section.
It is also a well-known fact that after raising uncalled for and unjustified high demands, the Revenue authorities take recourse to coercive measures for the recovery of such demands in a highly arbitrary and hasty manner. In such a situation, the assessee gets harassed and ultimately lies on the mercy of the income Tax Department. Many a times it has been observed that the assessing officers adjust refunds of the assessee exceeding 20 percent of the demand in the cases when the assessee has gone into the appeal. Arbitrary adjustments of refunds with outstanding demands of the assessee leads to shortage of working capital and at times even closure of business in the cases where demand is huge. Hence before adjusting the refund of the assessee against demand, the assessing officer should verify the outstanding demand of assessee and ensure that procedure for section 245 has been adopted and complied with.
In a number of cases it has been observed that the assessing officers adjust more than 20 percent of the outstanding demand of the assessees with the refunds due to them. Although Various Courts in their Judgments have issued strictures against such practices of the income tax officers but it seems that the officers go on for recovery of tax due disregarding the Judicial precedents, CBDT Circulars and instructions of the department.
Let us discuss the provisions of section 245, 220(6) and recovery procedure u/s 222 and 223 with the help of recent judgment of Rajendra Kumar V. Assistant Commissioner of Income-Tax And Another  445 ITR 622 (Raj)
Facts of the case
Assessment order u/s 143(3) of the Income Tax Act, 1961 was passed against the assessee on 13.12.2019 for AY 2017-18 and demand of Rs. 2,09,44,100/- was raised under section 156 of the Income-tax Act. The assessee filed an appeal under section 246 of the Income-tax Act on December 26, 2019 in the prescribed form submitting that he has a prima-facie case and the demand raised is not maintainable. On January 13, 2020, Income-tax return for the assessment year 2018-19 was processed by CPC and a refund of Rs. 70,86,950/- due in favour of the assessee was adjusted against the balance demand of the assessment year 2017-18. The petitioner-assessee filed a stay application in response to the intimation issued to him and also pointed out that 20 percent of the demand amounting to Rs. 41,88,620/- be adjusted from the said refund in terms of the Departmental circulars. Again on February 25, 2020, while processing Income-tax return for the assessment year 2019-20, the Central Processing Centre adjusted a refund of Rs. 32,35,662/- against the balance demand of the assessment year 2017-18 in spite of the appeal and the stay application filed in response to intimation under section 245 of the Income-tax Act.
Dates and Events
|13.12.2019||Assessment order passed u/s 143(3) –demand of Rs2,09,44,100/-|
|26.12.2019||Assessee filed appeal u/s 246|
|13.01.2020||Refund of Rs70,86,950/- for AY 2018-19 adjusted through notice u/s 245|
|22.01.2020||Assessee’s response to intimation u/s 245 for AY 2018-19 filing stay of appeal|
|25.02.2020||Refund of Rs32,35,662/- for AY 2019-20 adjusted through notice u/s 245|
|30.06.2020||Assessee filed second stay petition.|
|22.02.2021||Assessee filed third stay petition.|
|23.03.2021||Stay order passed granting stay for balance demand.|
In this background, the petitioner-assessee contended that in terms of the order under section 245 of the Income-tax Act, the appeal was preferred by him immediately and as per the provisions of section 220(6) of the Income-tax Act, he cannot be termed as an assessee-in-default.
Hence the assessee filed Writ Petition with the following prayers:
“(a) to issue a writ of mandamus or any other appropriate writ, directing respondent No. 1 to refund the amount adjusted in excess of 20 per cent. of the disputed demand for the assessment year 2017-18 ;
(b) to issue a writ of mandamus restraining the respondent from initiating any further recovery of outstanding demand for the assessment year 2017-18 until the disposal of appeal challenging the assessment order which is pending adjudication before the Commissioner of Income-tax (Appeals) ;
(c) to impose exemplary costs on respondent No. 1 for carrying out a blatantly illegal recovery of tax against the accepted principles of reasonableness, judicial discipline and law ;
(d) by awarding the cost of writ petition in favour of the petitioner ;
(e) any other order, relief or direction, which this hon’ble High Court may deem fit and proper be passed in favour of the petitioner ;”
Contention of the assessee
The contention of the petitioner is that his letter dated January 22, 2020,in response to intimation under section 245 of the Income-tax Act dated January 13, 2020, pointed out that 20 percent of the demand amounting to Rs. 41,88,620/- be adjusted from the said refund in terms of the Departmental circulars. He further contended that he has preferred an appeal against the said order but in spite of the same, again on February 25, 2020, while processing Income-tax return for the assessment year 2019-20, the Central Processing Centre adjusted a refund of Rs. 32,35,662/- against the balance demand of the assessment year 2017-18 in spite of the appeal and the stay application filed in response to intimation under section 245 of the Income-tax Act. In spite of stay application and filing of appeal in time the refunds of the assessee were adjusted beyond 20% of the outstanding demand.
The assessee further contended that in terms of the order under section 245 of the Income-tax Act, the appeal was preferred by him immediately and as per the provisions of section 220(6) of the Income-tax Act, he cannot be termed as an assessee-in-default. As per the petitioner, the recovery can only be initiated as per the statutory mechanism that too by the learned Tax Recovery Officer as mandated under section 223 of the Income-tax Act. He further submitted that giving a go-by to the Departmental circulars, settled position of law, principles of natural justice, statutory mandate and the provisions of section 245 of the Income-tax Act, the adjustment of refund was made suo motu and the act of the Department was high handed and autocratic without authority of law and as such, he has filed the present writ petition for violation of his fundamental rights, principles of natural justice and recovery being violative of article 265 of the Constitution of India.
Contention of the department
The assessee filed an appeal on December 26, 2019 which is pending adjudication with the Department. It was contended that no application for waiver of recovery and stay of demand was filed along with the appeal. They contended that it was only on February 22, 2021 that an application under section 220(6) of the Income-tax Act for stay of demand was filed by the assessee and thereafter, the respondents have passed an order of stay on the balance amount till disposal of the appeal before the Commissioner of Income-tax (Appeals). Therefore, the recovery made is within the four corners of law and till the filing of the stay application on February 22, 2021, the assessee was deemed to be in default and hence the recovery was made.
Observations of the Court
The assessee filed appeal in time. There was delay on the part of the department to dispose of the appeal. There is no statutory requirement for the assessee to file stay application u/s 220(6). The department cannot adjust more than 20% of the demand with the refund of the assessee without disposing his stay application.
It is also reflected that the petitioner-assessee, in terms of the Departmental circulars, has voluntarily requested the Department for adjustment of 20 per cent. of the demand to the tune of Rs.41,88,620/- from the refund and the balance amount to be refunded but it is analysed that de-hors the provisions of sections 245, 220(6) of the Income-tax Act the respondents have suo motu adjusted the entire amount of refund to the tune of Rs.70,86,950/- qua the assessment year 2018-19 on December 13, 2020 making the provisions of sections 220(6) and 245 of the Income-tax Act, referred to above, as an empty formality.
The high handed action of the respondents is also reflected in bye-passing the stay application for the assessment year 2019-20 as refund of Rs. 32,32,662/- was again suo motu adjusted on February 25, 2020 bye-passing the fact of filing of appeal as well as the provisions of section 245 of the Income-tax Act.
Holding of the Court
The case on hand is a classic example of “absolute power corrupts absolutely”.
“The petitioner-assessee was quite prompt in filing appeal under section 246A of the Income-tax Act against the order dated December 13, 2019 without waiting for thirty days of statutory time. It is a fact on record which is admitted by the respondents themselves that till date, the Commissioner of Income-tax (Appeals), for the reasons best known to him, has not considered the said appeal which is beyond the control of the assessee. In spite of the specific statutory provisions under section 220(6) of the Income-tax Act that on filing an appeal in the prescribed format, the petitioner-assessee will not be considered as an “assessee-in-default”, giving a go-by to the statutory provisions contained under sections 220(6), 222, 223 and 245 of the Income-tax Act, giving an intimation under section 245 of the Income-tax Act for staying of refund against the outstanding demand, the respondents have failed to consider the response rather have given a technical argument that the said application was not made as per the specific provisions of section 220(6) of the Income-tax Act. Nowhere in the provisions of section 220(6) of the Income-tax Act, it is specified that the stay application has to be filed. The mandate of section 220(6) of the Income-tax Act makes it very clear that once an appeal is filed within time in the prescribed format, the assessee will not be deemed as an “assessee in- default”. Further, the notice under section 156 of the Income-tax Act categorically specifies that the demand can only be initiated in the case of default under the provisions of sections 222, 223 of the Income-tax Act which in the given case is not made out.
In these facts and circumstances, placing reliance upon the judgment rendered by the apex court in Kamlakshi Finance Corporation Ltd.  AIR 1992 SC 711, this court deems it appropriate to allow the present writ petition on account of aforesaid discussion and findings and directs the respondent-Assessing Officer and other respondents to issue a refund to the petitioner-assessee along with interest as specified in law adjusted by them in excess of 20 per cent. of the disputed demand for the assessment year 2017-18 within a period of thirty days from the date of passing of this order.
This court considers that the respondents have totally ignored the provisions of law, the judicial pronouncements of higher forum and the action of the respondents in not considering the appeal in time and even till date, is against the principles of natural justice, the requirement of law, fair play and therefore, the action of the respondents and the Revenue Authorities is violative of article 265 of the Constitution of India. They have completely given a go-by to the principles of judicial discipline, majesty of law and even their action is contrary to their own circulars. This high-handed action of the respondents is against articles 14, 19 and 265 of the Constitution of India, in spite of categorical directions of the apex court in Kamlakshi Finance Corporation Ltd  AIR 1992 SC 711. Accordingly, on perusal of the case on hand, apart from allowing the writ petition, this court further deems it appropriate to issue strictures to the effect that appropriate Departmental action be initiated against the officers and authority concerned of the respondent-Revenue who are involved in non-consideration of appeal of the petitioner in time as well as for not obeying and considering the judgments of the apex court, referred to above as well as the provisions of sections 220(6), 245 of the Income-tax Act and the circulars of the Department. The Chief Commissioner of Income-tax, Rajasthan, Jaipur, Udaipur, etc., is directed to apprise about the pendency situation and statistics to the Rajasthan State Legal Services Authority, Jaipur so that in the interest of justice, the same can be considered and appropriate correspondences can be made with the higher appropriate authorities in the larger public interest as illegal recoveries, levy of interest is imposed for the reasons beyond their control.
In the case on hand, this court further deems it appropriate to impose a cost upon the respondents which is quantified to Rs. 50,000 which the respondent-Department shall pay itself or if it so chooses, the same may be recovered equally from respondent Nos. 1 and 2 and be deposited with the Rajasthan State Legal Services Authority, Jaipur and assessee in half and half within two months of passing of this order.
A copy of this order be sent by the Registry of this court to the Chairman, Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, Government of India, North Block, New Delhi-110001 and Revenue Secretary, Ministry of Finance, Government of India, North Block for appropriate compliance and to issue necessary instructions in the interests of citizens and the assessees.
After going through the above Judgment of the Rajasthan High Court it is lucid that if the appeal is filed by the assessee within due date and the assessee has paid 20 % of outstanding demand , the assessing officer should consider stay of demand as per departmental circulars. Also as per section 220(6) for granting stay there is no mandate for the assessee to file a stay petition. If the appeal has been filed in time and 20 percent of tax is paid, the assessing officer cannot consider the assessee in default and apply provisions of section 222 and 223 for recovery of tax.
The tendency of making high-pitched assessments and recovery of demand by passing all laws by the departmental officers may result in serious prejudice to the assessee and miscarriage of justice and at times it may also result in insolvency and closure of business of the assessee. Recovery of taxes should not be at the cost of remedy available with the assessee in form of filing appeal i.e. to say that recovery of tax by coercive powers before finalisation of appeal will be equal to denial of the assessee’s right for challenging the order at the appellate forum. In the case of Glaxo Smith Kline Asia Pvt. Ltd. Vs Addl. CIT  2 SOT 457 (Del) it was rightly held that “If the rights of the citizens are allowed to be crushed in this manner which is akin to Tsunami wave, then the day is not far, when we shall be driven into utter anarchy where people will forget what ‘rule of law is.
In various judgments, the courts have issued strictures against the department for not following its orders, instructions and further for going against the principal of judicial discipline. Hence the department should not disregard the orders of the court and departmental circulars by pressing demands by jumping on to tax recovery measures which causes distress, harassment and inconvenience caused to the tax-payers.