Income Tax Refund Cannot be Adjusted When Recovery Is Stayed: Orissa HC

Saurav Chachra Vs Central Board of Direct Taxes (Orissa High Court)

The writ petition before the Orissa High Court challenged the action of tax authorities in adjusting a refund of Rs. 14,80,270/- for Assessment Year (AY) 2025–26 against an outstanding disputed demand of Rs. 84,46,855/- for AY 2018–19, despite an existing stay on recovery under Section 220(6) of the Income Tax Act, 1961.

The petitioner had been assessed under Section 147 for AY 2018–19, and subsequently filed an appeal before the National Faceless Appeal Centre. During the pendency of the appeal, the petitioner sought a stay on recovery of the demand. Initially, the authority directed payment of 20% of the demand as a condition for granting stay, which the petitioner could not fulfil. Thereafter, upon consideration of a waiver request, an interim order dated 12 January 2026 granted stay of recovery of the disputed demand until disposal of the appeal.

Separately, an intimation under Section 143(1) dated 12 December 2025 determined that a refund of Rs. 14,80,270/- was due to the petitioner for AY 2025–26. However, on 27 January 2026, the authorities adjusted this refund against the outstanding demand for AY 2018–19, despite the subsisting stay order.

The petitioner contended that such adjustment violated the stay order and principles of natural justice, arguing that the authorities had acted arbitrarily and in disregard of the restraint on recovery proceedings. The Department’s counsel did not dispute the factual position and acknowledged that the refund had indeed been adjusted against the earlier demand despite the stay granted under Section 220(6).

Upon examining the record, the High Court found merit in the petitioner’s submissions. It observed that the authorities had granted a stay on recovery of the disputed demand during the pendency of the appeal, subject to certain conditions. In spite of this, the adjustment of refund against the stayed demand was carried out.

The Court held that such action was illegal, arbitrary, and perfunctory. It concluded that the adjustment of the refund during the subsistence of a stay order was not justified.

Accordingly, exercising powers under Article 226 of the Constitution, the Court directed the authorities to release the refund amount of Rs. 14,80,270/- as determined under Section 143(1), along with applicable interest under Section 244A, within four weeks from the date of the order.

The writ petition was disposed of with these directions.

FULL TEXT OF THE JUDGMENT/ORDER OF ORISSA HIGH COURT

Challenging the arbitrary, illegal and irrational action of the opposite parties in adjusting the refund due amounting to Rs.14,80,270/- for the Assessment Year 2025-26 on 27^th January, 2026 against the disputed tax demand of Rs.84,46,855/- for the Assessment year 2018-19 during subsistence of order of stay of recovery under Section 220(6) of the Income Tax Act, 1961, the petitioner has approached this Court by way of filing this writ petition invoking provisions of Articles 226 & 227 of the Constitution of India with the following prayer(s):

“In view of the above circumstances, it is most respectfully prayed that this Hon’ble Court may graciously be pleased to:

a) Admit the Writ application;

b) Issue a writ in the nature of mandamus/certiorari or any other appropriate writ, directing the Opposite Party No.3 to release refund due to the petitioner vide Intimation u/s. 143(1) of the Income Tax Act, 1961 dated 12.12.2025 under Annexure-8 along with interest u/s 244A of the Act from the date the same is due till the date of actual payment in the ends of justice;

c) Issue a writ in the nature of certiorari or any other appropriate writ, quashing the adjustment of refund for A.Y. 2025-26 amounting to Rs.14,80,270/- against the demand for A.Y. 2018-19 in the ends of justice;

d) Pass such further or other order/direction as this Hon’ble Court may deem fit and proper. And for this act of kindness, the petitioner as in duty bound shall ever pray.”

2. The petitioner, was assessed under Section 147 of the Income Tax Act, 1961 (for short, “the IT Act”) for the Assessment Year 2018-19 by the Assistant Commissioner of Income Tax, Central Circle, Sambalpur-opposite party No.2 vide order dated 29^th March, 2023, against which the petitioner filed an appeal under Section 246A of the IT Act before the National Faceless Appeal Centre (NFAC)-opposite party No.4. While the matter was pending, the petitioner filed an application dated 23^rd December, 2024 before the opposite party No.2 for stay of recovery of the outstanding demand amounting to Rs.84,46,855/- till the disposal of the said appeal.

2.1. The Opposite party No.2 vide order dated 26^th December, 2024 passed under Section 220(6) of the IT Act directing the petitioner to deposit 20% of the outstanding tax demand as a condition for grant of stay, which could not deposited by the petitioner. Therefore, the petitioner filed an application for waiver, which was considered and vide order dated 12^th January, 2026 under Section 220(6), the opposite party No.2 passed an interim order directing stay of recovery of the demand in connection with the assessment under Section 147 of the IT Act till the disposal of first appeal.

2.2. While the matter stood thus and the appeal is still pending before the Appellate Authority, the Assessing Authority issued intimation order dated 12^th December, 2025 under Section 143(1) of the IT Act for the Assessment Year 2025-26, wherein the refund to the tune of Rs.14,80,270/- was directed to be paid.

3. Learned counsel appearing for the petitioner submitted that the authority concerned overreached the order restraining to proceed with coercive measure for the balance tax demand pertaining to Assessment Year 2018-19 and adjusted the refund flowed with respect to the Assessment Year 2025-26 against the disputed demand for the assessment year 2018-19. It is contended that such action of the authority is not only reproachable, but also is in blatant violation of the principles of natural justice.

4. At this stage, learned Senior Standing Counsel appearing for the opposite parties did not dispute the factual position as narrated in the writ petition. He conceded that the refund to the tune of Rs.14,80,270/- flown for the assessment year 2025-26 has been adjusted against the demand for the assessment year 2018-19, notwithstanding the fact that the Assessing Authority invoked under Section 220(6) of the IT Act granting stay of recovery of demand pertaining to the assessment year 2018-19.

5. Heard learned counsel appearing for the petitioner and learned Senior Standing Counsel appearing for the opposite parties-Department.

6. On perusal of record, it is revealed that upon deposit of Rs.14,80,270/-, the authority at Central Circle, Sambalpur vide order dated 12^th January, 2026 invoked power under Section 127(6) of the IT Act and passed the following order:

“In view of the above facts, stay is hereby granted to the assesse for disputed demand for AY 2018-19 on the following conditions:

i. The assesse will cooperate in the early disposal of appeal failing which the stay order will be cancelled.

ii. This stay order will be reviewed after expiry of six months or if the assesse did not cooperate in the early disposal of appeal.

Accordingly, the petition filed u/s 220(6) of the Act dated 18/12/2025 in respect of the demand raised u/s 147 of the Act is disposed hereby granting stay of demand in dispute till disposal of the First Appeal on the aforementioned conditions.”

6.1. An intimation order dated 12^th December, 2025 under Section 143 was issued indicating refund of Rs.14,80,270/- pertaining to Assessment Year 2025-26. It is the submissions contained in the instant writ petition that the said amount of refund has been adjusted vide Challan Receipt No.11045, dated 27^th January, 2026 against the balance demand pertaining to the Assessment Year 2018-19 notwithstanding the fact that the authority concerned granted stay of recovery during the pendency of finalization of the appeal invoking power under Section 220(6) of the IT Act.

7. This Court finds force in the submission of Sri Chitrasen Parida, learned Advocate that such an action of the authorities is illegal and arbitrary and such recourse of the authorities are held to be perfunctory. In view of such, this Court is in exercise of power under Article 226 of the Constitution of India, directs the opposite parties to release the refund dues to the petitioner as computed vide intimation order dated 12^th December, 2025 under Section 143 (Annexure-8) along with interest under Section 244A of the IT Act within a period of four weeks from date.

8. With the aforesaid observation and direction, the writ petition along with pending Interlocutory Application(s), if any, stands disposed of.