The AO passed an assessment order u/s 143(3) and raised a demand of Rs. 1719 crores. In response to the assessee's stay application, the AO 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. HELD by the High Court:
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.