Whether adjustment made by Revenue u/s 245 can be treated as 'recovery' - YES, rules Delhi HC
NEW DELHI, DEC 02, 2011: THE issues before the Bench are - Whether the provisions of section 220(6) are applicable when an appeal is preferred before the ITAT; Whether adjustment u/s 245 can be regarded as "recovery"; Whether pendency of appellate proceedings by itself alone cannot be a ground not to refund the amount due and payable, and is not sufficient to pass an order of the adjustment for demand on issues which have been decided against the Revenue and whether the conduct and action of the Revenue in recovering the disputed tax in respect of additions on issues which are already covered in favour of the assessee by earlier orders of ITAT and CIT(A) is justified. And the verdict goes against the Revenue.
Facts of the case
The assessee is entitled to refund of Rs.122.57 crores and Rs.107.42 crores for the AYs 2003-04 and 2005-06 respectively. For the AY 2006-07, an assessment order u/s 143(3) read with Section 144C was passed on 20th October, 2010. This created an additional demand of Rs.266.61 crores, (Rs.169 crores on account of income tax and Rs 95,49,06,432/- and Rs.1,91,31,933/- respectively on account of interest u/ss 234B and 234C). Against the said assessment order, the assessee on 19th November, 2010 filed an appeal before the ITAT. Subsequently, on 30th November, 2010, an application for stay of demand was filed. This stay application came up for hearing before the ITAT on 9th December, 2010 and an interim order was passed directing status quo in respect of recovery till 14th December, 2010.
The assessee also filed a letter before the AO informing about the status quo order with copy to the CIT. On 13th December, 2010, one day before the date of hearing, the DCIT informed the assessee that refund of Rs.122.57 crores for AY 2003-04, stands adjusted against the demand for AY 2006-07 vide order dated 7th December, 2010. This communication was made on 13th December, 2010, after the status quo order was passed on 9th December, 2010.
Similarly, the Revenue vide order dated 22nd November, 2010, had made adjustments u/s 245 of the Act for refund of Rs.69.94 crores for AY 2005-06.
The two orders u/s 245 of the Act making adjustment of refunds of Rs.69.94 crores for the AY 2005-06, dated 22nd November, 2010 and Rs.122.57 crores for AY 2003-04 vide order dated 7th December, 2010 but communicated on 13th December, 2010, were made without prior intimation as mandated and required by law.
The contention of the assessee before the ITAT was that the additions or disallowances made in the assessment order dated 20th October, 2010, for AY 2006-07, were partly covered by decisions of the ITAT and the CIT (Appeals) in favour of the assessee and thus demands should not be recovered and there should be an absolute or blanket stay from recovery of the demand in respect of at least the issues which have been decided by the appellate authorities in favour of the assessee. The ITAT instead of examining the said questions while considering the stay application on 20th January, 2011, recorded the statement made by the DR that he had received a letter dated 19th January, 2010 accepting that the earlier action u/s 245 of the Act was bad and proper proceedings u/s 245 would be initiated. Accordingly, the matter was adjourned to 4th February, 2011 "on the request of both the parties".
The assessee filed written submissions dated 27th January, 2011 before the AO, along with the chart indicating how and in what manner, as per the assessee, several issues which had resulted in the additional demand for the AY 2006-07, were covered in their favour by the orders of the appellate authorities in earlier years.
The assessee also filed an application u/s 220(6) of the Act before the AO on 8th November, 2010, that the petitioner should not be treated as an assessee in default and the demand should be kept in abeyance till disposal of the appeal before the ITAT. The ITAT while dealing with the applications was of the opinion that the AO should first dispose of the application u/s 220(6) of the Act.
The AO vide order dated 2nd February, 2011, disposed of the `stay application' and substantially dismissed the same stating inter alia, that refund of Rs.107.41 crores for the AY 2005-06 and Rs.122.57 crores for the AY 2003-04 stand adjusted and that there would be a stay of the balance amount of Rs.36.61 crores pending decision of the appeal before the ITAT, for the AY 2006-07. Another order dated 2nd February, 2011 was passed by the AO u/s 245 of the Act.
The stay application filed by the petitioner thereafter came up for hearing before the ITAT on 11th February, 2011 and the same was disposed of after recording the factual position. ITAT by its order dated 11th February, 2011, held that recovery cannot be equated with adjustment or refund u/s 245. ITAT in this regard has stated that Section 245 does not occur under the Chapter "refund" and, therefore, cannot be equated with recovery. Against this, the assessee filed a writ petition challenging the adjustment of refunds.
Having heard the matter, the High Court held that,
++ whether the stay application u/s 220(6) was maintainable - It may be noted here that the petitioner and Revenue have proceeded on the assumption that the said Section was applicable to the present case though the petitioner had filed an appeal before the ITAT and no appeal was filed before the CIT (Appeals) u/s 246A. The Revenue has rightly submitted that Section 220(6) is not applicable when an appeal is preferred before the ITAT, as it applies only when an assessee has filed an appeal u/s 246 or Section 246A of the Act;
++ an assessee is required to file an appeal before the ITAT against an assessment order u/s 143 (3) read with Section 144C. Appeal u/s 246 or 246A is not maintainable. As per Section 253(1d), against an order under sub-section 3 of Section 143 in pursuance to the direction of the DRP an appeal is maintainable before the ITAT. It may be noted that the ITAT has power to grant stay as an inherent power vested in the appellate authority as well as u/s 254 and the Rules;
++ whether adjustment u/s 245 can be regarded as recovery and the orders passed by the authorities/tribunal - It is not possible to agree with the contention of the Revenue that the word "recovery" cannot and would not include adjustment u/s 245. Recovery can be made by various modes including adjustments. Each AY is treated as separate and independent under the Act. Section 245 of the Act permits the Revenue to recover demand of one year which is pending by adjusting the refund due for another year. The term `refund' has not been defined in the Act and, therefore, it has to be understood and interpreted in the manner in which it is understood in day to day life. The term `recovery' in common parlance includes adjustments;
++ Chapter XVII of the Act deals with "collection and recovery of tax". The said chapter is divided in various parts including deduction of tax at source, payment of advance tax and Part-D is also given the same heading as Chapter XVII "collection and recovery". Chapter XIX deals with refund and Section 245 deals with adjustment/set off of refund of the tax remaining payable in other years. Placement of Section 245 in Chapter XIX relating to refund is a matter of convenience. The provisions relating to `collection and recovery" have been put in an earlier Chapter i.e. Chapter XVII, whereas "refunds" have been placed in a subsequent Chapter XIX. While dealing with the question of refund, the Legislature has provided that the refund can be adjusted or set off against a pending demand. We do not think that set off or adjustment cannot be regarded as a mode of recovery or is not a recovery mechanism. The term "recovery" is comprehensive and includes adjustment thereby reducing the demand;
++ at the same time, different parameters and requisites may apply when the appellate authority considers the request for stay against coercive measures to recover the demand and when stay of adjustment u/s 245 of the Act is prayed for. In the first case, coercive steps are taken with the idea to compel the assessee to pay up or by issue of garnishee notice to recover the amount. In the second case, money is with the Revenue and is refundable but adjusted towards the demand. Thus, while granting stay, the appellate authority or the ITAT (for that matter, even u/s 220(6)), the authority can direct stay of recovery by coercive methods but may not grant stay of adjustment of refund. However, when an order of stay of recovery in simplistic and absolute terms is passed, it would be improper and inappropriate on the part of the Revenue to recover the demand by way of adjustment. In case of doubt or ambiguity, an application for clarification or vacation/modification of stay to allow adjustment can be, and should be filed. But no attempt should be made and it should not appear that the Revenue has tried to over-reach and circumvent the stay order. Obedience and compliance with the stay order in letter and spirit is mandatory. A stay order passed by an appellate/higher authority must be respected. No deviancy or breach should be made;
++ It will be odd for the Revenue to contend that if an issue or contention is decided in favour of the assessee then for the said year refund has to be paid but the refund can be adjusted u/s 245 of the Act, on account of the demand on the same issue in a subsequent year. The broad contention is specious and illogical to be accepted. Similar or same additions can be made in a subsequent year for justifiable cause including contention of the Revenue that they have not accepted the earlier decision but it cannot be accepted as a principle that the Revenue can in ordinary course make adjustments towards a demand on an issue or contention which is already decided in favour of the assessee, though it may be a subject matter of appeal or challenge by the Revenue. Normally in such circumstances, the appellate forum should not permit the Revenue to adjust the demand, for it will be unjust, unequitable and unfair. However, while examining the issue of grant of stay including adjustment, the appellate authority for good grounds and justification made by the Revenue can refuse to grant stay of the adjustment of the refund. In such cases, adjustment can be permitted in exceptional situations pointed out by the Revenue but not as a matter of routine. It may not be possible or proper to postulate and elucidate all such situations but grounds mentioned u/s 241 of the Act are indicative;
++ pendency of appellate proceedings by itself alone cannot be a ground to not to refund the amount due and payable and is not sufficient to pass an order of the adjustment for demand on issues which have been decided against the Revenue;
++ Circular No. 1914 dated 2nd December, 1993 has been issued by CBDT with reference to Section 220(6) of the Act. These are guidelines, when and in what circumstances the demand should not be recovered. This is a reason why in clause (iv), it is mentioned that the words `stay of demand' does not occur u/s 220(6) and the AO should always use the expression `assessee in default' in consonance with the language of section 220(6). Clause (e) occurs and is a sub-clause of clause (ii) of the circular dated 2nd December, 1993. Sub-clause (e) read with (ii) will read as - "In granting stay, the AO may impose such condition as he may think fit" and "he may reserve a right to adjust refund arising, if any, against the demand." The use of word `may' and the expression `reserve a right' clearly shows that the Board itself did not postulate and regard `recovery' as excluding and not covering `adjustment' u/s 245 of the Act. As per the said circular, the AO may reserve a right to adjust, if the circumstances so warrant. In a given case, the AO may not reserve right to refund. Further, reserving a right is different from exercise of right or justification for exercise of a discretionary right/power. Moreover, the circular is not binding on the ITAT;
++ the stand of the Revenue cannot be agreed that in the present year, assessment order has been passed u/s 144C, i.e. after reference to the DRP, and therefore the orders passed by the CIT(Appeals) and ITAT in favour of the petitioner in earlier years have lost significance and do not justify stay of demand in matters covered in favour of the assessee. Decisions of the CIT (Appeals) or the ITAT in favour of the assessee should not be ignored and have not become inconsequential. This is not a valid or good ground to ignore the decisions of the appellate authorities and is also not a good ground to not to stay demand or to allow adjustment u/s 245 of the Act. Revenue has not made out a good cause or reason why adjustment should allowed to recover demand on issues that have been decided in favour of the petitioner in other years;
++ the conduct and action of the respondent-Revenue in recovering the disputed tax in respect of additions to the extent of Rs.96 crores on issues which are already covered against them by the earlier orders of the ITAT or CIT (Appeals) is unjustified and contrary to law. Accordingly, directions are issued to the respondents to refund Rs.30 crores, which will be approximately the tax due on Rs 96 crores. The said refund shall be made within one month from the date when a copy of this order is made available to the respondents;
++ with regard to the interest u/s 234B and 234C recovered on the said Rs.30 crores, no direction for refund is being issued as the respondents have not recovered the full demand. The allegation of the petitioner that several other disputed additions are also covered by the earlier orders of the ITAT/CIT (Appeals) prima facie has merit but it is not possible to quantify and calculate the exact amount. The order passed by the ITAT substantially dismissing the stay application is not correct. One option available is that the ITAT should be asked to examine the said questions and decide the stay application afresh. However, the second option is preferred i.e. to direct the ITAT to hear the appeal filed by the petitioner expeditiously and preferably within a period of four months from the date copy of this order is served in their registry.
NEW DELHI, DEC 02, 2011: THE issues before the Bench are - Whether the provisions of section 220(6) are applicable when an appeal is preferred before the ITAT; Whether adjustment u/s 245 can be regarded as "recovery"; Whether pendency of appellate proceedings by itself alone cannot be a ground not to refund the amount due and payable, and is not sufficient to pass an order of the adjustment for demand on issues which have been decided against the Revenue and whether the conduct and action of the Revenue in recovering the disputed tax in respect of additions on issues which are already covered in favour of the assessee by earlier orders of ITAT and CIT(A) is justified. And the verdict goes against the Revenue.
Facts of the case
The assessee is entitled to refund of Rs.122.57 crores and Rs.107.42 crores for the AYs 2003-04 and 2005-06 respectively. For the AY 2006-07, an assessment order u/s 143(3) read with Section 144C was passed on 20th October, 2010. This created an additional demand of Rs.266.61 crores, (Rs.169 crores on account of income tax and Rs 95,49,06,432/- and Rs.1,91,31,933/- respectively on account of interest u/ss 234B and 234C). Against the said assessment order, the assessee on 19th November, 2010 filed an appeal before the ITAT. Subsequently, on 30th November, 2010, an application for stay of demand was filed. This stay application came up for hearing before the ITAT on 9th December, 2010 and an interim order was passed directing status quo in respect of recovery till 14th December, 2010.
The assessee also filed a letter before the AO informing about the status quo order with copy to the CIT. On 13th December, 2010, one day before the date of hearing, the DCIT informed the assessee that refund of Rs.122.57 crores for AY 2003-04, stands adjusted against the demand for AY 2006-07 vide order dated 7th December, 2010. This communication was made on 13th December, 2010, after the status quo order was passed on 9th December, 2010.
Similarly, the Revenue vide order dated 22nd November, 2010, had made adjustments u/s 245 of the Act for refund of Rs.69.94 crores for AY 2005-06.
The two orders u/s 245 of the Act making adjustment of refunds of Rs.69.94 crores for the AY 2005-06, dated 22nd November, 2010 and Rs.122.57 crores for AY 2003-04 vide order dated 7th December, 2010 but communicated on 13th December, 2010, were made without prior intimation as mandated and required by law.
The contention of the assessee before the ITAT was that the additions or disallowances made in the assessment order dated 20th October, 2010, for AY 2006-07, were partly covered by decisions of the ITAT and the CIT (Appeals) in favour of the assessee and thus demands should not be recovered and there should be an absolute or blanket stay from recovery of the demand in respect of at least the issues which have been decided by the appellate authorities in favour of the assessee. The ITAT instead of examining the said questions while considering the stay application on 20th January, 2011, recorded the statement made by the DR that he had received a letter dated 19th January, 2010 accepting that the earlier action u/s 245 of the Act was bad and proper proceedings u/s 245 would be initiated. Accordingly, the matter was adjourned to 4th February, 2011 "on the request of both the parties".
The assessee filed written submissions dated 27th January, 2011 before the AO, along with the chart indicating how and in what manner, as per the assessee, several issues which had resulted in the additional demand for the AY 2006-07, were covered in their favour by the orders of the appellate authorities in earlier years.
The assessee also filed an application u/s 220(6) of the Act before the AO on 8th November, 2010, that the petitioner should not be treated as an assessee in default and the demand should be kept in abeyance till disposal of the appeal before the ITAT. The ITAT while dealing with the applications was of the opinion that the AO should first dispose of the application u/s 220(6) of the Act.
The AO vide order dated 2nd February, 2011, disposed of the `stay application' and substantially dismissed the same stating inter alia, that refund of Rs.107.41 crores for the AY 2005-06 and Rs.122.57 crores for the AY 2003-04 stand adjusted and that there would be a stay of the balance amount of Rs.36.61 crores pending decision of the appeal before the ITAT, for the AY 2006-07. Another order dated 2nd February, 2011 was passed by the AO u/s 245 of the Act.
The stay application filed by the petitioner thereafter came up for hearing before the ITAT on 11th February, 2011 and the same was disposed of after recording the factual position. ITAT by its order dated 11th February, 2011, held that recovery cannot be equated with adjustment or refund u/s 245. ITAT in this regard has stated that Section 245 does not occur under the Chapter "refund" and, therefore, cannot be equated with recovery. Against this, the assessee filed a writ petition challenging the adjustment of refunds.
Having heard the matter, the High Court held that,
++ whether the stay application u/s 220(6) was maintainable - It may be noted here that the petitioner and Revenue have proceeded on the assumption that the said Section was applicable to the present case though the petitioner had filed an appeal before the ITAT and no appeal was filed before the CIT (Appeals) u/s 246A. The Revenue has rightly submitted that Section 220(6) is not applicable when an appeal is preferred before the ITAT, as it applies only when an assessee has filed an appeal u/s 246 or Section 246A of the Act;
++ an assessee is required to file an appeal before the ITAT against an assessment order u/s 143 (3) read with Section 144C. Appeal u/s 246 or 246A is not maintainable. As per Section 253(1d), against an order under sub-section 3 of Section 143 in pursuance to the direction of the DRP an appeal is maintainable before the ITAT. It may be noted that the ITAT has power to grant stay as an inherent power vested in the appellate authority as well as u/s 254 and the Rules;
++ whether adjustment u/s 245 can be regarded as recovery and the orders passed by the authorities/tribunal - It is not possible to agree with the contention of the Revenue that the word "recovery" cannot and would not include adjustment u/s 245. Recovery can be made by various modes including adjustments. Each AY is treated as separate and independent under the Act. Section 245 of the Act permits the Revenue to recover demand of one year which is pending by adjusting the refund due for another year. The term `refund' has not been defined in the Act and, therefore, it has to be understood and interpreted in the manner in which it is understood in day to day life. The term `recovery' in common parlance includes adjustments;
++ Chapter XVII of the Act deals with "collection and recovery of tax". The said chapter is divided in various parts including deduction of tax at source, payment of advance tax and Part-D is also given the same heading as Chapter XVII "collection and recovery". Chapter XIX deals with refund and Section 245 deals with adjustment/set off of refund of the tax remaining payable in other years. Placement of Section 245 in Chapter XIX relating to refund is a matter of convenience. The provisions relating to `collection and recovery" have been put in an earlier Chapter i.e. Chapter XVII, whereas "refunds" have been placed in a subsequent Chapter XIX. While dealing with the question of refund, the Legislature has provided that the refund can be adjusted or set off against a pending demand. We do not think that set off or adjustment cannot be regarded as a mode of recovery or is not a recovery mechanism. The term "recovery" is comprehensive and includes adjustment thereby reducing the demand;
++ at the same time, different parameters and requisites may apply when the appellate authority considers the request for stay against coercive measures to recover the demand and when stay of adjustment u/s 245 of the Act is prayed for. In the first case, coercive steps are taken with the idea to compel the assessee to pay up or by issue of garnishee notice to recover the amount. In the second case, money is with the Revenue and is refundable but adjusted towards the demand. Thus, while granting stay, the appellate authority or the ITAT (for that matter, even u/s 220(6)), the authority can direct stay of recovery by coercive methods but may not grant stay of adjustment of refund. However, when an order of stay of recovery in simplistic and absolute terms is passed, it would be improper and inappropriate on the part of the Revenue to recover the demand by way of adjustment. In case of doubt or ambiguity, an application for clarification or vacation/modification of stay to allow adjustment can be, and should be filed. But no attempt should be made and it should not appear that the Revenue has tried to over-reach and circumvent the stay order. Obedience and compliance with the stay order in letter and spirit is mandatory. A stay order passed by an appellate/higher authority must be respected. No deviancy or breach should be made;
++ It will be odd for the Revenue to contend that if an issue or contention is decided in favour of the assessee then for the said year refund has to be paid but the refund can be adjusted u/s 245 of the Act, on account of the demand on the same issue in a subsequent year. The broad contention is specious and illogical to be accepted. Similar or same additions can be made in a subsequent year for justifiable cause including contention of the Revenue that they have not accepted the earlier decision but it cannot be accepted as a principle that the Revenue can in ordinary course make adjustments towards a demand on an issue or contention which is already decided in favour of the assessee, though it may be a subject matter of appeal or challenge by the Revenue. Normally in such circumstances, the appellate forum should not permit the Revenue to adjust the demand, for it will be unjust, unequitable and unfair. However, while examining the issue of grant of stay including adjustment, the appellate authority for good grounds and justification made by the Revenue can refuse to grant stay of the adjustment of the refund. In such cases, adjustment can be permitted in exceptional situations pointed out by the Revenue but not as a matter of routine. It may not be possible or proper to postulate and elucidate all such situations but grounds mentioned u/s 241 of the Act are indicative;
++ pendency of appellate proceedings by itself alone cannot be a ground to not to refund the amount due and payable and is not sufficient to pass an order of the adjustment for demand on issues which have been decided against the Revenue;
++ Circular No. 1914 dated 2nd December, 1993 has been issued by CBDT with reference to Section 220(6) of the Act. These are guidelines, when and in what circumstances the demand should not be recovered. This is a reason why in clause (iv), it is mentioned that the words `stay of demand' does not occur u/s 220(6) and the AO should always use the expression `assessee in default' in consonance with the language of section 220(6). Clause (e) occurs and is a sub-clause of clause (ii) of the circular dated 2nd December, 1993. Sub-clause (e) read with (ii) will read as - "In granting stay, the AO may impose such condition as he may think fit" and "he may reserve a right to adjust refund arising, if any, against the demand." The use of word `may' and the expression `reserve a right' clearly shows that the Board itself did not postulate and regard `recovery' as excluding and not covering `adjustment' u/s 245 of the Act. As per the said circular, the AO may reserve a right to adjust, if the circumstances so warrant. In a given case, the AO may not reserve right to refund. Further, reserving a right is different from exercise of right or justification for exercise of a discretionary right/power. Moreover, the circular is not binding on the ITAT;
++ the stand of the Revenue cannot be agreed that in the present year, assessment order has been passed u/s 144C, i.e. after reference to the DRP, and therefore the orders passed by the CIT(Appeals) and ITAT in favour of the petitioner in earlier years have lost significance and do not justify stay of demand in matters covered in favour of the assessee. Decisions of the CIT (Appeals) or the ITAT in favour of the assessee should not be ignored and have not become inconsequential. This is not a valid or good ground to ignore the decisions of the appellate authorities and is also not a good ground to not to stay demand or to allow adjustment u/s 245 of the Act. Revenue has not made out a good cause or reason why adjustment should allowed to recover demand on issues that have been decided in favour of the petitioner in other years;
++ the conduct and action of the respondent-Revenue in recovering the disputed tax in respect of additions to the extent of Rs.96 crores on issues which are already covered against them by the earlier orders of the ITAT or CIT (Appeals) is unjustified and contrary to law. Accordingly, directions are issued to the respondents to refund Rs.30 crores, which will be approximately the tax due on Rs 96 crores. The said refund shall be made within one month from the date when a copy of this order is made available to the respondents;
++ with regard to the interest u/s 234B and 234C recovered on the said Rs.30 crores, no direction for refund is being issued as the respondents have not recovered the full demand. The allegation of the petitioner that several other disputed additions are also covered by the earlier orders of the ITAT/CIT (Appeals) prima facie has merit but it is not possible to quantify and calculate the exact amount. The order passed by the ITAT substantially dismissing the stay application is not correct. One option available is that the ITAT should be asked to examine the said questions and decide the stay application afresh. However, the second option is preferred i.e. to direct the ITAT to hear the appeal filed by the petitioner expeditiously and preferably within a period of four months from the date copy of this order is served in their registry.
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This group is moderated by SHRI. BHUPENDRA SHAH, FCA, DISA(ICA)of Mumbai and DIPAK AGARWAL, FCA, DISA(ICA)of Guwahati. The opinion expressed here by any memebrs are of their own, and the user need to verify it from their own sources. No responsibility of any sort can be cast upon any members or the modertaor for any opinion expressed or the information posted on this group.
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