In a significant ruling, the Orissa High Court has held that adjusting an income tax refund against a disputed demand while a stay order is in force is illegal and arbitrary. The court directed the tax department to release a refund along with interest, declaring the adjustment as perfunctory and in violation of principles of natural justice.
The case involved petitioner Saurav Chachra, who had been granted an interim stay on recovery of a tax demand for Assessment Year 2018-19 under Section 220(6) of the Income Tax Act, 1961. Despite the stay order, the department adjusted a refund of Rs. 14,80,270 due to the petitioner for Assessment Year 2025-26 against the disputed demand. The department conceded that the adjustment was made despite the stay.
A Division Bench of Chief Justice Harish Tandon and Justice M.S. Raman found merit in the petitioner's contention, observing that such recourse was illegal. The court allowed the writ petition and directed the authorities to release the refund with interest under Section 244A of the Income Tax Act within four weeks.
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