The Bombay high court held that income tax (I-T) officers cannot adjust the refunds due to taxpayers against outstanding demands in excess of the limits laid down in instructions, circulars and guidelines issued by the Central Board of Direct Taxes (CBDT).

The I-T returns for the financial year 2012-13 filed by Vrinda Sharad Bal, a proprietor of a land development firm, was selected for scrutiny. Consequent to this, a tax demand notice of Rs 6.1 crore was raised. The I-T officer adjusted the refunds due for three subsequent financial years. However, the refunds adjusted were more than 20% of the tax demand that had been raised—the limit prescribed under latest CBDT instructions.

In the petition, Bal highlighted the financial difficulties that businesses were facing due to the pandemic and lockdowns. It was also pointed out that CBDT’s office memorandum dated February 29, 2016, which deals with stay on demand, provides that the I-T officer can adjust refunds only to the extent of 20% of the tax demanded. The writ petition sought a refund of the excess amount that had been adjusted.

The HC held that the CBDT’s instructions issued from time to time need to be applied. It ruled that any amount adjusted from the refunds over and above the limits prescribed was to be returned to the taxpayer with applicable interest. Refunds arising in future would not be adjusted until the disposal of the appeal filed by the taxpayer for the financial year 2012-13, it added.