Income Tax | Delhi High Court Bars Tax Recovery After Taxpayer Pays 20% Of Disputed Demand

The Delhi High Court on Tuesday restrained the Income Tax Department from taking any recovery action, including adjusting refunds, after it orally observed that the taxpayer had already paid 20% of the disputed tax demand and had the balance stayed during the pendency of the appeal.

A Division Bench of Justice Dinesh Mehta and Justice Vinod Kumar was hearing a petition filed by a trader who had filed his return for Assessment Year 2021–22.

The tax demand arose after additions were made to the taxpayer's income during the scrutiny assessment under the Income Tax Act.

Questioning these additions, the taxpayer approached the Commissioner of Income Tax (Appeals) and paid 20% of the disputed demand, which worked out to Rs 21.5 lakh. In 2024, the appellate authority stayed recovery of the balance amount while the appeal was pending.

Even so, the Department in 2025 adjusted refunds due to the taxpayer for two subsequent years. These included Rs 3.47 lakh for FY 2022–23 and Rs 6.45 lakh for FY 2023-24, leading to a recovery of about Rs 9.92 lakh despite the stay.

Even so, the Department in 2025 adjusted refunds of Rs 3.47 lakh for FY 2022–23 and Rs 6.45 lakh for FY 2023–24, recovering about ₹9.92 lakh despite the stay.

Appearing for the taxpayer, Advocate Prabhat Kumar said that once 20% of the disputed demand is paid, the taxpayer cannot be treated as a defaulter and no recovery can be made while the appeal is pending. He argued that adjusting refunds despite a subsisting stay was arbitrary.

He relied on the CBDT Office Memorandum dated July 31, 2017, which says that recovery proceedings, including refund adjustments, should remain stayed once 20% of the demand is paid. He also cited earlier Delhi High Court rulings, including Skyline Engineering and Dr. Priya Narula.

Taking note of the fact that the taxpayer had already deposited 20% of the demand for Assessment Year 2021-22, the Bench directed that no recovery or adjustment of refunds be carried out against the stayed demand until the appeal is finally decided.