Delhi High Court Holds Outstanding Demand Can't Block Refund, Orders ₹53 Cr. Release To Vodafone Idea

The Delhi High Court on 18 August allowed three petitions filed by Vodafone Idea Limited challenging the Income Tax Department's refusal to release Rs. 53,09,56,470 in tax refunds on the ground of outstanding demands against its PAN and sister TANs, and directed the Department to pay the amount with applicable interest by 30 September 2026.

A Division Bench of Justices Dinesh Mehta and Rajneesh Kumar Gupta held that an outstanding tax demand does not by itself permit the Department to withhold a refund unless it passes a valid order for adjustment or withholding under Section 245 of the Income Tax Act, 1961. It observed:

“Once an assessment under Section 201 of the Act of 1961 has been made, neither Rule 31A of the Rules of 1962 applies nor can the AO or the CPC compel any assessee to furnish Form 26B.”

The petitions concerned refunds pertaining to Assessment Years 2003-04 and 2008-09 to 2013-14. Vodafone Idea submitted that the Income Tax Appellate Tribunal (ITAT) had allowed its appeals through orders passed between April 2024 and February 2025. Pursuant to those orders, the Assessing Officer determined that Rs. 53.09 crore was payable to the company.

However, the Department did not release the amount and insisted that Vodafone Idea furnish Form 26B. The company eventually furnished the form, but the Department rejected it on the ground that outstanding demands against its PAN and sister TANs amounted to approximately Rs. 924.57 crore.

Before the High Court, the Department admitted that various authorities or courts had already stayed demands amounting to Rs. 913.66 crore, leaving approximately Rs. 10.91 crore against which no authority or court had granted a stay. Vodafone Idea disputed even this figure and submitted that only Rs. 27.63 lakh remained outstanding.

The Department defended its action by relying on the Centralised Processing Cell (TDS)'s Standard Operating Procedure dated 23 March 2023. It submitted that the SOP prevented it from approving the refund request where an outstanding demand existed against sister associated TANs.

The High Court rejected this stand, holding that the Department had conflated two separate stages of the TDS process: the initial processing of TDS statements and the subsequent determination of tax liability through an assessment or appellate order.

Explaining why the Department could not rely on the SOP to withhold Vodafone Idea's refund, the Court referred to Section 200A of the Income Tax Act, which deals with processing of a TDS statement by the Centralised Processing Centre (CPC) before any assessment. At that stage, the CPC may determine whether any adjustment is required on the basis of the information contained in the statement. Section 201, on the other hand, applies where a person responsible for deducting tax has failed to deduct tax, or has deducted it but failed to deposit it with the Government. Proceedings under this provision result in an assessment of the alleged TDS default.

The Court noted that Rule 31A and Form 26B govern the processing and correction of TDS statements and do not govern payment of a refund that becomes due after an assessment or appellate order. It therefore held that these provisions operate in different fields and that the Department could not use the procedure applicable to the initial processing of TDS statements to delay a refund that became payable after the ITAT's orders.

Once an assessment under Section 201 has been completed, or an appellate authority has passed an order resulting in a refund, the taxpayer acquires a “vested and crystallised right” to receive that amount along with applicable interest. At that stage, the refund no longer remains subject to Section 200A, Rule 31A or the requirement of furnishing Form 26B.

The Bench added that the Department must pay an amount found refundable after giving effect to an appellate authority's order along with applicable interest, subject to any withholding or adjustment through a legally passed order under Section 245. It further held that unless the Department passes an order under Section 245, the Assessing Officer or the CPC cannot withhold a refund once an assessment or appellate order finds the amount refundable. It held:

“Such being the position, the plea taken by the respondents that the refund has not been issued because of the pending outstanding demand qua petitioner's PAN and sister TANs is clearly untenable in law, arbitrary and violative of Articles 14, 19(1)(g) & 300A of the Constitution of India.”

Therefore, the judges directed the Department to pay Rs. 53,09,56,470 to Vodafone Idea with applicable interest under Sections 244A and 244A(1A) by 30 September 2026. They further directed that if the Department failed to credit the amount by that date, the entire amount would carry additional interest at 1% per month over and above the statutory interest.

The Bench also took note of the fact that the Department had not released the refunds despite Vodafone Idea succeeding in its tax litigation before the ITAT. It described the case as portraying “a grim picture of the state of affairs prevailing in the Department so far as issues relating to refund is concerned”, and noted that the Department had retained amounts pertaining to several assessment years after nearly 10 years of legal proceedings.

Accordingly, the High Court allowed the petitions.

For Petitioner: Mr. Sachit Jolly, Sr. Adv. with Ms.Soumya Singh & Mr. Abhyudaya Shankar Bajpai & Ms.Ananya Kapoor, Advs.

For Respondents: Mr. Indruj Singh Rai, SSC with Mr.Sanjeev Menon, Mr. Rahul Singh & Ms. Priya Sarkar, JSCs, Mr. Gaurav Kumar & Mr. Prateek Bhati, Advs. along with Ms. Sanjula Halder, DCIT, Circle 78(1).