The assessing authority adjusted the amount towards arrears for the assessment year 1986-87. However, the order was silent as to whether the amount was adjusted towards tax arrears or penalty.  On a writ allowing the petition the Court held that if Circular F. No. 149/145/98-TPL dated September 3, 1998 ([1998] 233 ITR (St.) 50) issued by the Central Board of Direct Taxes had been properly implemented, there was no reason for the assessing authorities to adjust the tax refund amount first to the penalty rather than the arrears of tax. The authorities were directed to adjust the tax refundable to the assessee for the year 1996-97  to the tax arrears instead of penalty and accordingly compute the amount payable by the assessee under section 90(1) of the 1998 Act and grant certificate. (AY. 1996-97)