Navneet Singal

Section 245 of the Income Tax Act, 1961 is related to adjustment of refund against demand. It empowers and authorizes an Assessing Officer (‘AO’) to adjust refunds against pending demand and arrears. It is worded as under:

“245. Where under any of the provisions of this Act, a refund is found to be due to any person, the [Assessing] Officer, [Deputy Commissioner (Appeals)] [, Commissioner (Appeals)] or [[Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner], as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section.”

It is not an arbitrary exercise under which an assessing officer can make adjustment without informing the assessee and giving him an opportunity of being heard. In the case of Court On Its Own Motion v. UOI in W.P.(C) 2659/2012, dated 14.3.2013, the Hon’ble Delhi High Court has issued interim directions vide its order dated 31-8-2012. One of the direction is on compliance of section 245 of the Income-tax Act, 1961. In compliance to direction of the Hon’ble Court, CPC Instruction No. 1 dated 27.11.2012 was issued explaining the step by step procedure for adjustment of refunds to be followed by Assessing Officers and CPC. These instructions clarified the procedure which is required to be followed by the AO & CPC to adjust the refund against the demand. The procedure is as follows:

  1. Physical verification of demands from all sources- arrear demands from IRLA, TMS and Manual Demands prior to 01-04-2010 ; and Demands from AST, TMS, Manual and CPC.
  2. The AO has to communicate the legitimate actionable demands to the assessee and provide an opportunity of being heard to the assessee for verification and confirmation of the genuineness of the demands. Modifications of the demands to be made by the AO following verification of documents submitted by the assessee.
  3. The AO and the Range head to certify the correctness and genuineness of the actionable demands.
  4. The AO to upload the above genuine demand on the CPC-FAS.
  5. The demands are also uploaded by the “My Account” of the Assesses on the incometaxindiafiling.gov.in website.
  6. In case of refunds due, on the basis of the demand so uploaded on CPC-FAS CPC shall issue a prior intimation u/s 245 of the IT Act, 1961 to the assessee to adjust the refund against the correct and legitimate actionable demands due. Simultaneously, CPC will inform the Chief Commissioner of Income-Tax, concerned regarding the intimation sent for his charge fortnightly. The Assesses can approach AO regarding grievances relating to demand, if any, within 15 days of receipt of intimation.
  7. The AO within 30 days of receipt of grievances in response to the notice u/s 245 shall either rectify or confirm the demand. The demand so crystallized shall be communicated back to the CPC in reference to the same communication vide which the AO was initially communicated regarding the demand. Functionality will be developed within the next six months to intimate CPC online by AO. In the interim period AO will intimate the CPC within 30 days from the date, the assesses approaches the AO.
  8. CPC to hold the refunds (refunds may be determined but kept on hold) in the interim period and following confirmation from the AO carry out adjustment of refund against the demands.

Further, through Instruction No. 12/2013 (F. NO. 312/55/2013-OT) dated 09.09.2013, It was directed that

the provisions of section 245 of the IT Act be strictly adhered to before making any adjustment of refund. In respect of adjustment of refund payable by the CPC at Bengaluru, the procedure detailed above may be complied with. The Assessing Officer, in this regard, should respond to CPC within 45 days from the date of communication of issuance of notice u/s 245 by the CPC to the Assessing Officer.”

Even though, it was directed by the CBDT through above instructions that an opportunity of being heard will be given to the assessee before any action will be taken u/s 245, however before uploading/finalization of the demand on the portal as per intimation issued u/s 143(1) or u/s 200A no opportunity is being given to the assessee. As soon as, any demand is uploaded on the portal, notice u/s 245 is getting issued to the assessee giving him an opportunity that why the demand should not be adjusted against the refund pending with the department.

Further, there is no justification by the department that why the refunds were pending with the department, when there was no demand. Why these refunds have not been issued when these have been finalized and crystalized and eligible for adjustment against the legitimate demands raised by the Department. Logically, there should not be any pending refund with the department which has finalized.

(Author may be contacted at navneet.singal@gmail.com )

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One response to “Adjustment of Income Tax Refund against Demand– Is it justified?”

  1. Akhil P Walia says:

    I have similar situation where refund for AY 2015-16 was adjusted against an outstanding demand interest from AY 2010-11, while I already paid the demand of 2970 last year in Nov 2015 when it started showing in eFiling portal and Form26AS confirms the same. I wasn’t even aware such a demand existed before. So how do I ask the IT dept. to nullify AY 2010-11 demand as it still says in recent intimation 143(1) that there is demand payable of 2970!

  2. SUKALYAN SANTRA says:

    Facts –
    Original return submitted on – 28.08.15, Revised return on – 01.09.15.
    As per original refund amount was – Rs 11080. As per revised return it – Rs 190.
    But after that I got refund of Rs. 11080. Now I have got a demand notice u/s 245 which I have accepted that ” demand is correct”. But how to pay (under which challan) the demand amount or what is the procedure.

  3. SUBHENDU GHOSH says:

    The assessee agrees with the proposal offered for adjustment of refund/demand u/s 245 of I.T. Act 1961 intimated under demand identification number 2009200351037215464T.

  4. hari babu says:

    Sir, My tax refund of AY 2015-16 is adjusted with demand of previous year AY 2014-15. But before filing tax return of this year, I have paid the demand amount of rs 1000 odd . Which is also reflecting in 26AS too. Please advise me how too get left over amount of refund or demand amount. Thanking you in anticipation.
    Hari babu

  5. CA PRAKASH S,D, says:

    Your article is realy worth raise question about automatic set-off of refund against refunds. But the CPC without verifying the actual demands just adjusting the refunds against demands. All should raise this question before the CPC.

  6. S K Ramkrishna says:

    That’s Tax Terrorism,Hope New FM will take care of it , with more accountability on AO for wrong doing n addition to Interest under statute.

  7. Varaprasad Daitha says:

    In spite of clear cut instructions, circular, Apex court judgments, there are certain bureaucrats (luckily not many but few but they occupy important posots) who feel that they are the bearers of the finances of Government. For instance there is a long pending claim for refund pending with the I T Department amounting to about Rs. 15 Crores since 1995 but the said bureaucrat had willfully showed wrong demands and undue interest there on and claimed before High Court. The HC had directed the department to adjust as claimed in 2006. The department did not appropriate as advised by HC, but waited till 2014. After prolonged pursuance the department had come with an acceptance that there was no demand at all. Now the refund together with interest on with held amounts are amounting to about Rs.50 Crores. From whose money this is being paid?

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