Set off of refunds against tax remaining payable as per Section 245 of the Income Tax Act, 1961

Section 245 of the Act empowers the Income Tax authorities to adjust any previous year/s outstanding demand of tax liability with the refund amount due to the assessee. However, this power can be exercised only after issuing an Intimation under section 245 to the assessee and providing an opportunity to furnish their response as to whether they agree or not and then the adjustment of the current refund with outstanding demand may or may not be carried out on merits. The issue of intimation under section 245 is a mandatory requirement and cannot be circumvented under any circumstances.

1. Text of Section 245 – SET OFF OF REFUNDS AGAINST TAX REMAINING PAYABLE.

1. 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.

2. Intimation under section 245 from the CPC

When the return furnished by an assessee is processed by the CPC unit of the Income Tax Department and if any refund is found due to the assessee the refund is paid to the assessee with applicable interest under section 244A. However, if there exists any outstanding demand against the assessee for any previous year(s), then before releasing the refund the CPC unit sends an Intimation to the assessee in his or her email.

The assessee is required to submit its response within 30 days failing which the outstanding demand is adjusted with the current refund amount due to the assessee. If the assessee furnishes the response within the prescribed time-limit, the same is duly considered before adjusting the refund with the outstanding demand.

3. Mandatory issue of Intimation under section 245

It is mandatory on the part of the Assessing Officer to issue an Intimation before making any such adjustment. The issue of such intimation adheres to the principles of natural justice since adjustment of refund amount due to the assessee with his outstanding demand amounts to payment of taxes.

Response of assessee to  intimation as per section 245 must be considered

Even after issuing the intimation as per section 245 and receiving the response from the assessee, the assessing officer proceeds to adjust the refund with the outstanding demand where the demand has arisen out of an issue which is already covered in favour of the assessee. This action of the Assessing Officer is wholly arbitrary since the issue is already settled in favour of the assessee.

4. Adjustment of refund with the outstanding demand of third person not permissible

The provision is very clear that an adjustment in respect of demand can be made relating to a person to whom refund is due. If the demand does not relate to the assessee and is related to some other person, adjustment under section 245 cannot be made. This happens when the refund due to a partner cannot be set-off with the outstanding demand of the firm.

5. ITBA – Assessment – Demand Adjustment by Assessing Officer under section 245 [CBDT Instruction No. 13, dated 19.02.2020]

[F. No. System/ITBA/Instruction/Assessment./Demand Adjustment by Assessing Officer under section 245/2019-20/1906

Subject: Functionality for Demand Adjustment under section 245 by Assessing Officer in ITBA – Regarding.

This is in reference to the subject mentioned above. This functionality is available w.e.f. 17th February, 2020 in Income Tax Business Application (ITBA).

2. The functionality of demand adjustment by Assessing Officer under section 245 can be accessed while passing assessment order, rectification order into the ITBA system. The ITBA Portal can be accessed by entering the following URL in the browser: https://itba.incometax.gov.in

The path for the accessing the functionality of demand adjustment under section 245 is: ITBA Portal – Login 4 Modules 4 Assessment/ Rectification 4 Worklist 4 Relevant Workitem 4 Order Generation screen.

3. In case, refund is determined in Computation of Assessment, Rectification then, following 4 below mentioned options regarding demand adjustment u/s 245 shall be available through ITBA. Assessing Officer can proceed with either of the options as the case may be:

(a) 245 Notice to be issued by CPC:

Notice under section 245 will be issued by CPC on selection of this option by the Assessing Officer. User can proceed with assessment/ rectification order generation. Further, demand will be adjusted by CPC.

(b) 245 Notice to be issued by Assessing Officer:

On selection of this option, user shall click on Demand Adjustment under section 245. Screen for Demand Analysis will open. All the demand(s) relating to the PAN will appear. User shall select the demand against which Notice under section 245 needs to be issued by Assessing Officer. User shall Generate Notice under section 245. Notice under section 245 will be issued and will be available in View/ Download Letter/ Notice/ Order. Based on the assessee’s response, Assessing Officer can enter/edit the Amount to be adjusted against the refund so determined. This amount can be entered from 2 navigation options mentioned below depending on order passing is done or it is still pending to be passed by the Assessing Officer:

Option-1: In case order is not passed yet (e.g. -There is time available to the Assessing Officer to pass the order i.e. Time Barring is not expiring in near future and Assessing Officer wants to select the demand adjustment under section 245 before passing of order):

Go to relevant workitem of Assessment/Rectification → Order Generation Screen → Demand Adjustment under section 245 → Enter amount to be adjusted → Submit to CPC

Option-2: In case order is passed already (e.g. where time barring is approaching in near future) but Refund is pending to be released after demand adjustment:

Go to Recovery Module →Demand Analysis screen → Enter amount to be adjusted →Submit to CPC

Demand will be adjusted by CPC as per the demand selected by Assessing Officer for adjustment.

Note: This option is only available for Online Assessment/Rectification Order and will not be available for Manual Order Upload. For Manual order Upload, Option 3a, 3c and 3d will work.

(c) No Adjustment — No need for demand adjustment:

On selection of this option, button for demand adjustment will be enabled. On click Demand Adjustment under section 245 button, screen with all the previous demand(s) will open for marking the recoverability status against all the previous demands. Further, user can proceed with assessment/ rectification order generation. In this case, no demand will be adjusted by CPC.

(d) Taxpayer consent obtained for demand adjustment, 245 Notice not to be issued:

On selection of this option, button for demand adjustment will be enabled. On click Demand Adjustment under section 245 button, screen with all the previous demand(s) will open. User shall enter the recoverability status against all the previous demands. Further, user can proceed with assessment/ rectification order generation. In this case, demand will be adjusted by CPC based on Assessing Officer s selection.

4. Post adjustment based on the above options, Assessing Officer will be able to view and generate refund intimation sheet. Navigation: ITBA Portal → Login → Modules → Assessment/ Rectification → List of Demand/ Refund Orders → Pending for Refund/ Adjustment Intimation Sheet.This will be required to be issued to assessee which contains the final amount of refund, interest under section 244A, TDS u/s 195 (if any, deducted in case of NRI), demand adjusted under section 245 (if any) and final amount of refund released to assessee and bank account details in which refund released.

5. Users as mentioned above will need their individual name based department email IDs and RSA tokens. The username and passwords will be communicated on their respective email ID. The log in to the system will be through the username and password (sent on individual email ID) along with the RSA token over the Tax net nodes.

Users are advised to contact helpdesk in case of any issues in respect of the ITBA.

(a) URL of helpdesk – http://itbahelpdesk.incometax.net

(b) Help desk number — 0120-2811200

(c) Email ID — itba.helpdesk@incometax.gov.in

(d) Help desk Timings — 8.30 A.M. — 7.30 P.M. (Monday to Friday)

This issues with the prior approval of the Pr. DGIT(System), Delhi

6. CPC allowed to issue refunds without adjustment if either of outstanding demands or refunds don’t exceed 5000/-

Letter [F. No. DIT(s)-iii/CPC/2013-14/Refund adjustment], dated 22.10.2013

Subject : Section 245 of the income-tax act, 1961 – Refunds – Set off of refunds against tax remaining payable – data pertaining to notices issued under section 245 by CPC, Bangalore where demand/refund is greater than Rs. 5000

I have been directed to inform you that in pursuance to the decision of Full Board and minutes of the meeting dated 21-8-2013, the CPC is allowed to issue refunds without adjustment of demand as an interim measure in cases where either the outstanding demand against the assessee was less than Rs. 5000/- or claim of refund was less than Rs. 5000/-.

2. A list of CCIT-wise cases where such refund/demand in excess of Rs. 5000/- exist, and notices under section 245 have been issued is available on i-Taxnet (http://10.152.2.10) on the following path:

Resources → Downloads → DIT_SYSTEMS → Notices issued under section 245 from CPC for confirmation of demands by AOs

3. It is requested to issue directions to the Assessing Officers under respective charges to make compliance of the aforesaid decision, perform necessary verification and correction following the procedure as per section 245 of the I.T. Act and communicate its findings on adjustable demand to CPC, Bengaluru, who will then process the refund and adjust the demand. The communication to CPC, Bengaluru, may also be give on its e-mail ld: cit.cpc.bangalore@incometaxindia.gov.in

7. CBDT Instruction on Procedure for Adjustment of Refund Against Demand

Pursuant to the judgement of the Delhi High Court in Court on Its Own Motion vs. UOI 352 ITR 273, the CBDT has issued Instruction No. 12/2013 (F. No. 312/55/2013-OT) dated 09.09.2013 stating that no refund should be adjusted without following the procedure prescribed in section 245 of the Act of intimating the assessee of the proposed adjustment and considering his objections thereto.

CBDT Instruction No. 12/2013 (F. No. 312/55/2013-OT) dated 09.09.2013

Hon’ble Delhi High Court vide its judgment in case Court on its own Motion v. UOI in W.P.(C) 2659/2012, dated 14.03.2013 has issued seven Mandamus for action by the Income Tax Department. One Mandamus is on compliance of section 245 of the Income-tax Act, 1961.

2. The Hon’ble High Court in this context had issued interim directions vide its order dated 31-8-2012 as under:

“13. We issue interim direction to the respondents that they shall in future follow the procedure prescribed under section 245 before making any adjustment of refund payable by the CPC at Bengaluru. The assessees must be given an opportunity to file response or reply and the reply will be considered and examined by the Assessing Officer before any direction for adjustment is made. The process of issue of prior intimation and service thereof on the assessee will be as per the law. The assessees will be entitled to file their response before the Assessing Officer mentioned in the prior intimation. The Assessing Officer will thereafter examine the reply and communicate his finding, to the CPC, Bengaluru, who will then process the refund and adjust the demand, if any payable. CBDT can fix a time limit for communication of findings by the Assessing Officer. The final adjustment will also be communicated to the assessees.”

4. In compliance with the above directions 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, followed by the DIT(Systems)-III letter dated 30.01.2013.

5. Vide its final order in the Writ Petition dated 14.03.2013, the Hon’ble High Court in para 24 has confirmed its interim order and issued Second Mandamus as under:

“24. The said interim order is confirmed. We notice that the respondents have taken remedial steps to ensure compliance of section 245 of the Act as they now give an option to the assessee to approach the Assessing Officer. This is the second mandamus which we have issued. As noticed above, the interim order passed in the writ petition dated 31st August, 2012 has been implemented.”

5. In view of the above directions of the Hon’ble High Court, I am directed to convey that the provisions of section 245 of the Income Tax 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 in Para 2 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 under section 245 by the CPC to the Assessing Officer.

6. I am further directed to state that the above be brought to notice of all officers working under your jurisdiction for necessary and strict compliance.”

It was held that the approach of the department of adjusting refund against demand without serving a prior section 245 intimation to the assessee and without providing the opportunity of hearing to assessee & without arriving at satisfaction to the effect that such adjustment of refund can only be the mode of recovery of demand is bad in law. – [Vijay Singh Kadam v. CCIT (2016) 384 ITR 69 (Del.)]

8. Simply issuance of intimation under section 245 is not sufficient, the response of the assessee should also be properly dealt with

It is settled law that mere service of notice under Section 245 is not sufficient and the taxpayer must be given a fair opportunity to put across his objections, if any, in the matter. In the case of Hindustan Unilever Limited v. DCIT, the Bombay High Court held that the Assessing Officer can’t proceed to adjust the refund against demand without taking assessee’s objections into consideration. Adjustment of refund against outstanding demand without taking into consideration of the assessee’s objections in response to intimation issued under section 245 is unsustainable. – [Hindustan Unilever Limited v. DCIT (2015) 60 taxmann.com 326 (Bom.)]

9. Demand on covered issues cannot be recovered by adjustment of refunds under section 245

It was held that demand on covered issues cannot be recovered by adjustment of refunds under section 245. The manner in which and the ground on which an adjustment of the refund was made is arbitrary and contrary to law. The stay order states that the assessee would not be treated as an assessee in default in respect of covered issues. Yet the department has proceeded to adjust the refund due and payable to the assessee merely on the ground that the department’s appeal is pending. The adjustment of a refund is a mode of effecting recovery. Once an issue has been covered in favour of the assessee in respect of another assessment year on the same point, it was wholly arbitrary on the part of the department to proceed to make an adjustment of the refund. If the adjustment was not made, there can be no manner of doubt that the assessee would have been entitled to a stay on the recovery of the demand. The demand cannot be adjusted by the department in this manner merely because it is in possession of the funds belonging to the assessee to which the assessee is legitimately entitled to and has been granted a refund. The making of an adjustment in these facts is totally arbitrary and contrary to law. As regards the other issues, the assessee has made out a strong prima facie case for a stay of the recovery of the demand. As the action of the department in adjusting the refunds due to the assessee was contrary to law, the interests of justice would be served if the department is permitted to make an adjustment to an extent of Rs.60 crores and refund the balance with interest. – [HDFC Bank Ltd. v. ACIT (2014) 44 taxmann.com 347 (Bom.)]

10. Refunds arising in earlier years on issues cannot be adjusted against demand on the same issue in subsequent years under section 245

It was held that refunds arising in earlier years on issues cannot be adjusted against demand on the same issue in subsequent years under section 245. It will be odd for the Revenue to contend that if an issue or contention is decided in favour of the assessee then for the said year refund has to be paid but the refund can be adjusted under Section 245 of the Act, on account of the demand on the same issue in a subsequent year. The broad contention is specious and illogical to be accepted. Similar or same additions can be made in a subsequent year for justifiable cause including contention of the Revenue that they have not accepted the earlier decision but it cannot be accepted as a principle that the Revenue can in the ordinary course make adjustments towards a demand on an issue or contention which is already decided in favour of the assessee, though it may be a subject matter of appeal or challenge by the Revenue. – [Maruti Suzuki India Ltd. v. DCIT (2012) 347 ITR 43 : (2011) 16 taxmann.com 40 (Del)]

In Lease Plan India & Anr. v. DCIT, the adjustment under section 245 was held to be ‘recovery’ by the Delhi High Court in the following words-

“It is not possible to agree with the contention of the Revenue that the word “recovery” cannot and would not include adjustment under Section 245. Recovery can be made by various modes including adjustments. Each Assessment Year is treated as separate and independent under the Act. Section 245 of the Act permits the Revenue to recover demand of one year which is pending by adjusting the refund due for another year. The term ‘refund’ has not been defined in the Act and, therefore, it has to be understood and interpreted in the manner in which it is understood in day to day life. The term ‘recovery’ in common parlance includes adjustments.” – [Lease Plan India & Anr. v. DCIT in WP (C) No. 2773/2012

It was held that the mode of recovery adopted by the Assessing Officer by way of adjustment of the refund due with the outstanding demand cannot be regarded as a coercive measure. – [Tata Communications Ltd. v. ACIT (2011) 130 ITD 19 (SB)(ITAT Mumbai)]

11. Any refund of income tax due under the Income Tax Act can be adjusted only with the outstanding demand of income tax

One of the essential elements of section 245 is that any refund of income tax due under the Income Tax Act can be adjusted only with the outstanding demand of income tax remaining payable under the Income Tax Act. Thus outstanding demand under any other Act cannot be adjusted with the income tax refund.

Refund due under the Income Tax Act cannot be set-off with the demand under the Interest Tax Act. -[State Bank of Patiala v. CIT (1999) 239 ITR 421 (P&H)]

It was held that “quite clearly the Revenue has no jurisdiction to make an adjustment of a refund without following Section 245 and without giving a prior intimation to the assessee as required by that section”. – [J. K. Industries v. CIT (1999) 238 ITR 820 (Cal)]

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Born on 27 June, 1958 in Narnaul, Haryana joined Income-tax Department in the year 1983 and retired as Income Tax Officer on 30.06.2018. Have so far author of 21 books on Income Tax and also writer of his own blog https://ramduttsharma.blogspot.com/. Previlliged to be recipient of first-ever Finance View Full Profile

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