Adjustment of Tax Refund Without Intimation Under Section 245

In our previous articles, we have discussed Section 245 of the Income-tax Act, 1961. Before going further, let’s take a glimpse of section 245 of the Income-tax Act, 1961.

Adjustment of tax refund without intimation under section 245

As per this section, if any person has a pending outstanding demand of earlier years and he has claimed the refund in the relevant financial year then the department may send an intimation to the assessee under this section in which it is stated that his demand shall get adjusted with the refund due. However, in practical life, it was seen in many cases where the AO adjusted the demand with the refund due without any notice to the assessee. This kind of adjustment would not be done in the future because of the high court judgment.

In a recent case of Bombay High Court, it has set aside any adjustment of tax refund against the tax demand without any intimation to the assessee.

As per the Income Tax Act, the department of income tax would need to issue a valid notice of demand to the concerned assessee before doing any adjustment against the demand. Here, valid notice means a notice which is served within the time-frame as specified under the respective provisions of sections of the Income Tax Act. Hence, if you are one of those people who did not get the valid notice of tax demand, then now there is no need to worry about the refund as now such a refund cannot be adjusted against any outstanding demand. 

In this article, we will discuss the other sides of this Bombay high court judgment.

So what was the exact case in which the high court has issued the said judgment?

In this case, the assessing officer has determined the outstanding tax demands for Assessment Years 1995-96, 2003-2004, 2009-10 and 2012-13 of the assessee. The department then adjusted the refund due to that person against the outstanding demands. However, as per such a person, he didn’t receive any notice or order relating to such demands. He, therefore, argued that such adjustment done against his refund was void.

“The case went to the Bombay High Court where it has been observed that if the assessing officer has to first ensure that a valid notice of demand was served on the taxpayer before any adjusted the refund with such pending outstanding demand. Therefore, the court gives directions to the Income Tax Department to grant the refund due to the taxable person with applicable interest. Also, Rs 1.5 lakh will be recovered from the assessing officer by the I-T department. Further, disciplinary action shall also be taken against such an assessing officer as per the instructions of the HC.

The High Court has also said in its order that these kinds of errors by the assessing officer shall not be considered lightly and will be taken strict action against him because this may lead to litigation and ultimately the court’s judicial time is wasted. 

What income tax law has said before this judgment?

The income tax law provides that where any refund is being due to any person, he may, in lieu of payment of the refund, be offset against any pending outstanding tax demand. However, this could be done only when a prescribed procedure has been followed, including giving a written intimation to the taxable person of the proposed action to be taken.

“In the given case, the High Court has set aside this adjustment of the amount pending for the refund of tax against the outstanding demand. Where the tax collections are the main focus of the revenue authorities, it should also be ensured that taxpayers are provided an opportunity in a just and fair manner to present their perspective. Also, the endeavor should be to cut down on unnecessary disputes and litigation especially on the procedural matters,” 

As per the income tax law, in fact, it is to be ensured by every IT officer that all the procedural requirements are complied with, along with the serving of notice, “A proof of service of demand is important before adjusting the amount of refund due to him against the outstanding demand. Further, with the advancement of technology, the work of department becomes an easy process to provide proof of service and also comply with other requirements of the law,” 

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Hence, now the income tax department officer, without serving a valid notice of demand, cannot adjust the refund of the amount due against the outstanding demand. If still, IT officers do so, then the cost incurred during such a process shall be imposed upon them. So, as per the tax experts, it is a highly-appreciated move of the High Court where the interest of the honest taxpayer can be upheld.

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