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Set Off and Withholding of Refund u/s 245 of the Income Tax Act

Article by Preeti Puri

Section 245 of the Income Tax Act 1961 provides that if income tax refund is found due to any person, by the Assessing Officer, the Deputy  Commissioner (Appeals), the Commissioner (Appeals), the Principal Chief Commissioner or the Chief Commissioner or the Principal Commissioner or the Commissioner, as the case may be, it can be adjusted in whole or in part against any outstanding income tax demand pertaining to earlier previous  years, after giving an intimation in writing to such person (i.e assessee) of the action proposed to be taken in accordance with this section.

To exercise the powers u/s Section 245 it is mandatory on the part of the Assessing Officer  to send intimation under section 245 notifying the taxpayer about adjustment of income tax refund against outstanding income tax demand pertaining to earlier years.  In response, the taxpayer has the option to agree, disagree, or partially agree with the outstanding demand and its adjustment against the refund. In case the taxpayer does not respond, the Assessing Officer can adjust refund against the outstanding demand.

Quite often, tax officials make an adjustment without giving a prior intimation as required by the law. There are various judicial pronouncements which affirm that  Assessing Officer cannot adjust a demand outstanding for an earlier assessment year against the amount of refund due to the taxpayer, without following the procedure prescribed under section 245, i.e., an advance intimation and opportunity of hearing. If such an unlawful adjustment is made the same is required to be set aside.

Judicial Rulings on issue that prior intimation is necessary u/s 245 before set off of refund against outstanding demand

 

  1. The Honble High Court of Mumbai in the matter of Jet Privilege (P.) Ltd v Deputy Commissioner of Income tax – Mumbai [2021] 131 taxmann.com 119 (Bombay)

Para 9 of the Judgment order says

The fact that respondent has not followed the mandatory prior requirement of intimation under section 245 of the Act would make the adjustment wholly illegal and therefore, respondent was clearly in error in not refunding the amount

  1. The Honble High Court of Kolkatta in the matter of Commissioner of Income-tax v JK Industies [2000] 111 Taxman 369 (Calcutta)

Para 9 of the Judgment Order says

The proceedings for adjusting an amount towards tax liability under section 245 out of any sum due to an assessee by way of refund, are quasi-judicial in nature. Without anything more, the assessee is entitled on the principles of the natural justice to a reasonable notice to represent his case before the authority before an order of adjustment is passed.

Provision of section 245 requires that an intimation should be given in writing to a person if the tax authorities want to set off any refund due against any sum payable by the assessee under this Act. No such intimation was given.

The order without intimation was non est and unless the statute prohibits, the pre-decisional hearing should be given to the person whose right is affected by that order. Moreover, there is no provision of appeal against the set-off order under section 245. Therefore, it was all the more necessary to give intimation to the assessee before set-off of his amount of refund due. In the result, the appeal was to be dismissed.

  1. Honble High Court of Delhi in the matter of Jindal Stainless Ltd.v Deputy Commissioner of Income tax – [2023] 154 taxmann.com 649 (Delhi)

Para 9 of the Judgment Order

The impugned action of the Assessing Officer in adjusting the refund due to the petitioner/assessee for assessment year 2022-23, against the disputed demands for assessment years 2011-12, 2012-13, and 2014-15 was not only hasty, but was also contrary to law.

Para 10 of the Judgment Order

Under the Office Memorandum (‘OM’) dated 29-2-2016, as amended by OM dated 31-7-2017, the Assessing Officer should have, ordinarily, in terms of para 4A adjusted not more than 20 per cent of the disputed demand, considering the fact that an appeal concerning the disputed demand was, admittedly, pending before the Commissioner (Appeals). Higher amount can only be retained, only if, as per the aforementioned OMs, the assessee’s case falls in the situation captured in para 4B(a)

No material has been furnished by the respondent/revenue which would suggest that the petitioner/assessee’s case would fall within 4(B)(a) which provides that In a situation where, (a) the assessing officer is of the view that the nature of addition resulting in the disputed demand is such that payment of a lump sum amount higher than 15 per cent is warranted (e.g. in a case where addition on the same issue has been confirmed by appellate authorities in earlier years or the decision of the Supreme Court or jurisdictional High Court is in favour of revenue or addition is based on credible evidence collected in a search or survey operation, etc.)

Para 11 of the Judgment Order

Given this position, the writ petition is disposed of with the direction to the respondents/revenue to release the amount, along with applicable interest, which is in excess of 20 per cent of the disputed demand, concerning the aforementioned Assessment years.

Steps to be taken by taxpayer upon Receiving Intimation u/s 245

Once  the taxpayer receive the Intimation under section 245 of the Income Tax Act 1961, he is suppose to check the timeline mentioned in the intimation(generally, it’s 30 days reduced to 15 days from AY 2024-2025) and accordingly respond towards the outstanding demand as appearing in the Income Tax Portal.

Failure to take action within 30 days of receiving this notice under Section 245 will lead to the consideration of the outstanding demand for adjustment against your refund. This adjustment will take into account the interest on the demand, and interest charges will be applied to the principal demand pending for the relevant assessment year. The adjustment of interest demand against the refund will be done without requiring confirmation from the assessee.

Amendment brought in by Finance Act 2023

Before the amendment brought in by the Finance Act of 2023 , there were two sections in the Income Tax Act that is section 241A and Section 245 , on the issue of withholding of refunds.

While Section 245 of the Income tax Act empowers the tax officials to set off refund against outstanding demand Section 241A enables the tax officials to withhold refund where refund if granted may adversely affect the recovery of revenue . The memorandum accompanying Finance Act 2023 noted an overlap between these two provisions and proposed their integration by eliminating Section 241A and consolidating the relevant provisions into Section 245 of the Income tax Act .

Section 245, sub-section (2), stipulates that if a portion of the refund is offset under sub-section (1), or if no amount is offset, and a refund is owed to the taxpayer, the Assessing Officer, considering the ongoing assessment or reassessment proceedings, and anticipating adverse effects on revenue from granting the refund, may, with written justification and prior approval from the Principal Commissioner or Commissioner, withhold the refund until the completion of the assessment or reassessment.

The Central Board of Direct Taxes (CBDT) has specified a monetary threshold of Rs. 10 lakh or higher for the withholding of refunds under section 245(2) of the Income Tax Act through its Instruction No. 02/2023 dated 10/11/2023. The CBDT has observed that the provision of section 245(2) will be applicable when the refund amount reaches or exceeds Rs. 10 lakh.

Interest on Refund – Section 244A of the Income tax Act 1961

The provisions outlined in Section 244A of the Income Tax Act pertain to the interest applicable to income tax refunds. According to this section, when a taxpayer qualifies for a refund, they are entitled to receive interest in addition to the refund amount. The calculation of interest under Section 244A of the IT Act is detailed as follows:

  • TCS, TDS, or Excess Advance Tax Paid: In the case of excess tax paid through tax deducted at source (TDS), tax collected at source, or excess advance tax payment, the taxpayer is entitled to 0.5% interest for each month or part of a month for the following periods: (i) From April 1 of an assessment year until the date on which refund has been granted (provided the income tax return is filed before the due date). (ii)From the date of filing the income tax return until the date on which refund is granted in case if it is not covered by (i)
  • Excess Payment of Self-Assessment Tax: For an excess payment of self-assessment tax, the taxpayer becomes eligible for interest at a rate of 1.5% per month. The calculation considers the date of filing the income tax return or the date on which the tax refund is granted, whichever occurs earlier.
  • Other Cases :- Interest will be computed at the rate of 0.5% for every month or part of a month comprised in the period from the date of payment of tax/penalty till the date on which refund is granted .

 

Conclusion

Following the integration of Section 241A and Section 245 brought in by Finance Act 2023 , the withholding of refunds is not confined solely to instances where they become due after a summary assessment under Section 143(1). Refunds may now be withheld when they become due through processes such as the reconciliation of TDS, appeal effects, etc. The Assessing Officer (AO) is required to provide prior notification before setting off refunds and is under an obligation to consider the objections raised by the taxpayer/assessee before doing so. The AO has to record the reasons in writing for withholding the refund and obtain prior approval of Principal Commissioner of Income tax (PCIT) or  Commissioner of Income tax (CIT ). The Assessing Officer must hold the opinion that the approval of refund is detrimental in the interests of the Revenue.

In CBDT Instruction No. 02/2023 issued on 10th November 2023, the Central Board of Direct Taxes (CBDT) has introduced a monetary threshold. Refunds with a value of Rs. 10 lakhs or more are subject to the provisions of Section 245(2) of the Income Tax Act, 1961. As per this notification reasons recorder by the  Jurisdictional Assessing Officer (JAO) shall not be cursory and such reasons should reflect the factual analysis of the case.

 

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