Section 242 of the Income Tax Act, 1961, clarifies that a refund claim cannot be used to challenge the correctness of an assessment order. This means:
Refund Claims ≠ Appeal Against Assessment
- A taxpayer cannot disputethe tax liability determined in an assessment while claiming a refund.
- Example: If the AO assesses ₹1 lakh as tax due, the taxpayer cannot reduce this amountwhile filing a refund claim—they must first appeal under Section 246A.
Refund is Only for Excess Tax Paid
- The refund process only verifies whether the tax paid exceeds the assessed liability, not whether the assessment itself was correct.
- Example: If ₹1.2 lakh was paid but the assessment demands ₹1 lakh, the refund is only for ₹20,000—not for challenging the ₹1 lakh demand.
Remedy for Incorrect Assessments
- If the taxpayer believes the assessment is wrong, they must:
- File an appeal (CIT(A), ITAT, etc.)under Sections 246A/253.
- Seek rectification (Section 154)for obvious mistakes.
- Only after the assessment is modifiedcan a revised refund claim be made.
Key Takeaways
| SCENARIO | CAN REFUND CLAIM CHALLENGE ASSESSMENT? | CORRECT APPROACH |
| Tax paid > Assessed demand | ✅ Refund for excess allowed | File refund claim |
| Taxpayer disagrees with assessment | ❌ Refund claim cannot dispute it | File appeal/rectification |
| Assessment modified later | ✅ Revised refund claim possible | Reapply after appeal |
