[Section 245]: Set-Off of Refund Against Outstanding Tax Demand

Section 245 of the Income Tax Act, 1961 allows the Income Tax Department to adjust (set off) a taxpayer’s refund against any outstanding tax demand (e.g., unpaid tax, interest, penalty). Below is a detailed breakdown of its provisions, procedures, and exceptions.

1. When Can a Refund Be Adjusted?

The Assessing Officer (AO) can adjust a refund against an outstanding demand if:

1. A valid tax demand exists(e.g., from a previous assessment year).
2. The demand is not stayedby any appellate authority (e.g., CIT(A), ITAT).
3. The taxpayer has not disputed the demand(or only partial disputes exist).

🔹 Example:

• A taxpayer is due a refund of ₹50,000for AY 2024-25.
• They have an outstanding demand of ₹30,000from AY 2020-21.
• The AO can adjust ₹30,000from the refund and pay only the remaining ₹20,000.

2. Mandatory Procedure for Adjustment

Before adjusting, the AO must:

1. Issue a Notice (Intimation):
   • Inform the taxpayer about the proposed adjustment(via email or online portal).
   • Specify the outstanding demand details(assessment year, amount, reason).
2. Provide 30 Days to Respond(reduced to 15 days from AY 2024-25):
   • The taxpayer can:
     • Acceptthe adjustment.
     • Challengeit (if the demand is incorrect/stayed).

3. Final Order:
   • If no response is received, the AO proceeds with the adjustment.
   • If the taxpayer objects, the AO must verify the disputebefore adjusting.

3. Exceptions & Restrictions

• No Adjustment If:
  • The demand is stayedby CIT(A), ITAT, or High Court.
  • The demand is under dispute(e.g., appeal pending).
  • The refund arises from an appellate order(Section 240) unless specified otherwise.
• Partial Adjustment:
  • If only part of the demand is disputed, the AO can adjust the undisputed portion.

4. Judicial Precedents

1. Mandatory Notice Requirement(CIT vs. Hindustan Coca-Cola):
   • No adjustment is valid without prior intimationto the taxpayer.
2. Disputed Demands(Jet Privilege Pvt. Ltd.):
   • Only 20% of a disputed demandcan be adjusted unless the department secures a stay.
3. Interest on Wrong Adjustments(ITC Ltd. vs. CIT):
   • If an adjustment is later found invalid, the department must refund with interest (Section 244A).

5. How to Prevent/Challenge an Adjustment?

If a refund is wrongly adjusted:

1. File a Grievanceon the e-filing portal.
2. Request Stay from CIT(A)/ITATif the demand is disputed.
3. Writ Petition (Article 226): If the department ignores objections.

Summary Table

Note: Always check Form 26AS and the e-filing portal for pending demands before filing returns.