Withholding of Refund in Certain Cases [Section 241A]

Section 241A allows the Income Tax Department to withhold refunds in certain cases, even if a taxpayer is otherwise eligible for a refund. This provision balances taxpayer rights with the government’s need to protect revenue interests.

1. When Can a Refund Be Withheld?

The Assessing Officer (AO) may withhold a refund if both of the following conditions are met:

1. A notice under Section 143(2)(for scrutiny assessment) has been issued for the same assessment year.
2. Granting the refund may adversely affect revenue recovery(e.g., if the AO believes the taxpayer’s liability may increase after scrutiny).

🔹 Example:

• A taxpayer files an ITR showing a refund of ₹50,000.
• The AO issues a scrutiny notice(Section 143(2)) suspecting underreported income.
• The AO withholds the refunduntil the scrutiny is completed.

2. Procedure for Withholding Refund

• Mandatory Approval: The AO must obtain prior approvalfrom the Principal Commissioner/Commissioner of Income Tax (PCIT/CIT) before withholding a refund.
• Written Justification: The AO must record reasons in writingexplaining why the refund should be withheld.
• No Automatic Withholding: The refund is not automatically withheld—the AO must actively decide to block it.

3. Time Limit for Withholding

• The refund can be withheld only until the scrutiny assessment is completed.
• Once the final assessment order is passed, any remaining refund must be issued(with interest, if applicable).

4. Judicial & CBDT Guidelines

• No Arbitrary Withholding: Courts have ruled that refunds cannot be withheld indefinitelyor without valid reasons ([Suresh Kumar Wadhwa vs. CIT]).
• CBDT Instructions (2021):
  • Refunds should not be withheld routinely—only if there is a genuine risk to revenue.
  • If the demand is disputed(e.g., in appeal), withholding should be limited to 20% unless strong reasons exist.

5. Remedies for Taxpayers

If a refund is wrongly withheld, the taxpayer can:

1. File a grievanceon the Income Tax e-filing portal.
2. Submit a request to the PCIT/CITciting unjust withholding.
3. Writ Petition (Article 226): Approach the High Courtif the withholding is arbitrary or excessive.

Key Takeaways