Adjusting substantial tax refunds against a disputed demand without a prior Section 245 intimation is unlawful when the taxpayer has already deposited the mandatory 20% amount.

Adjusting substantial tax refunds against a disputed demand without a prior Section 245 intimation is unlawful when the taxpayer has already deposited the mandatory 20% amount.

Adjusting substantial tax refunds against a disputed demand without a prior Section 245 intimation is unlawful when the taxpayer has already deposited the mandatory 20% amount.

Issue

Whether the tax authorities are legally justified in adjusting outstanding refunds under Section 245 to recover a disputed tax demand while an appeal is actively pending before the CIT(A), especially when the assessee has already deposited over 20% of the disputed demand in compliance with CBDT guidelines and no prior intimation was served.

Facts

• Disputed Demand & Appeal: For the Assessment Year 2012-13, the assessee faced a tax demand which was subsequently challenged in an appeal before the Commissioner of Income Tax (Appeals).

• Compliance with Stay Guidelines: While the appeal was pending, the assessee fully complied with the CBDT Office Memoranda dated 29.02.2016 and 31.07.2017 by pre-depositing more than 20% of the total disputed demand and formally moving a stay application.

• Unilateral Revenue Adjustment: Despite this compliance, the tax department forcefully recovered the remaining balance by adjusting ₹8.98 crores from the refunds legitimately due to the assessee for Assessment Years 2018-19 and 2019-20 to 2022-23.

• Lack of Notice: The revenue department executed these sweeping adjustments automatically without issuing any prior statutory notice or mandatory intimation under Section 245 of the Act.

Decision

• Violation of Section 245 Mandate: Held in favour of assessee. Section 245 is not an arbitrary tool; it explicitly mandates that a prior written intimation must be served to a taxpayer before any tax refund can be legally set off against an outstanding demand. Failing to give this notice nullifies the recovery.

• Protection Under CBDT Stay Thresholds: Held in favour of assessee. Once a taxpayer complies with the administrative standard of paying 20% of a disputed demand during a pending first appeal, they are entitled to a stay of demand. Unilaterally seizing their refunds beyond this threshold runs entirely contrary to law.

• Direction to Refund with Interest: Held in favour of assessee. The revenue authorities were strictly directed to release the wrongly adjusted refund sum of ₹8.98 crores to the assessee, augmented with statutory interest under Section 244A from the date the refunds were withheld.

Key Takeaways

• Section 245 Notice is Non-Negotiable: The tax department cannot surprise taxpayers by silently adjusting refunds against old, disputed dues. A formal, advance notice under Section 245 must be issued to allow the taxpayer a fair opportunity to raise objections.

• The 20% Rule Protects Refunds: Depositing 20% of a disputed tax demand under the CBDT guidelines effectively buys the taxpayer protection against coercive recovery mechanisms. The department cannot bypass its own circulars to sweep up a compliant taxpayer’s subsequent refunds.