Prior written intimation is mandatory before refund adjustment; breach invalidates the set-off and can make scheme declarations premature.

A refund cannot be adjusted against outstanding tax without prior written intimation to the assessee under section 245, because the notice requirement safeguards the opportunity to respond before civil consequences follow; an adjustment made without such intimation is invalid and the refund, with statutory interest, is restored. A declaration under the Kar Vivad Samadhan Scheme, 1998 cannot be accepted where the demand is not subsisting in the manner required and has been wrongfully or illegally liquidated by the impugned adjustment; in that situation the declaration is premature and not ripe for acceptance, while the underlying demand may revive and the parties may proceed in accordance with law.

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Issues: (i) Whether the adjustment or set-off of the assessee's refund without prior intimation under section 245 of the Income-tax Act, 1961 was valid; (ii) whether the declaration filed under the Kar Vivad Samadhan Scheme, 1998 could be accepted in the facts of the case.

Issue (i): Whether the adjustment or set-off of the assessee's refund without prior intimation under section 245 of the Income-tax Act, 1961 was valid.

Analysis: Section 245 requires an intimation in writing to the assessee before proposed adjustment of refund. The absence of prior notice deprives the assessee of an opportunity to respond or take lawful steps before civil consequences follow. On the admitted facts, no prior intimation was given before the refund was adjusted.

Conclusion: The adjustment was held illegal and wrongful, and the refund with interest at the statutory rate was directed to be restored in favour of the assessee.

Issue (ii): Whether the declaration filed under the Kar Vivad Samadhan Scheme, 1998 could be accepted in the facts of the case.

Analysis: The declaration was filed when, on the material before the Court, the relevant demand was not subsisting in the manner required for the declaration to be considered, and the demand was treated as having been wrongfully or illegally liquidated by the impugned adjustment. In that situation, the declaration could not be treated as ripe for acceptance.

Conclusion: The declaration was held to be premature and not accepted.

Final Conclusion: The assessee succeeded on the challenge to the refund adjustment and obtained restitution of the adjusted amount with statutory interest, but failed on the request for acceptance of the scheme declaration; the underlying demand was held to revive and both sides were left free to proceed in accordance with law.

Ratio Decidendi: A refund cannot be adjusted under section 245 of the Income-tax Act, 1961 without prior written intimation to the assessee, and any such adjustment made in breach of that requirement is invalid.

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