Court quashes adjustment order; assessee must be heard before offsetting refund against penalty demand.

The Oriental Insurance Co. Ltd. Versus Deputy Commissioner of Income Tax & Another

The Oriental Insurance Co. Ltd. Versus Deputy Commissioner of Income Tax & Another - TMI Issues:
1. Adjustment of refund against outstanding penalty demand without giving opportunity to the assessee.
2. Interpretation of Section 245 of the Income Tax Act, 1961.
3. Compliance with mandatory procedures for adjustment of refunds.
4. Quashing of adjustment order due to lack of opportunity of hearing to the assessee.

Analysis:
1. The petitioner sought a writ to quash the adjustment of refund against an outstanding penalty demand and to direct the respondents to grant the refund. The senior counsel argued that the adjustment was made without following the requirements of Section 245 of the Income Tax Act, citing previous court decisions like Glaxo Smith Kline Asia (P.) Ltd v. CIT, Genpact India v. ACIT, and Court on its Own Motion v. CIT. The court noted that the petition under Section 220(6) had already been decided, rendering prayer (b) moot. However, regarding prayer (a), the court emphasized that the adjustment was made without providing the assessee with an opportunity to be heard, as mandated by Section 245 and previous judgments.

2. The court referred to the interpretation of Section 245 in Glaxo Smith Kline Asia (P.) Ltd, emphasizing that the power to set off refunds is discretionary, not mandatory, and must be exercised after giving written intimation and an opportunity for the assessee to be heard. The court in Genpact India v. ACIT reiterated the mandatory nature of the procedure under Section 245, stating that any adjustment made without following this procedure is liable to be quashed. The court further highlighted the importance of prior intimation and opportunity for response before adjusting refunds, as outlined in Court on its Own Motion v. CIT.

3. The court found that in the present case, the adjustment was made simultaneously with the intimation, contrary to the requirements of Section 245 and previous court decisions. As no opportunity of hearing was provided to the assessee before the adjustment, the court directed the quashing of the adjustment order. The court emphasized that the spirit of Section 245 necessitates giving the assessee a chance to respond before making any adjustments. Therefore, the adjustment order was deemed invalid due to the lack of opportunity for the assessee to be heard.

In conclusion, the court ruled in favor of the petitioner, quashing the adjustment order and directing the respondents to comply with the mandatory procedures outlined in Section 245 for the adjustment of refunds against outstanding demands.