2024 (8) TMI 183 - HC - Income Tax

Revenue cannot withhold refunds without mandatory written intimation under Section 245 of IT Act

The Bombay HC ruled that Revenue cannot set off or withhold refunds without mandatory written intimation under Section 245 of the IT Act. The court held ... Interpretation of Section 245 - set off or withhold a refund without an intimation under Section 245 - whether an intimation under this Section is or is not mandatory? - whether the Revenue can set off or withhold a refund without an intimation under Section 245 of the IT Act? - HELD THAT:- As Section 245(1) shows, it is permissible for the Revenue to set off a refund that is found due against a demand but only after an intimation is given in writing to the person of the action proposed, i.e., the proposed set off or adjustment. Sub–section (2) of Section 245 was introduced by an amendment. It speaks of a set off of part of a refund or an alternative scenario where there is no set off and a refund becomes due. In that situation, if the Assessing Officer having regard to the fact that the proceedings for assessment or reassessment are pending, forms an opinion that the grant of a refund is likely to adversely affect the Revenue, he may, after recording reasons in writing and with the previous approvals of the Principal Commissioner, as the case may be, withhold the refund up to the date on which that assessment or reassessment is made. There are also relevant circulars of 2013 in regard to compliance of Section 245 before making any adjustment of a refund. The Affidavit in Reply on behalf of the Revenue is exceedingly peculiar. From paragraph 5.5 there are several sub-paragraphs that deal with the various assessment proceedings and the pendency of the stay proceedings. However, sub-paragraph (1) at internal page 6 clearly says that the adjustment by the CPC was effected without issuing a Notice under Section 245 of the IT Act. Sub-paragraphs (2) and (3) deal with a question of Tax Deducted at Source (“TDS”) credit but also mention an adjustment of the refund. It is therefore undisputed that no intimation under Section 245 of the IT Act was ever issued to the Petitioners. As decided in Hindustan Unilever Ltd. [2015 (7) TMI 366 - BOMBAY HIGH COURT] the power under Section 245 is discretionary. The orders of stay have to be honoured before adjustment of the demand out of refund is done by the Revenue. If the Assessing Officer did not accept the assessee’s contention at the time of making the adjustment, the petitioner should have been informed as to why the objections of the assessee to the adjustment is not sustainable. Unless the Assessing Officer exercising power under Section 245 of the Act subjects himself to this discipline, he would be exercising his powers in an arbitrary manner. Thus issue is that these unilateral adjustments without prior intimation are contrary to the specific wording of the statute itself. They are contrary to settled decisions of this Court. Dispossal of stay applications and rectification applications - We have yet to find a reason in the Affidavit in Reply justifying the failure to take up and dispose of the stay application and the rectification application. Having regard to these circumstances and the unambiguous state of the law in this regard, we make Rule absolute in terms of prayer clauses (a), a(i), a(ii), a(iii), (b) and (c) set out above. The Petition is disposed of in these terms with no order as to costs. All refunds are to be processed and paid out within a period of four weeks from today. We are told that the stay application has been decided after this Petition was filed and the Petitioner has no grievance in that regard. The rectification applications are to be taken up and decided on a priority basis as early as possible and preferably within a period of eight weeks from today. Issues Involved:1. Adjustment of refunds without intimation under Section 245 of the Income-Tax Act, 1961.2. Failure to dispose of stay and rectification applications.3. Entitlement to refunds and interest under Section 244A of the Income-Tax Act, 1961.Detailed Analysis:Issue 1: Adjustment of Refunds Without Intimation Under Section 245 of the Income-Tax Act, 1961The primary issue in this case is whether the Revenue can adjust refunds against outstanding demands without providing prior intimation under Section 245 of the Income-Tax Act, 1961. The Petitioner challenged the actions of Respondent No. 3, who adjusted refunds for Assessment Years (AY) 2017-18 and 2022-23 against demands for AY 2018-19 without issuing any intimation under Section 245.Section 245(1) of the IT Act mandates that the Assessing Officer or other authorized officers may set off refunds against outstanding demands only after giving an intimation in writing to the taxpayer. This requirement is to ensure that the taxpayer has the opportunity to address any factual errors or other issues before the adjustment is made. The court cited previous judgments, including Hindustan Unilever Ltd. and Jet Privilege (P) Ltd., which affirmed that prior intimation under Section 245 is mandatory and that failure to comply renders the adjustment illegal.In this case, the Revenue admitted in their Affidavit in Reply that no intimation under Section 245 was issued before making the adjustments. Therefore, the court found the adjustments to be contrary to the statute and previous judicial precedents.Issue 2: Failure to Dispose of Stay and Rectification ApplicationsThe Petitioner also sought relief due to the failure of Respondent No. 1 to dispose of stay and rectification applications for AY 2018-19, 2017-18, and 2022-23. The court noted that the pendency of these applications was critical, especially since the stay applications were related to the demands against which the refunds were adjusted.The court emphasized that the failure to dispose of these applications promptly was unjustifiable and contrary to the principles of natural justice. The court directed that these applications be taken up and decided on a priority basis, preferably within eight weeks from the date of the judgment.Issue 3: Entitlement to Refunds and Interest Under Section 244A of the Income-Tax Act, 1961The Petitioner sought the issuance of a Writ of Mandamus directing the Respondents to issue consequential refunds along with interest under Section 244A of the IT Act. The court noted that the total refund due to the Petitioner was Rs. 6,65,27,095/-, with additional amounts due if rectification applications were considered.Given the unlawful adjustments and the failure to dispose of stay and rectification applications, the court made Rule absolute in terms of the Petitioner's prayer clauses (a), a(i), a(ii), a(iii), (b), and (c). The court ordered that all refunds be processed and paid within four weeks and that the rectification applications be decided within eight weeks.ConclusionThe court concluded that the adjustments made by the Revenue without prior intimation under Section 245 were illegal. It also emphasized the necessity of promptly disposing of stay and rectification applications. The court granted the relief sought by the Petitioner, directing the issuance of refunds and the disposal of pending applications within specified time frames. The judgment underscores the mandatory nature of prior intimation under Section 245 and the importance of procedural fairness in tax administration.