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 that unilateral adjustments without prior intimation violate statutory requirements and established precedents. Revenue's affidavit admitted adjustment was made without Section 245 notice. The court emphasized that the Assessing Officer's discretionary power under Section 245 requires compliance with procedural safeguards including written intimation and recorded reasons. The petition was allowed, directing refund processing within four weeks and disposal of rectification applications within eight weeks.

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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, 1961
The 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 Applications
The 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, 1961
The 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.

Conclusion
The 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.

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