Refund Adjustment Quashed: Violation of Natural Justice Under Section 245, Respondents Ordered to Reassess and Deposit Funds

The Court quashed the adjustment of a refund amount against an outstanding tax demand by the Respondents under Section 245 of the Income Tax Act, 1961, due to non-compliance with natural justice principles. The Respondents failed to provide the Petitioner an opportunity to be heard, violating procedural fairness. The Court ordered the Respondents to deposit the adjusted amount with the Court and mandated that a reasoned order, considering the Petitioner's objections, be issued within two months. Additionally, the Petitioner's stay application for the assessment year 2018-2019 is to be resolved within four weeks.

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The judgment addresses the legality of an adjustment of a refund amount by the Respondents against an outstanding tax demand for the assessment year 2018-2019, purportedly under Section 245 of the Income Tax Act, 1961. The core legal issues considered by the Court include whether the Respondents followed the principles of natural justice in making the adjustment and whether the procedural requirements under Section 245 were adhered to.

The relevant legal framework revolves around Section 245 of the Income Tax Act, which allows for the adjustment of refunds against outstanding tax demands. The Court emphasized the necessity of adhering to the principles of natural justice, which require that the affected party be given a fair hearing before any adjustment is made. This is supported by precedents such as the decision in Hindustan Unilever Ltd. vs. Deputy Commissioner of Income-tax, where it was held that natural justice principles must be observed before making adjustments under Section 245.

The Court found that the Respondents failed to provide the Petitioner with an opportunity to be heard, despite the Petitioner's objections communicated through letters dated 5, 6, and 7 December 2023. No formal order was issued addressing these objections, which the Court deemed a gross violation of natural justice principles. The Court referenced its previous decision in Sulzer Pumps India Private Limited, where similar procedural lapses led to the quashing of an adjustment under Section 245.

In its reasoning, the Court highlighted the importance of procedural fairness and the right to be heard before any adverse financial adjustments are made. The lack of a formal order and the absence of a hearing were critical factors in the Court's decision to quash the adjustment.

The Court directed the Respondents to deposit the adjusted amount of Rs. 4,91,45,369/- with the Court within two weeks. This amount is to be invested in a nationalized bank and will be subject to future orders under Section 245, provided the Petitioner is given a reasonable opportunity to be heard. The Respondents are required to consider the Petitioner's objections and issue a reasoned order within two months. If no order is made within this period, the Petitioner may apply for the withdrawal of the deposited amount with any accrued interest.

Additionally, the Court noted that the Petitioner's stay application for the assessment year 2018-2019 remains pending and directed that it be disposed of in accordance with the law within four weeks.

Significant holdings include the reiteration of the necessity for adherence to natural justice principles in tax adjustments and the requirement for a reasoned order following a hearing. The Court's final determination was to quash the adjustment and mandate procedural compliance by the Respondents, ensuring the Petitioner's right to a fair hearing is upheld.

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