2025 (1) TMI 1503 - HC - Income Tax

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

Trent Ltd. Versus Deputy Commissioner of Income-tax Circle – 2 (3) (1), Mumbai & Ors.

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, ... Adjustment of refund against the outstanding demand in the purported exercise of powers u/s 245 - Violation of principle of natural justice - HELD THAT:- An intimation proposing an adjustment was sent to the petitioner. However, after that, the petitioner was not granted a hearing, and no formal order was made under Section 245 of the IT Act. Instead, by communication dated 16 March 2024, the Petitioner was informed of the adjustment against the outstanding demand for assessment year 2018-2019. In our judgment, the procedure followed by the Respondents grossly violates the principles of natural justice and fair play. The record shows that the Petitioner addressed communications dated 5 December 2023, 6 December 2023 and 7 December 2023 to the Respondents regarding objections to the proposed adjustments. There was no consideration of these objections. The petitioner was granted no opportunity of a hearing. No formal order was also made dealing with the petitioner’s objections. All this violates the principles of natural justice. We quash the adjustments made in the purported exercise of powers under Section 245 and direct the Respondents to deposit an amount of Rs. 4,91,45,369/- in this Court within two weeks from today. 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.