Facts of the Case

The petitioner, M/s Sant Ram Aggarwal, challenged the action of the Income Tax Department whereby a refund amounting to Rs. 56,45,790, determined for Assessment Year 1982-83, was adjusted against an alleged surtax demand for Assessment Year 1984-85.

The Assessing Officer, while giving effect to assessment orders relating to Assessment Years 1982-83 and 1983-84, directed that the refund due to the petitioner be adjusted against outstanding Income-tax and Surtax demands. The petitioner contended that such adjustment was made without complying with the mandatory requirement of prior written intimation prescribed under Section 245 of the Income-tax Act, 1961.

The petitioner, therefore, approached the Delhi High Court seeking quashing of the adjustment order and release of the refund amount.

 

Issues Involved

  1. Whether the Income Tax Department could adjust a refund due to an assessee against outstanding tax or surtax demands without issuing prior written intimation under Section 245 of the Income-tax Act, 1961.
  2. Whether compliance with Section 245 is mandatory before effecting any set-off of refund against tax liabilities.
  3. Whether adjustment of refund without affording the assessee an opportunity to object violates statutory requirements and principles of natural justice.

 

Petitioner’s Arguments

The petitioner argued that:

  • A substantial refund had become payable pursuant to assessment orders.
  • The Income Tax Department adjusted the refund against an alleged surtax demand without any prior notice or written intimation.
  • Section 245 expressly requires the Revenue authorities to intimate the assessee in writing before adjusting any refund against outstanding tax liabilities.
  • The adjustment was illegal and liable to be quashed because the mandatory statutory procedure was not followed.
  • The assessee was denied an opportunity to raise objections before the refund was appropriated.

 

Respondent’s Arguments

The Income Tax Department defended the adjustment by relying upon its authority under Section 245 of the Income-tax Act to set off refunds against outstanding tax demands.

It was contended that since outstanding liabilities existed against the petitioner, the Department was justified in adjusting the refund towards those dues.

 

Sections Involved

Income-tax Act, 1961

  • Section 245 – Set-off of refunds against tax remaining payable.

Relevant Provision

Section 245 authorizes the Assessing Officer or specified tax authority to adjust a refund due to an assessee against any outstanding tax demand, but only after giving an intimation in writing regarding the proposed adjustment.

 

Court Findings / Observations

The Delhi High Court examined the language of Section 245 and held that:

  • The statute clearly requires prior written intimation before any refund adjustment can be made.
  • The purpose of such intimation is to provide the assessee an opportunity to respond to the proposed action.
  • Adjustment of refund without prior notice is contrary to the express mandate of Section 245.
  • The requirement is not a mere procedural formality but a substantive safeguard available to the assessee.

The Court relied upon the earlier Delhi High Court judgment in:

Vijay Kumar Bhati v. Commissioner of Income Tax & Another

205 ITR 110 (Delhi)

where it was held that an assessee must receive written intimation before any set-off under Section 245 is carried out.

The Court also referred to the Karnataka High Court decision in:

Fosroc Chemicals (India) Ltd. v. Commissioner of Income Tax & Another

248 ITR 607 (Karnataka)

where it was held that the provisions of Section 245 are mandatory and that prior intimation must be given before making any adjustment of refund.

 

Court Order

The Delhi High Court allowed the writ petition and held that the adjustment of the refund amount against the surtax demand without prior written intimation was unsustainable in law.

Accordingly:

  • The order adjusting the refund due to the petitioner was set aside.
  • The parties were left free to take such action as may be permissible under law after following the prescribed statutory procedure.
  • No order as to costs was passed.

 

Important Clarification

The judgment clarifies that:

  • Compliance with Section 245 is mandatory.
  • Before adjusting any refund against outstanding tax demand, the Revenue must issue a written intimation to the assessee.
  • The assessee must be afforded an opportunity to know and respond to the proposed adjustment.
  • Any unilateral adjustment of refund without following Section 245 is liable to be quashed.
  • The decision reinforces procedural fairness and natural justice in tax administration.


Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2002:DHC:2735-DB/63019092002CW3191988_143204.pdf

 

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