Facts of the Case:

In this case, The Oriental Insurance Co. Ltd. filed a writ petition seeking to quash the adjustment of a refund of ₹89,16,28,190 for Assessment Year (AY) 2013-14 against an outstanding penalty demand from AY 2005-06. The petitioner argued that the adjustment was made without granting prior opportunity to the assessee, which is required under Section 245 of the Income Tax Act, 1961. The court had to address whether this action complied with the legal requirements of Section 245, as interpreted by prior case law.

Issues Involved

The primary issue in this case was whether the adjustment of the refund was made in violation of the provisions under Section 245 of the Income Tax Act, which mandates that the taxpayer be given prior written intimation and an opportunity to be heard before such adjustment is made.

Petitioner’s Arguments

The petitioner, represented by Senior Advocate Mr. M.S. Syali, argued that the adjustment of the refund was done without following the due process under Section 245, which requires advance intimation and a hearing before the adjustment of refunds can be made to settle outstanding demands. They cited previous case law, including Glaxo Smith Kline Asia (P.) Ltd v. CIT (290 ITR 35), Genpact India v. ACIT (205 Taxman 51), and Court on its Own Motion v. CIT (352 ITR 273), to support their claim.

Respondent’s Arguments

The respondent did not dispute that the adjustment was made without proper intimation but argued that the adjustment was necessary to recover the outstanding demand. They conceded that Section 245 requires prior intimation and an opportunity to be heard.

Court Order/Findings

The Delhi High Court, after examining the case and the provisions of Section 245, concluded that the adjustment made by the tax authorities violated the mandatory requirements of the law. The court held that the power to adjust refunds under Section 245 is discretionary and must be exercised after giving the taxpayer an opportunity to be heard, preceded by written intimation. Since this process was not followed, the court quashed the adjustment order. The writ petition was allowed in favor of the petitioner.

Important Clarification:
The court emphasized that Section 245 mandates two stages of action: (1) prior intimation and (2) the subsequent adjustment of refunds if required. The failure to provide a hearing before the adjustment was a violation of the taxpayer's rights under the Income Tax Act.

Sections Involved:

  • Section 245 of the Income Tax Act, 1961

Link to download the order -  The Oriental Insurance Co. Ltd. v. Deputy Commissioner of Income Tax & Anr. – Delhi High Court Judgment

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