Facts of the Case

  • The assessee filed return for AY 2006–07 declaring taxable income and claiming exemption on long-term capital gains from sale of agricultural land.
  • The Assessing Officer passed assessment order under Section 143(3), denying exemption and raising tax liability.
  • The Commissioner (Appeals) partly allowed the appeal.
  • Both parties filed appeals before the ITAT.
  • During pendency, Revenue recovered substantial tax from the assessee.
  • ITAT allowed the assessee’s appeal, making the assessee entitled to refund along with interest.
  • The assessee died during proceedings and the legal heir pursued the matter.
  • Revenue released part refund but withheld ₹36,34,267 against another assessment year demand.
  • No prior notice under Section 245 was issued before such adjustment.

Issues Involved

  1. Whether the Revenue can adjust or withhold refund against outstanding tax demand without issuing prior written intimation under Section 245 of the Income Tax Act?
  2. Whether withholding refund under the guise of “verification” amounts to adjustment attracting Section 245 compliance?
  3. Whether post-facto issuance of notice under Section 245 cures earlier illegality?

Petitioner’s Arguments

  • The adjustment of refund against demand for AY 2008–09 was made without prior notice, violating Section 245.
  • Section 245 makes prior written intimation mandatory before adjustment.
  • The tax demand for AY 2008–09 was already under challenge before CIT(A) along with a stay application.
  • Revenue could not unilaterally adjust the refund while appellate proceedings were pending.
  • Reliance was placed on:
    • Glaxo Smith Kline Asia (P) Ltd. v. CIT
    • Genpact India v. ACIT
    • The Oriental Insurance Co. Ltd. v. DCIT

Respondent’s Arguments

  • Revenue contended that no adjustment had been made.
  • It was argued that the amount was only withheld pending verification of outstanding demands.
  • Therefore, according to Revenue, Section 245 was not attracted.
  • Revenue also argued that notice under Section 245 had subsequently been issued.

 

Court Findings / Court Order

  • Section 245 clearly mandates prior written intimation before adjustment of refund.
  • The so-called “withholding” was in substance an adjustment of refund.
  • Revenue’s attempt to distinguish withholding from adjustment was rejected.
  • Subsequent issuance of notice under Section 245 could not cure the initial illegality.
  • Adjustment made without complying with mandatory statutory requirement was invalid.

The Court directed:

  1. Immediate release of the balance refund of ₹36,34,267 with statutory interest.
  2. CIT(A) to decide stay application for AY 2008–09 within four weeks.
  3. No coercive recovery steps till disposal of stay application.

 

Important Clarification

The judgment clarifies that:

  • Section 245 is mandatory and not procedural.
  • Prior intimation is a condition precedent before adjustment of refund.
  • Revenue cannot bypass statutory safeguards by labeling adjustment as withholding.
  • Refund rights of taxpayers must be protected against arbitrary tax administration.

This judgment strengthens taxpayer protection in refund matters.

 

Sections Involved

  • Section 245 – Set-off of refunds against tax remaining payable
  • Section 143(3) – Scrutiny Assessment
  • Section 244A – Interest on Refunds
  • Section 271(1)(b) – Penalty for non-compliance
  • Section 271(1)(c) – Penalty for concealment

 

Link to Download the Orderhttps://delhihighcourt.nic.in/app/case_number_pdf/2016:DHC:3149-DB/SMD25042016CW6832016.pdf

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