Court on Its Own Motion vs Commissioner of Income Tax – Mandatory Compliance of Section 245 of the Income Tax Act for Adjustment of Refunds Against Outstanding Tax Demand and Protection of TDS Credit Rights (Delhi High Court, 2012)

Facts of the Case

1. The Revenue Department acknowledged that taxpayers were facing difficulties in obtaining TDS credit and in receiving refunds because of adjustments against alleged outstanding tax arrears.
2. The Court categorized the issues into:

• Failure in granting TDS credit to taxpayers.
• Adjustment of tax refunds against prior tax arrears based on computerized records.

3. Large-scale computerized uploading of arrears data had resulted in incorrect and non-existing tax demands being reflected in the system. Refunds amounting to approximately Rs. 4800 crores had already been adjusted against such demands.
4. The Court observed that many demands were inaccurate because payments, rectification orders, and appellate effects had not been incorporated into the system.
5. Taxpayers were also denied TDS credit where deductors failed to correctly upload TDS information or where minor technical mismatches existed.

Issues Involved

1. Whether tax refunds can be adjusted against outstanding tax demands without prior written intimation under Section 245 of the Income Tax Act, 1961.
2. Whether denial of TDS credit due to errors by deductors or technical mismatches is legally sustainable.
3. Whether taxpayers should suffer consequences for incorrect uploading of data by departmental authorities or deductors.
4. Whether the Income Tax Department is under an obligation to rectify incorrect computerized records and adopt a fair procedure.

Petitioner's Arguments

The Petitioner submitted that:

• The mandatory procedure prescribed under Section 245 was not being followed before adjustment of refunds.
• Taxpayers were often receiving intimation only after adjustment had already been carried out.
• Assessing Officers and CPC Bengaluru were shifting responsibility between themselves, leaving taxpayers without an effective remedy.
• Taxpayers were being deprived of TDS credit despite actual deduction and payment of taxes.
• Small taxpayers and senior citizens were disproportionately affected and subjected to unnecessary hardship and repeated compliance burdens.

Respondent's Arguments

The Revenue contended that:

• Several procedural improvements and software modifications had already been introduced.
• Instructions had been issued mandating compliance with Section 245.
• Communications regarding adjustments were sent through e-mail and speed post.
• Taxpayers were informed of TDS mismatches and provided opportunities to seek rectification.
• Departmental instructions permitted grant of TDS credit in certain cases involving minor mismatches.

Court Findings / Order

The Court held:

1. Section 245 mandates a two-stage procedure:

• Prior written intimation to the taxpayer.
• Subsequent adjustment only after considering the taxpayer's response.

2. Adjustment of refunds without complying with Section 245 is contrary to law.
3. Taxpayers cannot be prejudiced due to wrong or inaccurate data uploaded by Assessing Officers.
4. Minor technical mismatches should not result in denial of TDS credit where the amount is reflected in Form 26AS.
5. Assessing Officers must issue notice and provide an opportunity for correction before denying tax credit.
6. The Revenue was directed to establish a fair and transparent procedure for handling taxpayer grievances.
7. Interim directions were issued requiring strict future compliance with Section 245 before refund adjustments.

Important Clarifications

• Prior notice under Section 245 is mandatory and not optional.
• Refund adjustment cannot be made solely on the basis of computerized records without verification.
• Taxpayers cannot be forced to make double payment because of deductor defaults.
• Minor and purely technical discrepancies in TDS particulars should not defeat substantive rights.
• The Revenue cannot remain a passive observer where taxpayers suffer due to deductor failures

Sections Involved

• Section 245 – Set-off of refunds against tax remaining payable
• Section 143(1) – Processing of return of income
• Section 200A – Processing of TDS statements
• Section 272BB – Penalty for failures relating to Tax Deduction Account Number provisions
• TDS Credit Provisions under the Income Tax Act, 1961

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Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:5370-DB/SKN31082012CW26592012.pdf

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