Facts of the Case

The petitioner, Apparel Export Promotion Council, challenged two adjustment orders dated 31.12.1992 and 31.01.2003, whereby refund amounts of ₹1,33,91,754/- and ₹9,93,214/- respectively were adjusted by the Income Tax Department against alleged outstanding tax demands.

The adjustments were made by the Department purportedly in exercise of powers under Section 245 of the Income-tax Act, 1961. The petitioner contended that no prior written intimation regarding the proposed adjustment was ever issued before effecting such adjustments.

 

Issues Involved

  1. Whether the Income Tax Department can adjust a tax refund against outstanding tax dues under Section 245 of the Income-tax Act, 1961 without first issuing prior written intimation to the assessee.
  2. Whether an adjustment made in violation of the mandatory requirement of prior intimation is legally sustainable.

 

Petitioner’s Arguments

  • The petitioner submitted that Section 245 expressly mandates that before any refund is adjusted against an outstanding tax demand, the assessee must be informed in writing regarding the proposed action.
  • No notice or intimation was provided before the adjustments were made.
  • Since the statutory requirement was violated, the adjustment orders were liable to be quashed.

 

Respondent’s Arguments

  • The Revenue relied upon the powers conferred under Section 245 of the Income-tax Act, 1961 for adjustment of refunds against amounts payable by the assessee.
  • It was contended that the adjustments were made in exercise of statutory powers available to the Department.

 

 

Court Order / Findings

The Delhi High Court observed that Section 245 clearly stipulates that adjustment of refund can be made only after giving written intimation to the assessee regarding the proposed action.

The Court noted that in the present case no prior intimation had been issued before making the adjustments. Since compliance with the requirement of prior written intimation is mandatory, the Department's action was contrary to the provisions of Section 245.

Accordingly, the Court:

  • Quashed and set aside both adjustment orders.
  • Allowed the writ petition in favour of the petitioner.

 

Important Clarification

  • Prior written intimation under Section 245 is a mandatory statutory requirement.
  • Adjustment of refund against outstanding tax dues cannot be carried out unilaterally.
  • Failure to provide prior notice renders the adjustment vulnerable to judicial review and liable to be quashed.
  • The judgment reinforces the principles of natural justice in tax administration and protects taxpayers from arbitrary adjustment of refunds.

 

Relevant Section Involved

Section 245 – Set Off of Refunds Against Tax Remaining Payable

Section 245 authorizes the Assessing Officer, Commissioner (Appeals), Commissioner (Appeals) or Chief Commissioner/Commissioner, as the case may be, to set off any refund due to an assessee against any tax remaining payable by such assessee.

However, the section specifically requires that an intimation in writing must first be given to the assessee regarding the action proposed to be taken before such adjustment is effected.

 

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2004:DHC:20085-DB/BCP27072004CW26852003_104842.pdf

 

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