Beware of I-T Dept’s right to ‘set-off’ or withhold your refunds

Recently we saw the Delhi High Court direct the Income Tax department to review an adjustment it had effected on the refund due to Travelport International Operation Ltd UK, against a tax demand it had for the assessment year 2019-20. On this premise, let us get acquainted with how and what authority the revenue department has to initiate such action and the appropriate response of the assessee and the streamlining brought in last November to reduce litigations.

Whenever there is an The authority to ‘set-off’outstanding demand from earlier years and a refund is claimed in another assessment year, the concerned Assessing Officer (AO) can adjust that refund or a part of it against the tax demand by issuing a prior notice-cum-intimation under Section 245 of the Income Tax Act, 1961. Any adjustment of refund without prior intimation is a violation of law and illegal as per Delhi High Court’s ruling in another case of 2012. So, the onus is on the revenue officer to follow due process in making any such adjustment.

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Of course, the adjustment against refund is allowed only on the pending demand applicable to the same assessee and not any other person.

Likewise, refund due to a partnership firm cannot be adjusted against previous tax demands related to individual partners. On the flip side, an assessee cannot seek a ‘set-off’ against his tax arrears, as underscored by the Calcutta High Court in 1999 verdict.

Notices & tailoring assessee response

An assessee is likely to receive e-Notices under various sections of the Income Tax Act, on his/her email address registered with the Income Tax department. The sections under which these notices can be issued include: Section 139 (9) for defective filing of returns, Section 142(1)(i) for scrutiny, Section 145 for intimating to ‘set-off’ tax refund against old tax demands, Section 143(1) for intimation, Section 148/148A for escaped income and Section 156 for demanding tax arrears. An assessee should check under which section he/she has received the notice and which assessment year it applies to.

Pursuant to filing their annual ‘return of income’, every assessee will get an intimation stating the final assessment, specifying refund of excess taxes paid or placing further tax demand (in case of short payment or omission of an income from the ambit of tax).

On receipt of intimation under Section 145, the assessee is required to submit his/her response within the prescribed time. There are two possibilities - he/she agrees with the outstanding demand or disagrees (partially or fully) with it. It is advisable for the assessee to first verify if there is any outstanding tax demand that persists in at least immediate last ten to fifteen previous assessment years or whether he/she has filed any rectification application during those years and it was processed or not. An assessee may disagree with the set-off by providing due clarifications/submitting the relevant documents. Failure on the part of the assessee will be deemed as accepted the outstanding demand and it will be adjusted eventually.

New timelines

The Department of Income Tax (Systems), in November last, issued instructions to its field officers, shrinking the time an AO has to decide on the adjustment of refunds to 21 days from 30 days. The AO is required to provide his/her feedback to the Centralised Processing Centre (CPC), Bengaluru, on whether the adjustment should be made or not. In the absence of AO’s timely response, the CPC is authorised to adjust or refund as agreed by the assessee. AO is also under the obligation to update the correct demand and collectability status based on stays granted by the Courts. It is pertinent to note here that wrong categorisation of demand or lack of feedback from the AO on the assessee’s response leads to incorrect adjustment and litigations.

Union Budget 2023-24

The latest Union Budget vide the Finance Act, 2023, has integrated ‘withholding’ provisions under Section 241A with ‘set-off’ provisions under Section 245 to provide greater powers to AO to withhold refunds with effect from April 1, 2023. The refund can be adjusted against any outstanding demand. In addition, any remaining refund can be withheld until the disposal of assessment or reassessment proceedings. Further, an assessee will not be entitled to an additional interest of 3 percent for the delay in issue of refund beyond three months.

The writer is Founder & CEO of Shree Tax Chambers