Section 245 - Adjustment of Refunds by Tax demands

1. Issue for consideration :

1.1 S. 245 of the Income-tax Act authorises an Assessing Officer to set-off the amount of refund of tax against any sum that has remained to be paid, under the Act, by the person otherwise entitled to refund. The Section further requires the Assessing Officer to give intimation in writing, to such a person, of the proposed action before setting off the refund due to him.

1.2 The said Section reads as under :

"S. 245. where under any of the provisions of this Act, a refund is found to be due to any person, the Assessing Officer, Deputy Com-missioner (Appeals), Commissioner (Appeals) or Chief Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set-off the amount to be refunded or any part of that amount, against the sum, if any remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section."

1.3 As noted, the Section categorically requires the Assessing Officer or any other authority, as the case may be to give intimation in writing to the assessee informing it of the proposed action before proceeding with the act of set-off. Intimation is statutory and is presumed to be mandatory. However, it is seen that the statutory requirement of giving written intimation is practised more in breach. It is very common to come across cases of unilateral adjustments of demands, at times non-existent demand, against lawful refunds without any intimation to the concerned assessee. In fact, it is common practice of the Assessing Officers to set-off refunds without intimation.

1.4 At a time when it was easier to conclude that such acts of unilateral adjustments were unauthorised and were to be held as made in gross violation of the mandate of the statute, a controversy has been triggered by the recent decision of the Allahabad High Court striking a discordant note, in an otherwise synchronised view, that the issue of written intimation was mandatory.

2. Brij Bhushan Lal & Sons’ case :

2.1 Recently in the case of Brij Bhushan Lal & Sons v. Designated Authority, 246 ITR 353, the Allahabad High Court had an occasion to consider the true meaning of S. 245. In this case, the petitioner HUF had filed a declaration under the Kar Vivad Samadhan Scheme (KVSS) for settlement of its tax disputes for assessment years 1988-89 to 1992-93. Under the KVSS, an assessee in arrears of taxes, only was authorised to file a declaration for settlement of dues. ‘Tax arrears’ under the KVSS was defined to mean amount of tax determined on or before 31st March 1998, and remaining unpaid on the date of filing declara-tion. The petitioner’s declaration was rejected on the ground that there were no arrears of tax on the date of declaration i.e. there were no unpaid taxes on the date of declaration.

2.2 In the case of the petitioner, taxes payable of Rs.49,58,109/-, as a result of assessments under Wealth-tax Act for different years were adjusted against the refund due of Rs.49,78,620/- under the Income-tax Act, leaving no arrears of tax. This set-off of refund against arrears of tax was carried out, prior to the date of declaration, without giving any written intimation to the applicant as required u/s.245 of the Act.

2.3 It was the contention of the petitioner that the adjustment of tax arrears against the refund was unauthorised and was in violation of the provisions of S. 245 of the Act. It was explained that no written intimation, as required under the Act, was given to the applicant and therefore, such an adjustment had to be treated as invalid and non-existent. It was accordingly contented that on reversal of the set-off, the Applicant should be found to be in arrears of tax on the date of declaration and accordingly should be held to be eligible to be covered under the KVSS. Reliance was placed on the decision of the Calcutta High Court in the case of Bank of Tokyo Mitsubishi Ltd. v. CIT, 240 ITR 331.

2.4 The Allahabad High Court, dissenting from the abovereferred decision of the Calcutta High Court, negatived the contention of the applicant. The Court held that the absence of intimation, if at all it was there, was a mere irregularity and such irregularity could not invalidate the adjustments made. The Court noted the fact that the adjustment was made, some years in past and was not objected to by the applicant.

3. Bank of Tokyo Mitsubishi’s case :

3.1 The Calcutta High Court in the case of Bank of Tokyo Mitsubishi v. CIT and Others, 240 ITR 331, was required to deal with a similar issue. In that case, again concerning itself with an application under KVSS, the assessee’s declaration for settlement of tax dues of assessment year 1993-94 was rejected in absence of tax arrears. The refund due to the assessee, for assessment year 1991-92, was set-off against the tax dues of assessment year 1993-94. This adjustment was carried out without giving written intimation to the assessee in terms of S. 245 of the Act.

3.2 Revenue’s contention was that the set-off of refund was validly carried out and that such set-off was within the knowledge of the assessee. It also contended that the assessee itself in past had requested for set-off of refund against any tax dues. In the circumstances it was contended that S. 245 was not violated by the Revenue.

3.3 The Calcutta High Court held that the adjustment of refundable amount against tax dues could be made and must be made only in accordance with S. 245 of the Act. It further held that the Section required that the prior intimation must originate from the Revenue before an act of set-off was carried out.

3.4 The Court accordingly treated the rejection as improper and declaration as the one properly filed.

4. Observations :

4.1 There does not appear to be any doubt about the requirement of the statute. S. 245 very clearly, in an unambiguous language, requires the Assessing Officer to give an intimation in writing conveying its proposal to set-off the refund against the tax that has remained to be paid. The doubt or controversy however is surrounding the issue as to whether such a requirement is a mere formality or was an essential pre-condition. Whether the violation of the express provisions of the Section was a mere irregularity not resulting in invalidity of the action or that it was fatal, resulting in quashing the action.

4.2 As noted earlier, the legislature in express and unambiguous language required the Assessing Officer, to give intimation in writing proposing the set-off, before the adjustment is carried out. The legislature has cast three obligations on the Assessing Officer :

(a) to give intimation,

(b) to give such intimation in writing, and

(c) to propose set-off in the intimation.

Again, such intimation has to be given before the act of set-off and any subsequent address will not meet the requirement of the Section. It appears that the legislature is seriously concerned about the adjustment of refund otherwise due to an assessee. It intended to ensure that no un-authorised adjustment is made by the Assessing Officer. The proposal and its intimation is in fact a provision of an opportunity of hearing, to the assessee for presenting his case and accordingly the provision of S. 245 is in fact recognising the need to observe and respect the provisions of natural justice. Looking at the requirement from this angle, the Calcutta High Court was correct in holding that no set-off of refund was possible without complying with the requirements of S. 245 of the Act.

4.3 S. 49E of the Act of 1922 contained provisions which permitted adjustment of tax dues against refund. The said Section did not contain any provision for giving a written intimation before set-off. This provision for intimation therefore is a specific addition by the legislature is S. 245 of the Act of 1961. This specific departure from the previous law, clearly explains the legislative intent to bring the provision in conformity with the provisions of natural justice. The Punjab High Court, applying the principle in the case of State Bank of Patiala v. CIT, 239 ITR 421, held that an adjustment which was in violation of this condition of prior written intimation, was not sustainable.

4.4 It is significant to note that the provisions of S. 245 are special provisions and are in departure from the provisions that do not as a rule permit the set-off of refund of one year against tax dues of another year. This Section is enacted to empower an Assessing Officer to do something which otherwise was not permissible. In the circumstances, it is fair for an Assessing Officer to strictly follow the letter and spirit of the law while exercising extraordinary power vested in it. Please see J. K. Industries Ltd. v. CIT, 238 ITR 820 (Cal.). The requirement of giving prior written intimation u/s.245 is a mandatory requirement and is not just a formality and the Allahabad High Court, in our respectful opinion of the Court, was in error in holding that not giving such intimation was a mere irregularity. It appears that the Court was so disturbed with the adverse facts of the case and the behaviour of the applicant that it chose to give the benefit of doubt to the Revenue.

4.5 The same Allahabad High Court, in the case of Hira Lal & Sons v. ITO, 156 ITR 30, held that the act of set-off of refund was quasi-judicial in nature and therefore the assessee on principles of natural justice, was entitled to a notice to enable him to place his version of facts on record.

4.6 The Delhi High Court in the case of Vijay Kumar Bhati v. CIT, 205 ITR 110, had invalidated the action of the Revenue in setting off the refund without passing an order u/s.245 of the Act. The SLP of the Revenue, against the above decision of the Delhi High Court, was dismissed by the Supreme Court, 203 ITR (St.) 1 (SC).

4.7 The Madhya Pradesh High Court, in a case concerning such unauthorised set-off in violation of S. 245 made without prior intimation, not only set aside the order but granted interest on such illegally withheld amount. Siv Narain Shivhare v. CIT, 222 ITR 620 (MP).

4.8 Lastly, the Bombay High Court in the case of A. N. Shaikh v. Suresh B. Jain, 165 ITR 86, held that adjustment of taxes payable against the refund due was not possible without the prior written intimation to the assessee. Please also see 165 ITR 151 (Bom.) and J. K. Industries Ltd. (supra).

4.9 In the facts of the case, the Calcutta High Court in Vijaykumar Bhati’s case, in order to set an example, imposed exemplary costs of Rs.11,000/- on Revenue for the glaring indifferent attitude of the assessing authorities which made successive orders of withholding refund, of creating hypothetical dues and then adjusting the refund against such tax dues.

4.10 The Chief Commissioner of Income-tax, Mumbai, in meetings held from time to time with the various professional associations including BCAS, has categorically prohibited the Assessing Officers from setting off refunds without prior written intimation. The minutes of the last meeting are published in August 2000 issue of BCAJ. Please refer to the same in case of need.