Withholding of Refunds under Section 245(2): An Overview of the New Power

 Introduction

Section 245(2), introduced by the Finance Act, 2023, empowers the Principal Commissioner or Commissioner of Income Tax to withhold tax refunds—either wholly or in part—in cases where:

• Assessment or reassessment proceedings are pending, and
• Issuing the refund is likely to adversely impact revenue interests.

 

Key Highlights of Section 245(2)

1. Conditional Applicability
   This provision can be invoked only when an assessment or reassessment is ongoing—for the same year or any other assessment year.
2. Mandatory Reasoning
   The authority must document the reasons in writing, demonstrating why the refund is being withheld.
3. Threshold Limit
   Refunds below ₹10 lakhs cannot be withheld under this section. It applies only if the refund amount is ₹10 lakhs or more.

Procedure for Withholding Refunds (As per CBDT Instruction No. 02/2023 dated 10 November 2023)

1. Initiation by FAO
   When Section 245(2) is considered relevant, the Faceless Assessing Officer (FAO), upon receiving communication from the Centralized Processing Centre (CPC), informs the Jurisdictional Assessing Officer (JAO) about potential demands arising from pending assessments.
2. Evaluation and Documentation by JAO
   The JAO must then carefully assess the situation by analyzing:
• The taxpayer’s financial health
• Any outstanding demands
• Status of pending appeals, etc.

The JAO must record the reasoning with due diligence.

3. Approval by PCIT
   The JAO must obtain prior approval from the Jurisdictional Principal Commissioner of Income-tax (PCIT) before proceeding.
4. Communication with CPC
   The JAO must then inform the CPC of the final decision—whether to withhold or release the refund.

Timelines for Completion

As per CBDT guidelines, the entire process must be completed within the following timeframes:

• FAO: Within 20 days
• Jurisdictional AO: Within 30 days