Section 245 – Wrongful adjustment of refund from earlier demands without intimating to the assessee.

We have been recently receiving a lot of mails asking for help for the Intimation received u/s 245 from the department. Most assesses are unaware of their outstanding demands for previous years. They filed their returns during the previous year but didn’t care to know the status of the return i.e. if it has been processed or any demand has been raised on it. As most of the returns were filed manually, the department used to send intimation via post which has often been missed or ignored by assesses or not delivered at all. Due to this reason their outstanding demand has not been settled till date. This has come as a shock to many individuals who were unaware of such outstanding demand for previous years. The reason for the outstanding demand has also not been mentioned making people confused and worried even more. Mostly in the case of salaried individuals demand has been raised for unknown reasons even though proper taxes had been deducted at source and the same reflects in Form 26AS. They are totally unaware of the reason for the demand. No further details of such demand are available online as the details of the return have been transferred to Local Assessing Officer (AO). So, in view of the above intimation from department we have jotted down some important points to be noted which can assist you in knowing about your demand and help you in solving the problem:

• As the return for the relevant Assessment Year (AY) has been transferred to Local Assessing Officer, rectification cannot be filed online.
• A timeline of 30 days is given from the department and if no respond is made within this time limit, the refund for AY will be considered for adjustment against outstanding demand.
• If the outstanding demand amount for previous years is more than the refund then according to the powers given in sec 245, the refund would be adjusted with the demand of previous years and an intimation regarding adjustment of the refund will be provided to the assessee.

The worst part was that many taxpayers saw such demands being adjusted against their legitimate refunds, often even before receiving such intimation of demands, and in most cases, while their rectification/objection applications were pending before AOs. A recent Delhi high court interim order has provided a ray of hope to such taxpayers of getting their legitimate refunds. The Delhi high court, which converted a letter of complaint filed by a chartered accountant into a writ petition, noticed that the procedure laid down in section 245 of the Income-tax Act was not being followed while adjusting such refunds. This procedure requires a notice to be sent to the taxpayer informing him of the proposal to adjust his refund against earlier demands, giving him an opportunity to respond and object to such adjustment, and only after taking into account his objections can such adjustment be made. This procedure ensures that unwarranted adjustments are not made. The Delhi high court directed the tax department to henceforth follow the prescribed procedure by giving taxpayers an opportunity to respond or reply to the AO and this response must be examined by AOs. The AO has to communicate his findings to CPC within a time limit specified by CBDT, which will then process the return and adjust only demands so confirmed by the AO. As regards to refunds that have already been wrongfully adjusted by CPC based on fictitious or non-existent demands, the high court noted that obviously they could not take a stand that they could make adjustments contrary to law based on wrong data fed in by AOs. Besides, the question of compensating taxpayers on account of interest also arose. The Delhi high court gave the tax authorities an opportunity to adopt a just and fair procedure to rectify and correct their records and issue refunds with interest, without putting a harsh burden and causing inconvenience to taxpayers. The Delhi high court also considered another of taxpayers’ problem—of getting credit for tax deducted at source (TDS) from their income. The court noted that there were two categories. The first was where the TDS amounts were reflected in Form 26AS (online tax ledger of the taxpayer), but the entry in the return of income was incorrect or there was a small mismatch, resulting in non-grant of credit. The second was where there was failure of tax deductors to correctly upload the TDS details. In both cases, taxpayers were forced to make double tax payment. Given the magnitude of the problem, isn’t this a case of too little, too late? As the Delhi high court observed, “The issue is of general governance, failure of administration, fairness and arbitrariness.” At least now, thanks to the Delhi high court, there is some check on the arbitrariness of the tax department. Thanks for reading for this article. Please feel free to write to us, We want to hear it all!Suggestions? Complaints? Feedback? Requests?  at [info@taxmantra.com] or call us at +91 88208208 11. We would be more than happy to assist you.