Calcutta HC Directs Income Tax Dept to Release Withheld Refund Under Section 245 Without Justification

Introduction

The Calcutta High Court, in a ruling delivered by Justice Raja Basu Chowdhury on November 3, 2025, allowed a writ petition filed by Rajneesh Agarwal, a practicing Chartered Accountant, against the Income Tax Officer, Ward 22(2). The court directed the release of a withheld refund of Rs.22,73,833 under Section 245 of the Income Tax Act, 1961, along with interest, emphasizing that such withholding requires a demonstrable tax liability, which was absent here. This decision came in the context of a second writ petition after the petitioner had withdrawn an earlier one based on departmental assurances that proved unfulfilled, highlighting issues of procedural fairness in tax refunds.

Case Background

Rajneesh Agarwal, the petitioner, filed his Income Tax Return for assessment year 2018-19 on August 14, 2018, declaring a net income of Rs.37,09,520 and claiming eligibility for a refund due to excess TDS of Rs.39,51,350. An intimation under Section 143(1) on January 7, 2020, adjusted this to a net payable of Rs.9,75,430 with reduced TDS credit. Following a rectification order under Section 154 on January 16, 2024, a gross refund of Rs.55,54,357 was determined, but Rs.22,73,833 was withheld under Section 245, netting Rs.32,80,524. Only partial payments were made—Rs.18,26,159 on March 18, 2024, and Rs.14,99,725 on May 5, 2025—despite repeated representations and a prior withdrawn writ petition (WPA No.6316 of 2025) based on assurances of resolution. The core legal questions were: (1) the maintainability of a second writ petition after withdrawal of the first without prejudice, and (2) the validity of withholding refund under Section 245 absent any pending tax dues.

Arguments Presented

The petitioner, represented by Mr. Vinay Shraff, argued that the prior writ withdrawal was without prejudice, based on the respondent's assurance of resolution, and thus did not bar the current petition under Order 23 Rule 1(4) of the Code of Civil Procedure, 1908. He distinguished the causes of action, noting partial refunds in the interim created a fresh dispute, and cited Sarva Shramik Sanghatana (KV), Mumbai v. State of Maharashtra (2008) 1 SCC 494 to argue against applying precedents like Sarguja Transport Service v. State Transport Appellate Tribunal (1987) 1 SCC 5, which aimed to prevent bench-hunting. The petitioner emphasized no justification for withholding under Section 245, as no dues were outstanding, and sought the full refund of Rs.22,73,833 plus interest under Section 244A.

The respondent, Income Tax Officer, Ward 22(2), represented by Mr. Soumen Bhattacharjee, challenged maintainability, claiming the prior withdrawal abandoned the claim per Sarguja Transport Service (supra), invoking Order 23 Rule 1(4) CPC. They admitted partial refunds but offered no evidence of proceedings justifying the Section 245 withholding, stating on instructions that no independent action existed against the petitioner for the amount.

Legal Analysis

The court analyzed maintainability first, rejecting the respondent's reliance on Sarguja Transport Service (1987) 1 SCC 5, which deterred forum-shopping in specific contexts, as inapplicable here. Drawing from Sarva Shramik Sanghatana (2008) 1 SCC 494, Justice Chowdhury noted the prior withdrawal followed an assurance and partial payment, creating a distinct cause of action since the earlier petition addressed a broader refund shortfall, while the current one focused on the unexplained Section 245 hold. On the merits, the court clarified Section 245 allows set-off only against verifiable dues, underscoring that "law does not sanction recovery of tax in absence of any specific charging statutory provision." With no demonstrated liability, withholding was unjustified, distinguishing it from valid adjustments under Sections 143(1) or 154. This reasoning reinforces procedural safeguards in tax administration, ensuring refunds are not arbitrarily delayed.

Key Observations

• "Admittedly, the respondent had refunded a sum of Rs.14,99,725/- to the petitioner on 5th May 2025. Following the above, the petitioner withdrew the writ petition. However, since no further step was taken by the respondent, the petitioner had written the letter dated 13th May 2025 and ultimately the present writ petition has been filed."
• "It is equally true that the cause of action for the previous writ petition and the present writ petition are not identical. In the interregnum, a part of the petitioner’s claim has already been allowed."
• "Mr. Bhattacharjee, on instructions, has stated in response to a query from the Court that no independent proceeding has been initiated against the petitioner in respect of the withholding of Rs.22,73,833/-."
• "It is true that Section 245 of the said Act authorises the Income Tax Department to set off refund against remaining tax payable. Unfortunately, in the instant case, the respondent has not been able to demonstrate that any amount is payable or is due from the petitioner."
• "Law does not sanction recovery of tax in absence of any specific charging statutory provision."

Court's Decision

The writ petition was allowed, directing the respondent to process and release the refund of Rs.22,73,833 along with updated interest under Section 244A of the Income Tax Act, 1961, within ten weeks from the order's communication. No costs were awarded. This ruling mandates strict adherence to Section 245, preventing arbitrary withholdings and promoting accountability in tax refunds. Practically, it benefits taxpayers facing delays, potentially reducing litigation by enforcing assurances, and may influence future cases by clarifying writ maintainability post-withdrawal when causes of action evolve, ensuring faster dispute resolution in income tax matters.