Orissa High Court: Tax Dept Cannot Adjust Refunds Without Prior Intimation as per Section 245

Cuttack, Odisha – In a significant ruling clarifying the powers of the Income Tax Department, the Orissa High Court has held that adjusting tax refunds against outstanding demands without issuing a prior written intimation under Section 245 of the Income Tax Act, 1961, is impermissible. The division bench, comprising Chief Justice Mr. Harish Tandon and Justice Mr. Murahari Sri Raman, directed the assessing officer to verify if such adjustments were made in excess of the mandatory 20% pre-deposit and to refund any excess amount to the taxpayer.

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Background of the Case

The writ petition was filed by M/s Reliable Security and Intelligence Services (Orissa) Private Limited, challenging the Income Tax Department's action of setting off its tax refunds for four consecutive assessment years (2021-22 to 2024-25) against a disputed tax demand of ₹1.35 crore for the Assessment Year (AY) 2018-19.

The company had already filed a statutory appeal against the demand and, as per the Income Tax Officer's (ITO) direction, had deposited 20% of the disputed amount (₹27.07 lakhs) to secure a stay on further recovery proceedings pending the appeal's disposal. Despite this compliance, the department proceeded to adjust the petitioner's subsequent refunds against the remaining 80% of the demand.

Arguments from Both Sides

Petitioner's Stance: Senior Advocate Mr. Jagabandhu Sahoo, representing the petitioner, argued that the department's action was a "flagrant violation of the tenet of natural justice." He contended that Section 245 of the IT Act explicitly requires the department to give "an intimation in writing" to the assessee about the proposed adjustment, thereby providing an opportunity to be heard. He stated that no such intimation was issued for the adjustments pertaining to AYs 2021-22, 2022-23, and 2023-24. While an intimation was received for AY 2024-25, the petitioner argued that the unilateral adjustment without further opportunity was unjust.

Income Tax Department's Defense: Mr. Avinash Kedia, Junior Standing Counsel for the Income Tax Department, countered that the petitioner was aware of the outstanding demand. He also pointed out that the stay order granted to the petitioner explicitly reserved the department's right to "adjust refunds arising, if any." Furthermore, he highlighted that the petitioner had made the final installment of the 20% deposit two days after the stipulated deadline, arguing this nullified the conditions of the stay.

Court's Legal Analysis and Findings

The High Court meticulously analyzed the statutory mandate of Section 245 of the Income Tax Act and the procedural guidelines laid down by the Central Board of Direct Taxes (CBDT).

On the Mandate of Section 245: The Court emphasized the importance of the phrase "after giving an intimation in writing to such person of the action proposed to be taken" in Section 245. Justice Raman, writing for the bench, noted that this provision is a cornerstone of natural justice.

For the Assessment Year 2024-25, where the petitioner admitted to receiving an intimation but failed to respond, the Court held the department's action was justified. The judgment clarified:

"As is apparent from bare reading of provision of Section 245 of the IT Act, it is unequivocal that once it is admitted that an intimation under said section has been received, it is incumbent on the part of the assessee to respond to the same, in absence of which the ITO is empowered to set off the amount to be refunded..."

However, for the refunds of AY 2021-22, 2022-23, and 2023-24, the department's counsel could not provide evidence that any prior intimation had been issued.

On Recovery Beyond the 20% Pre-Deposit: The Court referred to CBDT Office Memoranda (dated 29.02.2016 and 31.07.2017) which establish that upon payment of 20% of the disputed demand, a stay on recovery of the balance amount should normally be granted until the first appeal is decided. The Court also cited precedents from the Delhi High Court, including Skyline Engineering Contracts (India) Private Limited and Jindal Stainless Ltd. , which have consistently held that any recovery or adjustment beyond the 20% pre-deposit, without special reasons, is improper while an appeal is pending.

Final Verdict and Directions

Finding merit in the petitioner's argument regarding the lack of intimation for three of the four assessment years, the High Court allowed the writ petition with specific directions. The Court ordered the assessing officer to:

1. Issue a fresh intimation to the petitioner within one week.
2. Provide an opportunity of hearing to examine whether refunds for AYs 2021-22, 2022-23, and 2023-24 were adjusted in excess of the 20% pre-deposit requirement.
3. If found to be in excess, take necessary steps to refund the excess amount to the petitioner.

This judgment reaffirms the principle that administrative convenience for the tax department cannot override the statutory safeguards and principles of natural justice afforded to taxpayers.