FAQs On Adjustment of Refund under Section 245

Adjustment of Refund under Section 245 of the Income-tax Act — Detailed FAQs & Practical Guide

Section 245 of the Income-tax Act, 1961 empowers the Income Tax Department to adjust a refund due to a taxpayer against any outstanding tax demand payable by such taxpayer under the Act. This provision enables the department to recover existing demands without issuing a separate recovery notice, while simultaneously safeguarding the taxpayer’s right to be informed and to raise objections.

In practice,Adjustment of refund under section 245 are commonly made against earlier years’ demands, demands arising from processing under section 143(1), or demands uploaded by jurisdictional Assessing Officers. This FAQ page explains the scope, procedure, taxpayer rights, response mechanism, and practical implications of adjustment of refund under section 245, based on the Income-tax Act and prevailing departmental practice.

FAQs on income tax refund adjustment under Section 245 and taxpayer rights
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FAQs– Section 245 of the Income-tax Act

Adjustment of refund under section 245 refers to the process by which the Income Tax Department sets off a refund payable to a taxpayer against any outstanding tax demand payable by that taxpayer under the Act.

The department may adjust a refund under section 245 when there exists an outstanding demand against the taxpayer for any assessment year and a refund becomes due for another assessment year.

Yes. The department is required to intimate the taxpayer of the proposed adjustment and provide an opportunity to respond before adjusting the refund against outstanding demand.

Intimation is generally communicated electronically through the Income Tax e-filing portal and by email or SMS alerts registered with the department.

Yes. The taxpayer may disagree with the proposed adjustment by submitting a response on the e-filing portal, citing reasons such as incorrect demand, pending rectification, appeal filed, or stay granted by appellate authority.

Common reasons include incorrect or disputed demand, demand already paid, demand stayed by appellate authority, demand under rectification, or demand arising due to clerical or arithmetical error.

Refund may be proposed to be adjusted even against disputed demand; however, where the taxpayer has filed an appeal or rectification and the demand is stayed or under challenge, appropriate response must be filed to prevent or reverse the adjustment.

If no response is submitted within the prescribed time, the department may proceed to adjust the refund against the outstanding demand as proposed.

Yes. If the demand against which the refund was adjusted is subsequently deleted, reduced, or rectified, the taxpayer may become eligible for refund of the adjusted amount, subject to applicable interest provisions.

Interest on refund is governed by section 244A. Where refund is adjusted against demand, interest computation depends on the facts of the case and the timing of adjustment and subsequent relief, if any.

Adjustment under section 245 is a statutory mode of recovery, but it is distinct from coercive recovery proceedings such as attachment or garnishee proceedings.

Yes. Refund adjustment may be made against demands arising from processing, assessment, or uploaded legacy demands, provided statutory intimation requirements are complied with.

The taxpayer should verify the correctness of the outstanding demand, check payment or appeal status, file rectification if required, and submit a timely response on the portal to protect refund rights.

Key Takeaway

Section 245 of the Income-tax Act provides the Income Tax Department with a statutory mechanism to adjust refunds against outstanding tax demands instead of releasing the refund and initiating separate recovery proceedings. While this provision facilitates efficient tax administration, it is not an unfettered power and must be exercised in accordance with procedural safeguards prescribed under the Act.

A critical aspect of section 245 is the mandatory requirement of prior intimation to the taxpayer before any refund adjustment is made. This ensures that the taxpayer is given a reasonable opportunity to verify the correctness of the demand and to raise objections where the demand is incorrect, disputed, stayed by an appellate authority, or already paid. Failure to respond to such intimation within the stipulated time may result in automatic adjustment of the refund.

In practice, a significant number of refund adjustments arise due to legacy demands, system-generated demands, or demands pending rectification or appeal. Taxpayers often remain unaware of these demands until a refund is proposed to be adjusted. Timely monitoring of the demand register on the e-filing portal and prompt resolution of incorrect demands through rectification under section 154 or appeal proceedings is therefore essential.

It is equally important to note that adjustment of refund under section 245 does not amount to final recovery where the underlying demand is subsequently deleted or reduced. In such cases, the taxpayer becomes entitled to refund of the adjusted amount, subject to applicable interest provisions. Understanding the scope and procedural framework of section 245 enables taxpayers to protect legitimate refunds, avoid unintended set-offs, and ensure that recovery actions are legally justified.

Adjustment of refund under Section 245 of the Income Tax Act explained through FAQs
FAQs explaining adjustment of income tax refunds under Section 245 and the taxpayer’s right to object to outstanding demands

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Disclaimer

This FAQ is for informational purposes only and does not constitute legal or professional advice. Tax positions should be evaluated based on individual facts and applicable law.