Section 245 Income Tax Act | Refund Adjustment Exceeding 20% of Disputed Demand Without Hearing Violates Natural Justice : Calcutta HC

The Calcutta High Court has reaffirmed that tax authorities cannot adjust refund amounts exceeding 20% of a disputed tax demand without first affording the assessee a meaningful opportunity to be heard, thereby upholding the foundational principles of natural justice under Section 245 of the Income Tax Act, 1961. The judgment clarifies that procedural compliance is non-negotiable, even where appeals remain pending.

Background & Facts

The Dispute

The petitioner, P.S. Srijan Height Developers, a partnership firm, challenged the adjustment of refund amounts from assessment years 2021-22 and 2022-23 against a disputed tax demand for assessment year 2018-19. The adjustment exceeded 20% of the disputed amount, and was carried out without considering the petitioner’s right to object under Section 245 of the Income Tax Act, 1961.

Key Facts

• The petitioner filed its return for A.Y. 2018-19 on 15.10.2018 declaring income of Rs. 1,16,24,230
• A scrutiny assessment under Section 143(3) read with Section 144B was completed on 11.09.2021, assessing income at Rs. 6,60,76,120
• A notice of demand was issued on the same date (11.09.2021)
• The petitioner filed an appeal under Section 246A on 22.09.2021, which remains pending
• For A.Y. 2021-22, the petitioner filed return on 15.03.2022 declaring income of Rs. 4,85,23,350 and claimed refund of Rs. 7,59,274
• On 25.10.2022, an intimation under Section 143(1) was issued, determining refund of Rs. 7,58,210
• On the same day (25.10.2022), an intimation under Section 245 was issued, proposing adjustment of the entire refund against demands for A.Y. 2009-10 and 2018-19
• The adjustment of Rs. 7,58,210 was made on 25.10.2022 itself, without waiting for the 30-day response period
• For A.Y. 2022-23, the petitioner filed return on 31.12.2022 declaring income of Rs. 2,54,61,800 and claimed refund of Rs. 1,56,22,708
• On 27.09.2023, an intimation under Section 143(1) determined refund of Rs. 1,64,03,820
• On 10.11.2023, an intimation under Section 245 was issued, proposing adjustment of Rs. 1,64,03,820 against outstanding demands of Rs. 37,740 (A.Y. 2016-17) and Rs. 2,63,64,130 (A.Y. 2018-19)
• The notice granted 21 days to respond
• On 11.11.2023, the very next day, the entire refund of Rs. 1,64,03,820 was adjusted
• The petitioner wrote to the Revenue on 08.01.2025 and 02.09.2025 requesting release of Rs. 1,16,96,443 adjusted in excess of 20% of the disputed demand, but received no response
• The writ petition was filed on 27.10.2025

Procedural History

• 15.10.2018: Return filed for A.Y. 2018-19
• 11.09.2021: Scrutiny assessment order and notice of demand issued
• 22.09.2021: Appeal filed under Section 246A (pending)
• 15.03.2022: Return filed for A.Y. 2021-22
• 25.10.2022: Intimation under Section 143(1) and Section 245 issued; refund adjusted same day
• 31.12.2022: Return filed for A.Y. 2022-23
• 27.09.2023: Intimation under Section 143(1) issued for A.Y. 2022-23
• 10.11.2023: Intimation under Section 245 issued proposing adjustment
• 11.11.2023: Refund adjusted within 24 hours of notice
• 08.01.2025: First written request to release excess adjustment
• 02.09.2025: Follow-up request
• 27.10.2025: Writ Petition (WPO 780 of 2025) filed before Calcutta High Court

Relief Sought

The petitioner sought:

• Immediate release of Rs. 1,16,96,443 adjusted in excess of 20% of the disputed demand for A.Y. 2018-19
• Refund of the adjusted amounts with interest under Section 244A
• Stay of recovery pending disposal of the appeal

The Legal Issue

The central question was whether the Revenue authorities could adjust refund amounts exceeding 20% of a disputed tax demand under Section 245 of the Income Tax Act, 1961, without affording the assessee a reasonable opportunity to object, and whether such adjustment is permissible despite the pendency of an appeal.

Arguments Presented

For the Petitioner

The petitioner relied on multiple judicial precedents and CBDT instructions to argue that:

• Adjustment of refunds beyond 20% of the disputed demand is prohibited under Office Memoranda dated 29.02.2016, 31.07.2017, and 25.08.2017, unless specifically approved by the Pr. CIT/CIT
• Section 245 mandates prior intimation and consideration of objections before adjustment
• The adjustment made on 11.11.2023 violated natural justice by occurring within 24 hours of the notice
• The intimation under Section 143(1) cannot substitute the statutory requirement under Section 245
• The judgment in Graphite India Limited v. Deputy Commissioner of Income-Tax and Rajendra Kumar v. Assistant Commissioner of Income-Tax support the proposition that adjustment beyond 20% without due process is illegal
• The delay in filing written submissions in the appeal cannot justify procedural violations in refund adjustment

For the Respondent

The Revenue contended that:

• Section 220(1) and (4) deem an assessee in default if the demand is not paid within the stipulated time, regardless of appeal filing
• Section 245 only requires intimation, not a hearing or consideration of objections
• The intimation under Section 143(1) already warned of possible adjustment, so the petitioner had constructive notice
• The User Manual provided a mechanism to object, which the petitioner failed to use
• The delay in filing the writ petition (over three years for the first adjustment) disentitles the petitioner to relief
• The judgment in Northern Coal Fields Limited v. Assistant Commissioner of Income-Tax permits adjustment beyond 20% if intimation is given
• Mere filing of appeal does not stay recovery

The Court's Analysis

The Court undertook a detailed analysis of Sections 220 and 245 of the Income Tax Act, 1961, and the principles of natural justice. It held that while the mere filing of an appeal does not automatically stay recovery, the Revenue’s power to adjust refunds under Section 245 is not unfettered.

"The expression, 'after giving an intimation in writing to such person of the action proposed to be taken under this sub-section' employed in Sub-Section (1) of Section 245 of the 1961 Act makes it explicit that the intimation must be prior to the adjustment and axiomatically the adjustment mentioned in the intimation would then only be in contemplation."

The Court emphasized that the purpose of the intimation is not merely informational but procedural - it is to afford the assessee an opportunity to raise objections, which triggers the Assessing Officer’s discretion under Section 220(6). The adjustment made on 11.11.2023, just one day after the 21-day notice period was issued, was held to be a clear violation of natural justice.

The Court distinguished Northern Coal Fields Limited on factual grounds, noting that the Supreme Court’s dismissal of the SLP was not a reasoned judgment on merits. It also rejected the Revenue’s reliance on the User Manual, holding that Section 245 provides an independent statutory trigger for objection, which supersedes general portal-based notices.

The Court further clarified that while Rajendra Kumar incorrectly held that filing an appeal automatically prevents an assessee from being deemed in default, the correct position - as affirmed in Golam Momen - is that the Assessing Officer retains discretion under Section 220(6), which must be exercised fairly and reasonably. However, this discretion cannot be exercised without compliance with Section 245’s procedural safeguards.

The Court also noted that the Revenue’s own CBDT Instruction No. 12/2013, issued in compliance with the Delhi High Court’s directions, mandates that objections under Section 245 must be examined and communicated to the CPC - a step entirely skipped in this case.

The Verdict

The petitioner succeeded on the second adjustment. The Calcutta High Court directed the Revenue to refund the amount adjusted in excess of 20% of the disputed demand for A.Y. 2018-19, as intimated on 11.11.2023, within eight weeks from the date of communication of this order. The amount to be refunded is Rs. 1,16,96,443. The adjustment made on 25.10.2022 is not subject to refund due to the petitioner’s inordinate delay in challenging it. No interest is payable on the refund amount, as the writ petition was filed nearly two years after the illegal adjustment. The Commissioner (Appeals) is directed to dispose of the pending appeal within two months.

What This Means For Similar Cases

Procedural Compliance Under Section 245 Is Mandatory

• Practitioners must insist that any adjustment under Section 245 must be preceded by a valid intimation and a reasonable opportunity to object
• Adjustments made within 24 - 48 hours of notice are prima facie illegal and subject to quashing
• Revenue authorities cannot treat Section 245 intimation as a formality - failure to consider objections renders the adjustment void

20% Threshold Is Not Optional

• Office Memoranda dated 29.02.2016, 31.07.2017, and 25.08.2017 remain binding on Assessing Officers
• Adjustments exceeding 20% of disputed demand require prior approval from Pr. CIT/CIT, even if the appeal is pending
• Failure to obtain such approval invalidates the adjustment, regardless of the amount involved

Delay in Appeal Does Not Justify Procedural Violations

• Delay in filing written submissions in the appeal cannot be used to excuse non-compliance with Section 245
• The two processes - appeal and refund adjustment - operate independently
• Revenue cannot use procedural delays by the assessee to bypass statutory safeguards

Intimation Under Section 143(1) Is Not a Substitute

• Notices under Section 143(1) are for processing returns and do not trigger recovery powers

• Section 245 is a distinct statutory mechanism requiring its own procedural compliance

• Failure to respond to a Section 143(1) notice does not waive rights under Section 245

• The Court’s direction to dispose of the appeal within two months reinforces the need for expeditious adjudication in tax matters

• Practitioners should now routinely raise objections under Section 245 in writing and retain proof of submission to prevent unilateral adjustments

• This judgment provides a clear roadmap for challenging illegal adjustments in pending appeals across all High Courts