Withholding and Setting Off of Refund

Introduction-

Income tax department for a considerable period of time had the power to withheld refund if certain proceedings were pending before the income tax officer or the power to set of the amount refundable to the assessee with any existing demand. However prior to 1st the powers came from two different sections i.e., Section 241A and Section 245. But wide Finance Act, 2023 both these sections have been merged and the previous section 245 has been substituted with new section 245. The rationale behind such move can be understood from the Memorandum Explaining Finance Bill, 2023 extracts of which are reproduced as under-

“Section 241A of the Act deals with withholding of refund in certain cases. As per the section, where a refund becomes due to an assessee under sub-section (1) of section 143 and notice for assessment is issued to him under sub-section (2) of section 143, the Assessing Officer (AO) may withhold such refund till the date of such assessment being made, if he is of the opinion that the grant of refund is likely to adversely affect the revenue. Such withholding can be done after recording the reasons for doing so and with the prior approval of the Principal Commissioner or Commissioner, and applicable to assessment years on or after 2017-18.

2. Section 245 of the Act deals with set off of refunds against tax remaining payable. It provides that where refund is found to be due to any person under any provisions of the Act, the AO or other income-tax authorities mentioned in the section, may, in lieu of payment, set off part or whole of the refund against any sum remaining payable by such person, after giving him an intimation in writing regarding the proposed action.

3. There is an overlap between the two provisions. Therefore, it is proposed to integrate the two sections by substituting section 245, so as to provide that where under any of the provisions of this Act, a refund is due to any person, the Assessing Officer or Commissioner or Principal Commissioner or Chief Commissioner or Principal Chief Commissioner, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against any sum remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section.

4. It is also proposed to provide that where a part of the refund has been set off under subsection (1) or where no amount is set off, and refund becomes due to a person, then, the Assessing Officer, having regard to the fact that proceedings of assessment or reassessment are pending in such case and grant of refund is likely to adversely affect the revenue, and for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, may withhold the refund till the date on which such assessment or reassessment is made.

5. It is also proposed to amend section 241A of the Act to make the provisions of that section inapplicable from 1st April, 2023.”

Provisions of Newly substituted section 245-

[Set off and withholding of refunds in certain cases.245. (1) Where under any of the provisions of this Act, a refund becomes due or is found to be due to any person, the Assessing Officer or Commissioner or Principal Commissioner or Chief Commissioner or Principal Chief Commissioner, as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this sub-section.

(2) Where a part of the refund is set off under the provisions of sub-section (1), or where no such amount is set off, and refund becomes due to a person, and the Assessing Officer, having regard to the fact that proceedings for assessment or reassessment are pending in the case of such person, is of the opinion that the grant of refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner, as the case may be, withhold the refund up to the date on which such assessment or reassessment is made.]

Analysis: Setting off of refund against any outstanding Demand

The Income Tax Department has the power to adjust any outstanding tax liability from previous years against a refund that is due to you for the current year. However, before they can do this, they are required to send you an intimation under Section 245 of the Income Tax Act, 1961 (ITA). This intimation will give you the opportunity to review the adjustment and to provide your feedback.

The intimation will tell you how much outstanding tax liability you have and how much of your refund will be used to offset that liability. You have 30 days to respond to the intimation. If you do not take any action within 30 days, the outstanding tax liability will be deducted from your refund.

So once Intimation is received following steps should be followed-

1. Read the intimation carefully. Make sure you understand the amount of outstanding tax liability, the amount of your refund, and the time frame within which you need to respond.

2. If you agree with the outstanding demand, you can do nothing. The outstanding tax liability will be deducted from your refund.

3. If you disagree with the outstanding demand, you can file a reply with the Income Tax Department though. Your reply should explain why you disagree with the demand and provide any supporting evidence.

Analysis: Withholding of refund-

Following was mentioned in the Instruction No. 7/2022 dated 06.12.2022 on Section 241A which may continue to apply on the case at hand-

The ITBA- ITR Processing Instruction No. 5 dated 14.12.2018 provides that, if the amount of refund determined is more than Rs 2,000 and the case is under scrutiny, such case will be referred by CPC to the Assessing Officer through ITBA to take action on either to withhold or to release the refund through the ITR Processing Module.

2. The time limit for intimation of decision by the AOs to CPC (regarding whether refund is to be withheld or released) is not stipulated. It is therefore decided as under:

a. The time limit for submission of response from JAOs to CPC u/s 241A of the Act, shall be 50 days from the date of issue of notice u/s 143(2), or the date of processing, whichever is later.

b. In case of Faceless assessment, Faceless Assessing Officer (FAO) shall convey the decision to JAO within 40 days from the date of issue of notice u/s 143(2), or the date of processing, whichever is later and JAO shall ensure that the decision is submitted to CPC (through ITBA/ other system functionality such as BO portal/email, as applicable) within 10 days from the date of receipt of communication from FAO.

c. In case where the JAO communicates that the provisions of section 241A of the Act are NOT invoked, CPC will release the refund within 10 days from the date of receipt of such communication from JAO, subject to other provisions of the Act.

d. In case of non-submission of response by JAO within the time limit of 50 days, refunds due to the assessees shall be released by the CPC without further notice to FAO/JAO, subject to other provisions of the Act.

e. The monetary limit for withholding the refunds u/s 241A of the Act stands increased from Rs. 2000 to RS. 50,000.

3. This Instruction is applicable for the Returns of Income (ROIs) of AY 2022-23 onwards.