Waiting for income tax refund? You might not get it if tax department has sent you this notice

An individual may not get the income tax refund claimed while filing income tax return (ITR) if the income tax department has sent a tax notice under Section 245 of the Income Tax Act, 1961. This tax notice is sent to inform the individuals that the income tax department will not credit the tax refund amount (either fully or partially) and that it will set it off against the pending income tax liability from past years. An example of this is of an individual with an outstanding tax demand in AY 2002-03 and income tax refund in AY 2023-24 is being set off now.

The income tax department via its official account on X (formerly known as Twitter) said, “There are a few cases in which refunds are due to the taxpayer, but previous demands are outstanding. Section 245(1) of the Income-tax Act, 1961, mandates providing an opportunity to the taxpayer to make a representation before adjusting the refund against an existing demand. Accordingly, taxpayers with existing demand(s) in the previous years are being intimated of the same.”

If an individual has received an income tax notice under Section 245, then intimation will be sent to their registered email ID and SMS. One must log in to their income tax e-filing account to read the tax notice.

The income tax department can send a section 245 notice if the current year’s income tax refund is being set off against the past year’s outstanding tax liability. If the current year’s tax refund amount is more than the past year’s tax liability, then the balance refund (tax refund less of tax liability) amount will be credited to the bank account of the individual. If the past income tax liability is more than the tax refund amount in the current year, then the additional tax liability will be imposed by the tax department.

This must be paid by an individual before the due date mentioned in the notice to avoid further penalties. In case the individual was not eligible for income tax refund, then a section 245 tax notice would not been sent.

Two income tax notices
While filing ITR, an individual makes a claim for an income tax refund. After processing of the income tax return, the income tax department is required to send the intimation notice under Section 143 (1). The intimation notice will inform you that whether the income tax department has accepted your claim of the income tax refund.”An individual will get two notices from the income tax department. The first intimation notice will be under section 143 (1) specifying the tax refund amount. The second notice will be issued under section 245 mentioning that the tax refund amount cited in the first notice under section 143(1) is being set-off against past tax liability pertaining to a specifically mentioned assessment year. Usually, both the tax notices are sent immediately, one after the other. If there is an outstanding additional tax liability even after setting off of the current year’s tax refund with it, then another notice under section 156 will be sent. This third notice (if additional tax liability exists) will be a tax demand notice,” says Sujatha G, CA & President of Karnataka CA Association (KSCAA).

How to read section 245 income tax notice?

The tax notice is available on the individual’s account on the income tax e-filing portal. To read the notice, an individual will need to download it from the ITR e-filing portal. The tax notice is available in the ‘e-proceedings’ option under the ‘pending action’ tab.
After downloading the notice, an individual should check their name, PAN and other details to ensure that the notice is sent to them only and not somebody else. Tax experts say that when an individual has received a section 245 notice, one of the first things that he/she should do is check whether the correct PAN and assessment year was quoted in it or not.

The notice will inform an individual for which year the outstanding demand has been raised. Further, an annexure will be attached along with the tax notice. This annexure will inform the tax calculations made by the income tax department due to which additional tax demand has arisen.

Also read: What is the maximum time limit to send 6 different income tax notices.

What is the time limit to respond to section 245 income tax notice?

The time limit to respond to the income tax notice under section 245 would be mentioned in the notice itself. Generally, it is 21 days. “However, if the taxpayer fails to respond to the notice under section 245 within 21 days, the income tax department will automatically set off the tax refund against the outstanding demand,” says Dr Surana, founder, RSM India, a business consulting group.

How to respond to section 245 income tax notice online?

If an individual has received income tax notice under Section 245, then there are broadly two options:

  • ” Agree with outstanding demand
  • ” Disagree with demand (either in full or in part)

“If the taxpayer agrees with the demand, he can pay the demand amount. Once the response is submitted as “demand is correct”, then disagreement with the demand cannot be done later. Hence the taxpayer has to be careful in selecting the options. In case the taxpayer selects the option disagree with the demand (either in full or part), the reasons for disagreeing list will pop up. The taxpayer has to choose from the list of 11 options for disagreeing with the demand,” says Sujatha G.

“If the assessee either does not fully agree or partially agrees for adjustment, the matter shall be referred by central processing centre (CPC) immediately to the Assessing Officer (AO). The AO within 21 days from the date of such reference provide feedback to CPC as to whether the adjustment should be made or not, and in case of partial adjustment to be made then, amount of demand to be adjusted for each year needs to be specified,” says Surana.

“In case no feedback is received from the AO within 21 days, CPC shall either release the refund without adjustment, or adjust the refund to the extent of demands agreed for adjustment by the individual. Thus, the CPC shall not hold these refunds beyond the period of 21 days from the date of reference to the AO and shall release the same to the assessee, without delay. The Assessing Officers shall be held to be solely responsible for the effect of no response/ delays in response,” says Surana.

If the AO disagrees with the responses of the individual for the section 245 income tax notice, then feedback will be given by the AO to the CPC. This feedback will mention whether the adjustment (tax refund of the current year with past year’s tax liability) should be made or if any partial adjustment should be made, and also the amount of tax liability demand for each year (if any).

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