How to Reply to Section 245 Intimation: Refund Adjustment & Defense Guide

One of the most frustrating experiences for a taxpayer is receiving an email stating that an Income Tax Refund has been successfully computed and approved for the current Assessment Year, followed immediately by an intimation under Section 245 of the Income-tax Act, 1961 proposing to adjust that entire refund against an alleged legacy tax demand from 5, 8, or even 12 years ago.

In millions of cases across India, these historical demands are entirely bogus—originating from uncredited TDS, clerical data-entry errors by legacy assessing officers, missing challan entries (CIN/BSR code mismatches), or forgotten CPC processing errors where rectification applications were never disposed of.

Under Section 245(1), the department is legally barred from seizing your refund without first giving you written intimation and affording you a statutory 30-day window to object. If you fail to submit a timely objection on the e-filing portal, the Centralized Processing Centre (CPC) automated algorithm will mechanically offset your hard-earned refund, leaving you with months of grueling litigation to recover your money.

This guide breaks down the verbatim statutory provisions of Section 245, decodes the response options under Pending Actions > Response to Outstanding Demand, and provides established High Court jurisprudence to prevent illegal refund seizures.

Statutory Authority Block: Verbatim Law

To defend your refund legally, review the governing statutory provisions from the official Income-tax Act, 1961:

Section 245 of the Income-tax Act, 1961: Set-off and Withholding of Refund

*"Section 245(1): Where under any of the provisions of this Act, a refund is found to be due to any person, the Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals) or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part thereof, 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.

Section 245(2): Where a part of the refund has been set off under sub-section (1) or where no 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 such case, is of the opinion that 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 Commissioner, as the case may be, withhold the refund up to the date on which such assessment or reassessment is made."

Why Legacy Demands Appear: Unmasking Bogus Portal Liabilities

Before submitting your portal response, understand where these phantom demands originate:

1. Uncredited TDS (Form 26AS Mismatch): Your employer, bank, or customer deducted tax and issued Form 16/16A, but deposited it under an incorrect PAN or delayed filing quarterly Form 24Q/26Q. The CPC software disallowed TDS credit, creating an artificial demand.
2. Missing Advance Tax / Self-Assessment Challan Credit: You paid tax via challan ITNS-280, but the BSR code, challan serial number, or date was mistyped in the ITR schedule, causing the system to ignore the payment.
3. Pending Section 154 Rectification Application: You filed an online rectification years ago to correct a computational slip, but the jurisdictional AO never passed the rectification order. The legacy software continued carrying the demand forward indefinitely.
4. Appeals Pending with Valid Stay Orders: You filed an appeal before the CIT(Appeals) or ITAT and obtained a formal stay order or deposited 20% under CBDT Office Memorandums. Despite the stay, the CPC automated database continued flagging the liability as an active recovery item.

Decoded: The Four Response Pathways on the e-Filing Portal

When you log into the Income Tax portal under Pending Actions > Response to Outstanding Demand, you will see the disputed demand amount alongside four statutory response buttons:

1. "Demand is Correct"

• When to select: Only if you agree that the tax was genuinely unpaid, and you wish to allow CPC to adjust your refund to extinguish the old liability permanently.
• Result: The system adjusts the refund, issues the net balance (if any) to your bank account, and marks the past demand as settled.

2. "Demand is Partially Correct"

• When to select: When part of the demand is legitimate (e.g., self-assessment tax of Rs. 10,000 was indeed short-paid), but the remainder consists of incorrect interest under Section 234B or disputed additions.
• Action: Enter the undisputed amount to be adjusted, and provide detailed grounds for the disputed balance.

3. "Disagree with Demand"

• When to select: When the entire demand is erroneous, already paid, stayed, or legally untenable.
• Available Grounds in Portal Dropdown:
  • Demand has already been paid: Provide BSR code, Challan Date, Challan Serial Number, and Amount Paid.
  • Demand has been stayed by an appellate authority: Upload the interim stay order passed by CIT(Appeals), ITAT, or High Court.
  • Rectification application filed under Section 154: Enter the rectification filing date and acknowledgement number.
  • Appeal has been filed (Form 35 / Form 36): Provide appeal filing acknowledgement number and date.
  • Demand was raised without serving Assessment Order: Cite lack of statutory notice/intimation.

Step-by-Step Portal Defense: How to File Section 245 Objection

Never ignore the 30-day statutory window. Execute your objection online:

1. Log in: Access incometax.gov.in with your PAN and password.
2. Navigate to Demands: Go to Pending Actions > Response to Outstanding Demand.
3. Inspect Outstanding Demand: Review the Assessment Year, Section under which demand was raised (e.g., 143(1)(a), 143(3), or 147), Outstanding Demand Amount, and Rectification Rights.
4. Click "Submit Response": Choose Disagree with Demand or Demand is Partially Correct.
5. Select Specific Reason: Choose the exact legal category from the dropdown menu (e.g., Demand has already been paid / Challan details).
6. Upload Documentary Proof:
   • For paid demands: Upload scanned copies of the stamped bank challan ITNS-280.
   • For TDS disallowances: Upload Form 16, Form 16A, and employer/deductor confirmation letters.
   • For stayed matters: Upload the formal Stay Petition order or copy of Form 35 appeal receipt.
7. Submit and Verify: Authenticate via Aadhaar OTP (EVC) or DSC. Download the generated Acknowledgement PDF.
8. File Parallel Grievance on CPGRAMS / e-Nivaran: To prevent the jurisdictional AO from sitting on the objection, immediately lodge a parallel grievance under e-Nivaran referencing the Section 245 response acknowledgement.

Landmark High Court Jurisprudence on Section 245

The Indian judiciary has repeatedly condemned the tax department's arbitrary use of Section 245 to seize refunds:

1. Mandatory Opportunity of Hearing Prior to Set-Off: Delhi High Court

In Glaxo Smith Kline Asia (P.) Ltd. v. CIT, the Hon'ble Delhi High Court ruled that the power under Section 245 is discretionary and cannot be exercised mechanically. The department must give meaningful notice and judicially consider the taxpayer's objections before setting off refunds.

2. Refund Cannot Be Adjusted While Rectification is Pending: Delhi High Court

In Maruti Suzuki India Ltd. v. DCIT, the High Court severely reprimanded the department for adjusting approved refunds against outstanding demands when the assessee had already pointed out apparent mistakes and filed rectification applications under Section 154. The court ordered immediate release of the refund along with statutory interest under Section 244A.

3. Automatic Set-Off Without Written Intimation is Illegal: Bombay High Court

In Avenue Supermarts Ltd. (DMart) v. DCIT, the Bombay High Court held that any adjustment of refund effected without serving prior statutory intimation under Section 245(1) violates principles of natural justice and is null and void in the eyes of law.

Golden Rules for Protecting Your Tax Refund

• Act Within 30 Days: Once 30 days lapse from the date of the Section 245 email, the system automatically marks the demand as undisputed and processes the offset.
• Check Form 26AS for Challan Mismatches: If you paid advance tax years ago that was never credited, check your AIS and OLTAS payment records to trace the missing BSR code.
• Demand Statutory Interest under Section 244A: When your refund is wrongfully delayed or withheld, ensure that the department pays statutory interest at the rate of 0.5% per month or part thereof under Section 244A from the 1st of April of the assessment year until the date of actual refund disbursement.

If you have received an intimation under Section 245 or have legacy demands blocking significant tax refunds, connect with our direct tax dispute team for expedited rectification and portal stay filing.