Income Tax Notice Under Section 245 – Set-Off of Refund Against Outstanding Demand | N D Savla & Associates

Tax Advisory & Refund Protection

Income Tax Notice Under Section 245 — Set-Off of Refund Against Outstanding Demand

Q: What if my old demand is wrong or already paid?

Multiple remedies exist. Section 154 rectification is the cheapest route for mistakes apparent from the record — such as unprocessed TDS, ignored advance tax, or computational errors. Section 246A appeal to the Commissioner (Appeals) is the proper route for substantive disputes. Rectification applications can be filed in parallel with Section 245 disagreements.

Mandatory prior intimation. 30-day response window. Three e-Proceedings options. OM 20% recovery cap during appeal. Protect your refund from wrongful adjustment — and recover what was already taken.

Part of our Tax Advisory practice: Income Tax Notice Tax Health Check Notice Section 142(1) Defective Return 139(9)

Overview

What Is a Notice Under Section 245?

A notice under Section 245 of the Income-tax Act is the Department's formal intimation to set off a current-year refund against an outstanding demand from a prior year. Section 245 empowers the Assessing Officer, Deputy Commissioner, Commissioner, and higher officers to adjust the refund — wholly or partly — against tax remaining payable by the assessee under any provision of the Act. Every Section 245 notice is therefore a refund-recovery mechanism that requires careful response within the prescribed window.

      Section 245 makes prior written intimation mandatory — the AO cannot adjust the refund without giving notice and opportunity. Multiple High Court rulings have confirmed that adjustment without intimation is wholly illegal. Finance Act 2023 subsumed the earlier Section 241A withholding power into a unified Section 245 framework that now governs all refund-recovery actions.
    

N D Savla & Associates handles complete Section 245 advisory for individuals, businesses, professionals, HUFs, LLPs, and corporates across Maharashtra and pan-India. We analyse the underlying demand, file the appropriate e-Proceedings response, secure rectifications under Section 154, and challenge unlawful adjustments through writ proceedings where required. Our service connects with our Income Tax Notice, Tax Health Check, Notice Under Section 142(1), and Defective Return Advisory services.

Statutory Backbone & PAN-Level Safeguard

Section 245 is the foundational refund-set-off provision. The set-off applies only to demands against the same assessee — not to demands of related parties or different PANs. Our team verifies every demand against the correct PAN at the start of every engagement. PAN-level verification remains the first procedural check on every Section 245 notice.

Mandatory Prior Intimation — The Strongest Procedural Shield

Section 245 makes prior written intimation an absolute precondition. The AO must give intimation in writing of the proposed action before any adjustment takes place. High Courts have consistently held that this requirement is mandatory — not directory. The proceedings under Section 245 are quasi-judicial in nature giving the assessee a right to respond. Adjustment without intimation is a clear ground for writ petition — the prior-intimation safeguard remains the strongest procedural shield in every refund-protection engagement.

Finance Act 2023 — Subsuming Section 241A

Finance Act 2023 consolidated the refund withholding framework. The earlier Section 241A (covering withholding of refund where assessment was pending) has now been folded into Section 245. The unified Section 245 now covers both set-off against existing demand and withholding pending fresh assessment. Our Notice Under Section 142(1) engagements often coordinate with Section 245 responses where multiple proceedings overlap.

Common Triggers

When Does the Income-tax Department Issue a Section 245 Notice?

Several triggers prompt the Department to issue Section 245 notices. The most common triggers cluster around old assessment demands, CPC processing errors, and post-appellate updates. Understanding the typical triggers helps taxpayers respond appropriately.

Old Scrutiny & Section 143(3) Demands

Demands created during scrutiny under Section 143(3) or reassessment under Section 147 sit on the Department's books for years. The Department awaits an eligible refund to apply Section 245 against these older liabilities.

CPC Phantom Demands

CPC processing errors are a major source. TDS-income mismatches under Rule 37BA, denied deduction claims, and computational errors generate demands the taxpayer never expected — surfacing only when a fresh refund triggers the Section 245 check.

TDS Mismatches & Rule 37BA

TDS credit claimed but income not offered under Rule 37BA produces demands that look like under-payment. Form 26AS and AIS reconciliation usually resolves these.

Pre-Appellate-Effect Demands

CIT(A) and ITAT orders that uphold or partly modify original assessments produce updated demand figures. An old demand fully extinguished by an appellate order can wrongly persist on the Department's records.

Section 154 Rectification Outputs

Rectification orders can either reduce or sometimes increase the outstanding amount. Section 245 notices flow from the post-rectification demand position — making accurate Section 154 work upstream essential.

Interest Accumulation Under §220(2)

Section 220(2) interest at 1% per month accumulates on unpaid demands. Old principal plus accumulated interest can produce a substantial set-off — making every Section 245 notice a higher-stakes intervention than it first appears.

e-Proceedings Response

The Three Response Options on the e-Proceedings Portal

The e-Proceedings portal provides three distinct response options. Each option triggers different downstream procedures. Response-type selection is a strategic choice in every engagement — the option should be selected only after careful review of the underlying demand.

CHOICE A — AGREE

Demand Is Correct

The taxpayer accepts the adjustment. The refund flows against the demand and the remainder (if any) is released. Used only after confirming the underlying demand is genuinely owed.

CHOICE B — DISPUTE

Disagree With Demand (Full or Part)

The taxpayer contests with stated reasons — demand paid, demand reduced by rectification, appeal pending, or stay granted. Documentary backing required. Often filed alongside a Section 154 rectification application.

CHOICE C — HYBRID

Demand Is Not Correct But Agree for Adjustment

A hybrid option — used where the taxpayer believes the demand is wrong but accepts the adjustment to avoid prolonged dispute. Reasons are recorded for the file. Tactical choice in low-quantum or aged-demand cases.

Response Workflow

Section 245 Response Decision Tree

The flowchart below maps every decision point in a Section 245 response. From notice receipt to final outcome, every choice has consequences. This is the visual every client uses at engagement kickoff.

Refund computed for current AY — Department checks for outstanding demands

↓If demand found, Section 245 notice issued

Section 245 notice received on e-Proceedings portal — 30-day window starts

↓Review underlying demand details and history

Verify demand validity against Form 26AS, original ITR, appellate orders

↓Choose appropriate response on e-Proceedings

Choice A
Demand correct — refund adjusted; remainder paid

Choice B
Disagree (full / part) — file objections + supporting documents

Choice C
Wrong but agree — accepted with reasons noted

↓Department considers response and decides

✕ No response within 30 days — automatic adjustment with interest deduction

Time Limits

Time Limits, Approval, and the OM 20% Cap

Section 245 operates within specific time limits and approval frameworks. The response window, intimation requirement, and approval safeguards collectively protect taxpayer rights.

STANDARD WINDOW

30 days

From the date of intimation. Taxpayer can request extension where complex demand history needs investigation.

REDUCED WINDOW

15 days

Available only with prior approval of the Joint Commissioner. The reduction itself can be challenged in appropriate cases.

✓ The OM 20% Cap — Office Memorandum dated 29 February 2016 (amended 31 July 2017). CBDT capped recovery during CIT(A) pendency at 20% of disputed demand. This cap applies to all recovery actions including Section 245 adjustments. Courts have repeatedly cited this OM to set aside excessive Section 245 adjustments. The OM remains a powerful procedural tool against over-recovery — invoked in every case where the underlying demand is under appeal.

Reference Matrix

Key Procedural Features of Section 245 — Complete Reference

Every procedural feature, its statutory source, and the corresponding remedy. The matrix below is the reference our team uses at every Section 245 case briefing.

Feature	Description	Source	Remedy
Prior intimation	Mandatory written intimation before adjustment	Section 245	Writ petition
Response window	30 days from intimation date	Practice + AO discretion	Request extension
Reduced window	15 days with Joint CIT approval	Practice	Challenge reduction
Response options	Correct / Disagree (full or part) / Wrong but agree	e-Proceedings portal	e-File response
Interest on demand	1% per month on principal demand	Section 220(2)	Computation review
OM 20% cap	Recovery capped at 20% during CIT(A) pendency	OM 29/02/2016	Invoke OM
Underlying demand	Rectification or appeal against demand	Sections 154, 246A	Rectify / Appeal
Unlawful adjustment	Adjustment without intimation — quasi-judicial defect	Court rulings	Writ petition
Balance refund	Excess refund over demand released to taxpayer	Section 245	Released

Our Services

Our Section 245 Advisory Services

Our practice is refund-protection focused. We do not just respond to the notice — we verify the underlying demand, fix it where wrong, invoke every procedural safeguard, and recover refunds that have been wrongfully adjusted.

Section 245 Notice Analysis & Demand Verification

Every engagement begins with a forensic verification of the underlying demand. We trace the demand's origin — Section 143(3) scrutiny, Section 147 reassessment, CPC processing, Section 154 rectification, or appellate effect — and reconcile against Form 26AS, the original ITR, and every appellate order. PAN-level verification confirms the demand actually belongs to the assessee, not a related party.
Income-tax Act, 1961 – Section 245

e-Proceedings Three-Option Response Strategy

We select the right response option based on demand history. Choice A (Agree) only where the demand is genuinely owed. Choice B (Disagree) with full documentary backing — demand paid, rectified, appeal pending, or stay granted. Choice C (Wrong but agree) tactically in low-quantum or aged-demand cases. Each option is filed with supporting documentation to lock in the position.

Section 154 Rectification Applications

Section 154 is often the cheapest fix for incorrect demands. Classic Section 154 fixes include unprocessed TDS credit, ignored advance tax payments, and TDS-income reconciliation errors. We file rectification applications in parallel with Section 245 disagreements within the four-year window. Integrated rectification and response strategy delivers the cleanest outcome.
§154 – Mistake Apparent

Section 246A Appeals & OM 20% Cap Application

Demands arising from assessment orders are appealable to the Commissioner (Appeals) within 30 days under Section 246A. Once an appeal is pending, the OM dated 29 February 2016 caps Section 245 recovery at 20% of disputed demand. We coordinate parallel appellate proceedings with our Reassessment Defence team — well-timed appeals can protect the refund from excessive adjustment.
§246A + OM 29/02/2016

Writ Petitions for Unlawful Adjustments

Writ petitions remain available for clear procedural violations. Adjustments made without prior intimation under Section 245 constitute clear illegality. High Courts have consistently set aside such unlawful adjustments and ordered refund restitution. The writ remedy is also available where the AO ignores the 20% OM cap. We coordinate with counsel for every writ proceeding.

Refund Recovery & Section 220(2) Interest Review

Wrongfully adjusted refunds can be recovered. We file refund-restitution claims for amounts adjusted without intimation, review Section 220(2) interest computation at 1% per month for accuracy, and challenge cases where stale demands carry inflated accumulated interest. Recovery of wrongly-adjusted refund often runs alongside a writ challenge to the underlying adjustment.
§220(2) – Interest Review

Remedies

Challenging an Incorrect Section 245 Adjustment

Section 245 adjustments can be challenged where the underlying demand is incorrect. Taxpayers retain multiple remedies including rectification, appeal, and writ petition. No Section 245 notice should be accepted without substantive verification.

Section 154 Rectification Route

Section 154 rectification is often the cheapest fix. The AO can rectify mistakes apparent from the record under this section. The rectification application must be filed within four years from the order date. Classic Section 154 fixes include unprocessed TDS credit, ignored advance tax payments, and TDS-income reconciliation errors — filed in parallel with Section 245 disagreements.

Appeal Under Section 246A

Appeal under Section 246A is the proper route for substantive disputes. Demands arising from assessment orders are appealable to the Commissioner (Appeals) within 30 days. Once an appeal is pending, the OM 20% cap restricts Section 245 recovery. Our Reassessment Defence team coordinates parallel appellate proceedings — well-timed appeals can protect the refund from excessive adjustment.

Writ Petition for Unlawful Adjustments

Writ petitions remain available for clear procedural violations. Adjustments made without prior intimation under Section 245 constitute clear illegality. High Courts have consistently set aside such unlawful adjustments and ordered refund restitution. The writ remedy is also available where the AO ignores the 20% OM cap. Writ petitions remain a powerful last resort against procedural abuse.

⚠ Non-response consequences: Failing to respond within 30 days triggers automatic adjustment of the refund. Outstanding demand as on the cutoff date is deducted from the refund without further confirmation. Section 220(2) interest at 1% per month also gets deducted. The balance refund (if any) is then released. Persistent non-response may attract attachment proceedings under Section 222.

FAQ

Frequently Asked Questions — Section 245

Q1What is a notice under Section 245 of the Income-tax Act?

A notice under Section 245 is the Department's formal intimation to set off your current-year refund against an outstanding demand from a prior year. The section empowers the Assessing Officer to adjust any refund — wholly or partly — against tax remaining payable under any provision of the Act. Prior written intimation is mandatory before any adjustment. The notice is delivered via the e-Proceedings portal and registered email. Our Income Tax Notice practice handles every aspect of Section 245 defence and refund protection.

Q2How much time do I have to respond to a Section 245 notice?

Section 245 prescribes a 30-day response window from the date of intimation. This is the standard window applied across most cases. The AO can reduce the window to 15 days with prior approval of the Joint Commissioner. Taxpayers can request extensions where complex demand history needs investigation. Failure to respond within the window means automatic adjustment with interest deduction — prompt action remains essential for refund protection.

Q3What are the three response options on e-Proceedings?

The e-Proceedings portal provides three distinct response options. 'Demand is correct' means the taxpayer accepts the adjustment and the refund flows against the demand. 'Disagree with demand (either in full or part)' allows the taxpayer to contest with stated reasons such as demand paid, demand reduced by rectification, appeal pending, or stay granted. 'Demand is not correct but agree for adjustment' is a hybrid option — used where the demand is wrong but adjustment is accepted to avoid further disputes. Response-type selection is a strategic choice in every engagement.

Q4Can the Department adjust my refund without giving Section 245 intimation?

No. Prior written intimation is mandatory under Section 245. Multiple High Court rulings have confirmed that adjustment without intimation is wholly illegal. The proceedings under Section 245 are quasi-judicial in nature giving the assessee a right to be heard. Where unlawful adjustment has happened, writ petitions can be filed seeking refund restitution — courts have consistently ordered refund of unlawfully adjusted amounts. The prior-intimation safeguard remains the strongest procedural shield.

Q5What if my old demand is wrong or already paid?

Multiple remedies exist for incorrect or duplicate demands. Section 154 rectification is the cheapest route for mistakes apparent from the record — such as unprocessed TDS, ignored advance tax, or computational errors. Section 246A appeal to the Commissioner (Appeals) is the proper route for substantive disputes. Our team files rectification applications in parallel with Section 245 disagreements. Our Tax Health Check engagement audits old demands proactively — addressing the underlying demand is often more valuable than the Section 245 response itself.

Q6Is there protection against excessive Section 245 recovery during appeal?

Yes. CBDT Office Memorandum dated 29 February 2016 (as amended on 31 July 2017) caps recovery during CIT(A) pendency at 20% of disputed demand. This cap applies to all recovery actions including Section 245 adjustments. Courts have repeatedly cited this OM to set aside excessive Section 245 adjustments. Our Reassessment Defence team invokes the OM in every case where the underlying demand is under appeal — the OM remains a powerful procedural tool against over-recovery.

Q7What happens if I do not respond to a Section 245 notice?

Non-response triggers automatic adjustment of the refund. The outstanding demand as on the cutoff date will be deducted from the refund without further confirmation. Interest accrues on the demand under Section 220(2) at 1% per month — this interest also gets deducted from the refund. The balance refund (if any) is then released to the taxpayer. Persistent non-response may attract attachment proceedings under Section 222. Every Section 245 notice deserves immediate professional response — our Defective Return Advisory team handles parallel cures where defects need addressing.

Related Services

Our Broader Tax Advisory & Refund Protection Practice

Section 245 advisory is most effective when integrated with the broader compliance and litigation defence picture. Our complete Tax Advisory practice covers:

Income Tax NoticeEnd-to-end defence for every category of income tax notice — assessment, scrutiny, reassessment, and refund-recovery.

Tax Health CheckProactive audit of old demands, Form 26AS and AIS reconciliation before refund issuance.

Notice Under Section 142(1)Inquiry before assessment — coordinated response where Section 245 overlaps with pending assessment.

Notice Under Section 147Reassessment defence — addressing demands arising from reopened proceedings.

Defective Return Section 139(9)Cure procedural defects within the 15-day window — often the root cause of CPC phantom demands.

Reassessment Defence (Form-146)Section 147 / 148 / 148A defence and Section 246A appellate coordination.

Business Tax FilingComplete ITR preparation with pre-filing reconciliation to prevent phantom demands.

Audits Under Income-tax ActSection 44AB tax audit coordination and Form 3CA / 3CB / 3CD preparation.

Expatriate TaxationSchedule FA disclosure, residency analysis, and DTAA-based refund claims.

Form 24Q TDS ComplianceSalary TDS return preparation — preventing TDS-income mismatch at source.

Notice Section 131(1A)Investigation Wing summons defence — often runs parallel to refund proceedings.

15CA / 15CB FilingForeign remittance compliance — preventing TDS mismatches on cross-border flows.