Process of Adjustment of I-Tax refund against Tax demand
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What is the process of Adjustment of income tax refund against Income tax demand?
- Adjusting an income tax refund against a Income tax demand occurs when the tax authorities set off any tax refund due to a taxpayer against the Income tax liabilities or Income demands that the taxpayer owes.
- Section 245(1) of the Income-tax Act, 1961, indeed mandates that taxpayers be given an opportunity to make a representation before their refund is adjusted against an existing demand. This provision ensures that taxpayers have a chance to voice their agreement, disagreement, or provide clarification regarding the status of the demand against which the refund is proposed to be adjusted.
- It’s commendable that taxpayers with existing demands from previous years are being intimated about this process. This initiative aligns with the principles of natural justice, ensuring that taxpayers have a fair opportunity to address any discrepancies or concerns regarding their tax liabilities and refunds.
- By providing taxpayers with the opportunity to respond to such intimations, the tax authorities aim to facilitate the cleanup and reconciliation of pending demands. This proactive approach not only promotes transparency and accountability but also helps expedite the issuance of refunds, thereby enhancing the overall taxpayer experience.
- Taxpayers are encouraged to avail themselves of this opportunity and respond to the intimations promptly. By doing so, they can actively participate in the resolution process, ensuring that their tax affairs are accurately accounted for and that refunds are issued in a timely manner.
Normal Process of adjustment of Tax refund against demand before Income Tax Amendments by Finance Act 2023:
The process and regulations regarding the adjustment of income tax refunds against outstanding tax demands are outlined in sections 245, 241A, and 244A of the Income Tax Act.
- Income tax authorities identify any outstanding tax demands against the taxpayer. This could be due to Previous assessments resulting in additional tax liability. Discrepancies or underreporting found in past returns. Penalties or interest levied for late payments or filing.
- The taxpayer is usually informed about the outstanding demand: The Income tax authorities issue a notice of demand. The taxpayer is given details of the demand and is asked to pay the amount due.
- Tax return is processed, and a income tax refund is calculated based on the excess tax paid over the actual tax liability. The income tax refund becomes due to the taxpayer.
- When there is an outstanding demand: The tax authorities can adjust the income tax refund against the demand. The taxpayer is notified about this adjustment. This notification typically includes details such as the amount of the refund adjusted against the demand and the remaining balance, if any.
- The taxpayer receives an intimation under the appropriate section of the Income Tax Act, this intimation outlines the amount of income tax refund adjusted against the demand. If the entire Income tax refund is adjusted and a balance demand still remains, the Income taxpayer is informed about the remaining payable amount. In case the refund exceeds the demand, the remaining income tax refund amount is credited to the taxpayer’s account.
- If the taxpayer disputes the demand or the adjustment – Income tax payer can file rectification or Appeal – The Income taxpayer can file a rectification request if there is a mistake apparent from the record. The taxpayer can appeal against the demand if they believe it is incorrect or unjustified.
Section 245 – Adjustment of Refund Against Demand:
- The Income Tax Department is required to send an intimation to the taxpayer before making any adjustment. This intimation will detail the amount of refund due, the outstanding tax demand, and the proposed adjustment.
- Taxpayers are given 30 days to respond to the intimation, either agreeing or disagreeing with the proposed adjustment.
- If the taxpayer agrees, the department will adjust the refund against the demand and issue any remaining balance to the taxpayer.
- In case the taxpayer disagrees, the department will review the claim. If the Assessing Officer finds the taxpayer’s claim untrue based on available information and the explanation provided, the department may still proceed with the adjustment.
Section 241A – Withholding Refunds (Before FY 2023-24):
- Before FY 2023-24, Section 241A empowered the Assessing Officer to withhold refunds due to an assessee if assessment or reassessment proceedings were pending, provided this was believed to adversely affect government revenue.
- Such withholding required prior approval from the Principal Commissioner or Commissioner.
- This provision applied to assessment years on or after 2017-18.
Process of Adjustment of income tax refund against demand- after the Income Tax Amendments by Finance Act 2023:
Income Tax Amendments by Finance Act 2023:
- The Finance Act 2023 merged Section 241A with Section 245, updating the procedures accordingly.
- Now, if a refund becomes due while assessment/reassessment proceedings are pending, the Assessing Officer can withhold the refund until these proceedings are completed, with the necessary approval from the Principal Commissioner or Commissioner.
- This provision covers situations where either part of the refund has been set off or no amount has been set off.
Section 244A – Interest on Income Tax Refund:
- An amendment to Section 244A specifies that no interest on income tax refunds will be given for the period during which the refund is withheld until the assessment/reassessment is completed.
Provisions of Sections 245, 241A, and 244A of the Income Tax Act ensure that Income tax taxpayers are notified and given a chance to respond before any adjustments are made to their refunds. They also provide the tax authorities the ability to withhold refunds in certain circumstances to protect government revenue, with clear guidelines and necessary approvals to safeguard taxpayers’ rights.
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