Section 245: When IT Department adjusts refund against past-year outstanding demand

You filed your ITR for AY 2025-26 on 18 July 2025, claimed a refund of Rs 47,300, and waited. On 14 May 2026 the income-tax portal flashed a yellow banner — "Intimation under Section 245: Proposed adjustment against outstanding demand of AY 2018-19." The amount: Rs 32,500. The cause: a long-forgotten Section 143(1) intimation from 2019, plus 84 months of interest under Section 220(2) at 1% per month. This guide covers what Section 245 of the Income Tax Act 1961 lets CPC Bengaluru do, the 21-day window to push back, and the four response options on the portal that decide whether the refund lands in full, partly, or not at all.

The Scenario

The fact pattern is common enough that CPC processes thousands of Section 245 intimations every refund cycle. Take a typical salaried reader: gross salary Rs 14.8 lakh for FY 2025-26, TDS of Rs 1,42,500 deducted across 12 months, ITR-1 filed in the new regime on 18 July 2025. The arithmetic on filing shows tax payable of Rs 95,200 (after the Rs 60,000 Section 87A rebate, which now applies up to total income of Rs 12 lakh per the Finance Act 2025 amendment effective 1 April 2025) and a refund of Rs 47,300.

Three weeks after e-verification, the status moves from "Return Processed" to "Refund Adjusted in Part". The reason: an AY 2018-19 demand of Rs 18,750 (principal) raised by Section 143(1) intimation dated 7 March 2019, on which Section 220(2) interest has accrued since 7 April 2019. As of 14 May 2026 the demand reads Rs 18,750 + Rs 13,750 interest = Rs 32,500. CPC proposes to set this off and release the balance Rs 14,800. The reader's question: is this lawful, and what can be done in the next 21 days?

Statutory Answer

Section 245 of the Income Tax Act 1961 (titled "Set off of refunds against tax remaining payable") gives the Assessing Officer, Commissioner, Principal Commissioner, or the prescribed income-tax authority a discretionary power to adjust any refund due to a taxpayer against any amount of tax remaining payable by that taxpayer under the Act. The provision was last amended by the Finance Act 2023 (effective 1 April 2023) to formalise the role of the prescribed authority — in practice CPC Bengaluru, notified under the Centralised Processing of Returns Scheme 2011. The full bare text is available on indiacode.nic.in (Income Tax Act 1961, Section 245).

The critical procedural safeguard sits in the proviso: the set-off may be made "after giving an intimation in writing to such person of the action proposed to be taken under this section". The Delhi High Court in Court On Its Own Motion v. Union of India (W.P. (C) 2659/2012, judgement dated 14 March 2013) held that any adjustment without prior intimation is illegal and must be reversed with interest under Section 244A — the order led directly to the current CPC workflow that mandates a 21-day notice window. CBDT Instruction No. 1/2023 dated 13 February 2023 further codified the response timelines.

The four response options on the portal map directly to the assessee's litigation posture on the old demand. The Income Tax Department's "Response to Outstanding Demand" user manual at incometax.gov.in lists them as: (a) Demand is Correct, (b) Disagree with Demand (Either in Full or Part), (c) Demand is Partially Correct, and (d) Demand is Not Correct but Agree for Adjustment. Each option triggers a different downstream workflow, and selecting the wrong one can hard-code an erroneous demand into your record for the next four assessment years.

Worked Resolution

Using the salary numbers above — gross Rs 14.8 lakh, TDS Rs 1,42,500, AY 2025-26 refund Rs 47,300, old AY 2018-19 demand Rs 32,500 — the workflow runs as follows. Log in to incometax.gov.in with the PAN-based user ID. Navigate to Pending Actions → Response to Outstanding Demand. The portal will list every open demand by AY, DIN (Document Identification Number), section under which it was raised, original amount, interest accrued under Section 220(2), and the date the demand was first issued.

For the AY 2018-19 entry, click "Submit Response" and pick one of the four options. The decision tree depends entirely on whether the original Section 143(1) intimation from 7 March 2019 was correct. If you pulled Form 26AS for FY 2017-18 and found that the demand arose because Rs 18,750 of TDS deducted by your then employer was reported to a different PAN (a common cause), the demand is wrong and you should mark "Disagree with Demand". Use our Form 26AS reconciliation guide to pull the correct AY records before responding. If the demand was real but you have since filed an appeal before CIT(A) and obtained stay under Section 220(6), pick the same "Disagree" option and attach the stay order copy along with the appeal acknowledgement number.

The optimal move depends on documentation. If the AIS (Annual Information Statement) for FY 2017-18 still shows the missing TDS credit, file a Form 26B correction through the deductor, then mark "Disagree with Demand" referencing the correction. If the deductor has shut shop, file a Section 154 rectification citing the Bombay High Court ruling in Sanchit Balkrishna Zaveri (WP 1750/2019, judgement dated 10 February 2020) that excess TDS in 26AS cannot be denied on technical grounds. The 21-day clock runs in calendar days from the date the Section 245 intimation lands in your registered e-mail, per the General Clauses Act 1897.

Ignore the intimation and the adjustment is processed on day 22, with the net Rs 14,800 credited to the pre-validated bank account. Reversal then requires a Section 154 rectification within 4 years from end of the FY of the adjustment order per Section 154(7). Use our income tax calculator to verify what the AY 2025-26 refund should have been — any material discrepancy with the CPC intimation is itself grounds for "Disagree". The old vs new regime comparator confirms the underlying refund maths, and the TDS calculator helps reconstruct deductor reporting in employer-change years.

FAQ

What if I miss the 21-day Section 245 response window entirely?

The CPC processes the adjustment on day 22 and your refund is credited net of the demand. To reverse it, you must file a rectification application under Section 154 within four years from the end of the financial year in which the adjustment intimation was passed — so a 14 May 2026 adjustment can be rectified up to 31 March 2031. After that the demand is final and the only remaining route is a revision petition under Section 264 before the Principal Commissioner, with a 1-year limitation period per Section 264(3).

Can CPC adjust a refund against a demand that is under appeal?

Yes, unless you have obtained a stay order. The Bombay High Court in Maharashtra State Co-operative Bank Ltd. (ITA No. 1024 of 2014, judgement dated 7 September 2017) confirmed that mere filing of appeal does not stop adjustment under Section 245. You must apply for stay under Section 220(6) before the Assessing Officer and pay 20% of the disputed demand per CBDT Office Memorandum No. F.No. 404/72/93-ITCC dated 29 February 2016 (revised 31 July 2017). Once stay is granted, mark "Disagree with Demand" on the portal and attach the stay order.

Does the 21-day window apply to refund adjustments against current-year self-assessment tax dues?

No. Section 245 only applies to adjustments against demands of "other years". If you have a self-assessment tax shortfall for the same AY as the refund, the CPC will net the two at the time of intimation under Section 143(1) without a separate Section 245 notice. The credit set-off is automatic and final on processing of the return.

What interest do I get if the Section 245 adjustment is later reversed in my favour?

Section 244A(1)(a) entitles you to interest at 0.5% per month on the wrongly adjusted refund, calculated from 1 April of the assessment year to the date the refund is granted. If the original adjustment was made on 14 May 2026 and the AO accepts your "Disagree" response on 10 November 2026 with a corrected refund order, you earn interest for the period 1 April 2026 to 10 November 2026 — roughly seven months. The interest itself is taxable as "income from other sources" in the year it is received.

Can the IT Department adjust my refund against my spouse's outstanding demand?

No. Section 245 is strictly person-specific — the refund of one PAN cannot be adjusted against a demand raised against another PAN, even if the two assessees are spouses, partners, or directors of the same company. Any such adjustment is void ab initio and can be challenged by a simple letter to the Assessing Officer plus a "Disagree" response on the portal. This was confirmed by the Madras High Court in S. Subramanian v. Income-tax Officer (Writ Petition No. 31657 of 2016, judgement dated 22 December 2016).

Does Section 245 apply to TDS refunds claimed in ITR by an NRI?

Yes, identically. A non-resident filing ITR-2 to claim refund of excess TDS deducted under Section 195 on rental income or capital gains is subject to the same adjustment workflow if there is any outstanding demand on the PAN — including demands from years when the assessee was resident. The portal response panel works the same way; only the bank account validation for refund credit must be NRO-account-validated through the pre-validation flow on incometax.gov.in.

What if I receive multiple Section 245 intimations covering several past AYs at once?

Each intimation must be responded to separately on the portal — there is no bulk-response facility as of the AY 2025-26 cycle. Each demand has its own DIN and its own 21-day clock starting from the date of its specific intimation. Prioritise the largest demands first, but do not let any single 21-day window lapse. The CPC may also issue a consolidated intimation listing all outstanding demands; in that case the 21 days runs from the consolidated intimation date for all listed demands.