Section 245 set-off of refund against demand: the 30-day window and how to fight an outdated demand

You filed your ITR for FY 2024-25 (AY 2025-26) expecting a Rs 78,000 refund. Instead, on 12 May 2026, an intimation under Section 245 of the Income Tax Act 1961 lands in your inbox — the Centralised Processing Centre (CPC) proposes to set-off your refund against an outstanding demand of Rs 1.12 lakh from AY 2017-18, an assessment year you barely remember. You have 30 days. Do nothing and your refund disappears into a demand that may not even be valid any more. This guide walks through the statutory mechanism, the three response options on the e-filing portal, and the exact arithmetic of pushing back when the demand on record is stale, stayed, or already paid.

The Scenario

Picture a salaried professional in Bengaluru — gross income Rs 18.6 lakh for FY 2024-25, TDS deducted Rs 1.42 lakh, advance tax paid Rs 30,000, and a self-assessment top-up of Rs 8,000 filed alongside the return on 14 July 2025. The return is processed under Section 143(1) on 22 February 2026 and a refund of Rs 78,420 is determined. Before the refund is released, CPC throws up an intimation under Section 245 dated 11 May 2026 stating that an outstanding demand of Rs 1,12,300 exists for AY 2017-18 and proposes to adjust the entire Rs 78,420 against it, leaving a net payable of Rs 33,880.

The taxpayer's records show that the AY 2017-18 assessment was indeed contested at CIT(A) and the appeal effect order dated 09 January 2024 had reduced the demand to nil. But the Assessing Officer never uploaded the rectified figure to the demand register on the e-filing portal. This is a textbook Section 245 fight: the statute permits adjustment of "any amount remaining payable" — but if nothing is actually payable, the proposed set-off cannot stand. The 30-day window that began on 11 May 2026 closes on 10 June 2026. After that, the refund is gone and recovering it means filing a separate rectification request that can take 6 to 12 months.

Statutory Answer

Section 245 of the Income Tax Act 1961 reads, in operative part, that where a refund is found to be due to any person under any provision of the Act, the Assessing Officer or Commissioner may, in lieu of payment of the refund, set-off the amount to be refunded against the sum remaining payable under the Act, after giving an intimation in writing of the action proposed to be taken. The phrase "after giving an intimation in writing" is the taxpayer's lifeline — adjustment is not automatic, it is conditional on a prior notice and an opportunity to be heard. The Bombay High Court in Hindustan Unilever Ltd vs Deputy Commissioner of Income Tax (writ petition 2945 of 2014, judgement dated 25 March 2015) struck down an adjustment that was made without prior intimation, holding that Section 245 mandates a pre-decisional notice and a reasonable opportunity to respond.

The procedural rails are laid by Central Board of Direct Taxes (CBDT) Instruction No. 1914 dated 02 December 1993 and the Office Memorandum F. No. 404/72/93-ITCC dated 29 February 2016, modified on 31 July 2017 to address the standardised pre-deposit norm. When an appeal is pending before the Commissioner (Appeals), the CBDT permits stay of the balance demand on payment of 20 per cent of the disputed demand, provided the case does not fall in the exceptional list in para 4(B) of the OM (where higher pre-deposit may be insisted upon). If the assessee has paid 20 per cent and an appeal is pending, the Assessing Officer is administratively barred from coercive recovery — including refund adjustment under Section 245 — for the disputed portion.

On the e-filing portal at incometax.gov.in, the Section 245 intimation appears under the "Pending Actions > Response to Outstanding Demand" tab. The taxpayer is shown three radio buttons:

The "Disagree" route exposes a further drop-down with six grounds — demand paid, demand reduced by rectification under Section 154, demand reduced by appellate order, demand stayed by ITAT/High Court, return of income filed but not processed, and "other" (free text). Each ground requires uploading PDF evidence: the challan with CIN, the rectification order, the appellate order, or the stay order, as applicable.

Worked Resolution

Returning to the Bengaluru scenario — refund of Rs 78,420 for AY 2025-26 being adjusted against a Rs 1,12,300 demand for AY 2017-18 that should have been wiped by the 09 January 2024 appeal effect order. The arithmetic of doing nothing versus disputing the adjustment within 30 days plays out as follows:

The right move is to log in to the e-filing portal before 10 June 2026, choose "Disagree with Demand", select the ground "Demand reduced by appellate order", upload the CIT(A) appeal effect order dated 09 January 2024, and add a short narrative naming the appellate order's DIN. CPC routes the response to the jurisdictional Assessing Officer who is required to verify the demand register entry and either accept the disagreement (releasing the refund in full) or escalate with a counter-notice. The Delhi High Court in Court On Its Own Motion vs Union of India (writ petition civil no. 2659 of 2012, judgement dated 14 March 2013) issued a mandamus to the CBDT mandating that all uncommunicated demand entries be reconciled and that taxpayers cannot suffer for the Department's record-keeping lapses — a citation worth invoking in the narrative.

Three calculators on Oquilia help quantify the downstream impact. The income-tax calculator lets you re-verify the FY 2024-25 self-assessment figure that produced the original refund. The old-vs-new regime comparator is useful if the underlying dispute hinged on regime selection. The TDS calculator is the cross-check for whether any TDS credit was missed in the original assessment, a common reason demands inflate and then collapse on appeal. For capital-gain reinvestment disputes, the capital gains calculator confirms the exemption arithmetic. Related Oquilia analysis worth bookmarking: Section 87A rebate FY 2025-26 (the rebate is Rs 60,000 in the new regime when income is at or below Rs 12 lakh) and faceless assessment under Section 144B rights for the procedural parallel on time-bound responses.

FAQ

What happens if I miss the 30-day Section 245 response window entirely?

Once the 30-day window from the date of the Section 245 intimation expires without a response, CPC processes the adjustment automatically and the refund is set-off against the displayed demand. Recovery then requires a fresh rectification application under Section 154 (which must be filed within 4 years from the end of the financial year in which the order sought to be amended was passed, per Section 154(7)) or an appeal under Section 246A if the underlying assessment is still appealable. The CBDT helpline at 1800-103-0025 and the e-Nivaran grievance module on incometax.gov.in are also options for pushing CPC to reverse a wrongly adjusted refund.

Can CPC adjust refund against a demand that is under appeal at CIT(A)?

Per CBDT Office Memorandum dated 29 February 2016 (modified 31 July 2017), if the assessee has paid 20 per cent of the disputed demand and an appeal is pending before the Commissioner (Appeals), the balance demand is treated as stayed and is not available for refund adjustment under Section 245. The taxpayer must select "Disagree with Demand", upload the stay order or proof of 20 per cent pre-deposit, and the AO is administratively required to vacate the proposed set-off for the disputed portion.

Does the 30-day clock start from the email date or the portal upload date?

Section 245 itself is silent on the trigger. The standard CPC intimation states "30 days from the date of this notice" and the portal's "Response to Outstanding Demand" tile shows the deadline date explicitly. In practice, the email and portal upload happen on the same day; if they diverge, the later of the two dates governs, since the statutory requirement is "intimation in writing" and intimation is complete only when actually received. Keep screenshots of the inbox timestamp and the portal upload date.

Can I claim interest under Section 244A on the period the refund was wrongly held?

Yes. Section 244A(1)(a) provides interest at 0.5 per cent per month (or part of a month) on refunds arising out of excess TDS, advance tax, and self-assessment tax. When a refund is wrongly adjusted and subsequently released, interest accrues for the entire period of withholding — from the date the refund was first determined to the date of grant. The Supreme Court in CIT vs HEG Ltd (civil appeal 1235 of 2008, judgement dated 03 December 2009) confirmed that interest is payable on interest if the Department delays granting the refund after a successful challenge.

Does the Vivad se Vishwas 2024 scheme close out demands that could be Section 245 candidates?

The Direct Tax Vivad se Vishwas Scheme 2024 (operational from 01 October 2024) allows settlement of pending disputes by paying the disputed tax with reduced interest and waiver of penalty. Demands settled under the scheme are extinguished and cannot then be used as a basis for Section 245 adjustment. If you have settled an old dispute under VSV 2024, ensure that Form 5 (the conclusion certificate) is uploaded against the demand entry — CPC otherwise continues to show the original demand and may propose adjustment until the demand register is updated.

What if the demand on the portal is older than 7 years — is there a limitation?

There is no fixed statutory limitation on outstanding demand display, but the CBDT in its OM dated 29 February 2016 directed field officers to reconcile and either confirm or expunge demands older than 7 financial years where no recovery proceeding is alive. The Delhi High Court ruling in Court On Its Own Motion vs Union of India (writ petition civil no. 2659 of 2012, judgement dated 14 March 2013) requires the Department to issue a written notice before any uncommunicated demand is enforced. Cite this judgement in your Section 245 disagreement narrative if you are challenging an ancient demand that was never properly communicated.