How to handle tax notice under Section 245

If the refund is wrongly adjusted against any past tax liability, immediately clarify it online

Even if an individual has diligently filed returns and declared everything, the first thing that a taxpayer thinks on receiving an income tax (I-T) notice is whether he or she has got on the wrong side of the law, unknowingly.

Take Sandhya S, who received a letter from the I-T department. It mentioned her assessment for the financial year 2014-15 is completed. But it had a note that her refund is adjusted against outstanding tax liability that she had five years back.

But she recalled that the I-T department had earlier intimated her that there was an outstanding demand for the same year but she had already filed an application for rectification for the specific year.

While a letter from the I-T department is always dreaded by most taxpayers, the inability to take immediate action can lead to a greater loss. The most common notice is the intimation that Sandhya received, which set off her refund against past outstanding tax. In case you receive a similar letter, don’t worry. A few checks can help you tide over it easily.

Intimation under Section 245

This intimation is received when the I-T department feels there’s an outstanding demand from earlier years and you claim a refund in some other assessment year. The Section 245 of the Income Tax Act empowers the assessing officer to adjust refund (or a part of refund) against any tax demand which is outstanding from the tax payer.

Individual taxpayers tend to look at the income tax return for a single year in isolation but this is not the manner in which things work. When a person files tax returns year after  year, he creates a string of record. If there is some tax that has to be paid for any specific year in the past, then the income tax department can set it off against refunds.

There are some conditions that assessing officers need to fulfil when making such adjustments. They need to intimate the taxpayer of the adjustment and allow them a chance to put forward their views, in case they believe it’s not correct. But the taxpayer needs to take the necessary action in time.

First step: Check the demand

On receiving this intimation, the taxpayer should first refer to the past records and verify if the demand is correct. Collect all the details you have pertaining to the year where the I-T department claims you have an outstanding. Calculate the actual tax payable and paid. Check if you have disputed any outstanding demand in that year and if any action was taken against it.

There is also a possibility that a person had filed for a rectification due to an error and it was not processed. A person also needs to check whether the outstanding shown is correct or it’s lower, according to their calculations.

Second step: Answer online

Most of I-T processes are online like filing of returns. A taxpayer also has the option of logging online onto their online tax filing account and reply to the notice sent. Log on to www.incometaxindiaefiling.gov.in. Go to the tab named e-File and click on ‘Response to Outstanding Tax Demand’.

Here you can view the details of the demand and also submit a response if you believe ‘demand is correct’ or ‘demand is partially incorrect’ or if you ‘disagree with the demand’. In case you don’t see the ‘submit’ option; it means the demand has already been finalised by your Assessing Officer.

But if you have to the option to reply to the notice, it means the final adjustment has not been made yet. Usually, the taxpayer can respond to the notice within one month from receiving it, and therefore one must always act fast on such notices.

If the demand is correct, select the option ‘demand is correct’. The I-T department will adjust the amount. But there is a possibility that the demand, according to the taxpayer, is ‘partially incorrect’. In this situation the taxpayer needs to give details on why he/she things that it’s only partially correct. You have to specify the reasons for it.

The third situation is where you ‘disagree with the demand’. It’s usually happens when the department has not considered the tax deduction at source (TDS) or the figures taken by the assessing officer are wrong. You should say that you don’t agree with the demand and give reasons for it. Such a situation where the TDS is not considered is not uncommon.

Wait for the decision

Once replied, the taxpayer has to wait for the action taken by the I-T department. Usually, the Assessing Officer examines the reply and communicates his findings to the CPC, Bengaluru, which will then process the refund and adjust the demand, if any. Irrespective of the outcome it is essential that the person needs to point out any discrepancy they see in the tax notices they receive.

And in case you don’t understand the demand, take help of chartered accountant before submitting a reply.

Action plan

• I-T department can adjust past outstanding against refund
• They need to send an intimation mandatorily
• Retrieve the past record and verify the amount
• Log on to www.incometaxindiaefiling.gov.in to reply
• Taxpayers get three options — ‘demand is correct’, ‘demand is partially incorrect’ and ‘disagree with the demand’
• Take suitable action within stipulated period
• Don’t leave any intimation unanswered

Arnav Pandya is a certified financial planner

Illustration: Uttam Ghosh/Rediff.com