How outstanding demand of previous year are settled with this year refund?

What is section 245?

Section 245 gives powers to the Income Tax Department to adjust any previous year's demand of tax payable with the current year's refund. But to exercise this power, it's mandatory on their part to send intimation u/s 245 to the taxpayers and give them opportunity to submit their response on it whether they agree with it or not.

In other words, if you owe income tax department, then they will adjust the amount you owed in the current year's refund. But before adjusting that amount they will send you a notice u/s 245, stating that they are adjusting your refund with the previous years outstanding amount. You have to submit your response on it that whether you agree with department or not.

NOTE: The outstanding amount will be adjusted when refund is generated. That means even if the refund generated after 5 years, the refund will be adjusted then.

To understand this better let's take an example:

Mr. Sharma filed his return for F.Y. 2012-13. But income tax department had raised a demand for tax of Rs 21,000 on him. Mr. Sharma did not agree with the demand as the department did not consider his TDS. So, he simply filed for rectification u/s 154 for it and lived peacefully thereafter.
Then came F.Y. 2016-17, like every year Mr. Sharma filed his return, but this time he claimed a refund of Rs. 15,000. But instead of getting refund, he got an intimation from the Income Tax Department u/s 245 stating that his refund of Rs 15,000 will be adjusted with the demand raised by the department in the F.Y. 2012-13.
Now in this case apparently, Income Tax Department did not agree with the rectification u/s 154 at that time, and the demand raised still remained.

So then what to do when you receive an intimation u/s 245?

Well in such case, first thing is to stay calm and read all the details along with the time mentioned within which you can take any action (generally it's 30 days). If you do not take any action till the date mentioned then outstanding demand will be adjusted against your refund.

After reading and analyzing the notice, there can be many possibilities namely, either you agree to the outstanding demand or you don't or you agree partially or you don't agree with demand but still agree with the adjustment.

Let us discuss them all in detail :

• If you agree with the outstanding Demand:
  Well in such case, you have to login to the income tax department website with your user id and password.Then follow the process given below-
  
  Even if you do not take any action within the provided time, then the demand will automatically be adjusted with your refund.
• If you partially / fully disagree with the outstanding Demand:
  If you feel that outstanding demand is partially or fully incorrect then you have to login to https://www.incometax.gov.in/iec/foportal/ with your user id and password. Then follow the process given below-
  a) In partially incorrect, enter both the amounts i.e. partially correct and incorrect in their respective fields along with it, attach the documents.
  b) In fully incorrect, you have to give the detailed reason for disagreeing and also you have to attach documents that supports your argument. This will then be reviewed by Income Tax department.
  In these cases, you'll have to also submit the reasons for our partial/full disagreement with the demand like Demand Paid, Demand already reduced by rectification/revision, Appeal has been filed, others etc.
  This is all you have to do, now its upto the department that whether it agrees to your reason or not.
• If you opt with the option that Demand is not correct but agree for adjustment :
  If assessee selects Demand is not correct but agree for adjustment, then assessee must furnish the details for disagreement along with reasons. Reasons are same as provided under Demand is not correct but agree for adjustment.
  ADVICE: Before taking any action it is advisable to take help of Chartered Accountant.
  Click here for our services.
  Now, Here's a step by step look of how you will submit the response to the Outstanding Demand:

Step-1
Go to the website, log yourself in and click on the worklist option listed on dashboard.

Step-2
Click on the "submit" option in order to submit the response of the demand.

Step-3
Choose your option carefully after reading and analyzing your situation. We would suggest you to take help of CA if you find yourself in doubt.

The remaining part is upto the option you will select , the detail of these options have been described above.

Below are the some of the Questions/queries for your better understanding!