Adjustment of refund against outstanding demand held violative of natural justice

Adjustment of refund against outstanding demand without considering objections and without providing opportunity of hearing, violative of principles of natural justice.

In a recent judgment, Bombay High Court has held that adjustment of refund against the outstanding demand without considering objections and without providing assessee opportunity of hearing was violative of principles of natural justice and fair play.

ABCAUS Case Law Citation:
4441 (2025) (03) abcaus.in HC

In the instant case, the Petitioner/assessee had challenged the adjustment of refund against the outstanding demand in the purported exercise of powers under Section 245 of the Income Tax Act, 1961 (the Act).

An intimation proposing an adjustment of refund was sent to the petitioner. However, after that, the petitioner was not granted a hearing, and no formal order was made under Section 245 of the Act. Instead, by communication, the Petitioner was informed of the adjustment of refund against the outstanding demand.

The Hon’ble High Court opined that the procedure followed by the Revenue grossly violated the principles of natural justice and fair play.

It was observed that the Petitioner had duly addressed communications of the Revenue raising objections to the proposed adjustments. However, there was no consideration of these objections. The petitioner was granted no opportunity of a hearing. No formal order was also made dealing with the petitioner’s objections. All this violates the principles of natural justice.

The Hon’ble High Court noted that the Coordinate Bench of the High Court had held that the principles of natural justice must be followed before making any orders or making any adjustments under Section 245. This position was reiterated recently when the Court found fault with the revenue’s order of adjustment under Section 245 of the Act and directed the revenue to deposit the adjusted amount in this Court.

The Hon’ble High Court opined that a similar course of action will have to be adopted in this case because the impugned adjustment was in gross breach of the principles of natural justice and fair play. 

Accordingly, the Hon’ble High Court quashed the adjustments made in the purported exercise of powers under Section 245 of the Act and directed the Revenue to deposit the amount adjusted in the Court. The Revenue was directed to consider the objections of the assessee and afford the Petitioner an opportunity of hearing. A reasoned order must afford the Petitioner an provide an opportunity of hearing before passing a reasoned order with its communication to the Petitioner.

Download Full Judgment Click Here >>

• FAQs on Foreign Assets of Small Taxpayers Disclosure Scheme and Rule 2026
• Foreign Assets of Small Taxpayers- Disclosure Scheme Rules 2026 notified
• Order u/s 69 of the CGST Act has to be communicated before arrest of person concerned– SC
• Refund can not be denied on the ground that it was claimed in a return filed u/s 148 – ITAT
• Distinction between religious & charitable purposes is determined by institution’s primary or dominant object