Section 245 Notice – Adjustment of Refund Against Demand

Seeing a Section 245 notice and wondering why your refund is suddenly gone is stressful. Salaried professionals, founders and MSMEs often discover an unexpected adjustment when they check Form 26AS or log into the e-filing portal. You need a quick, practical roadmap to respond—before your cash flow is impacted.

Summary: Section 245 allows the tax department to adjust any due refund against an outstanding demand after giving you an opportunity to be heard. Check 26AS/AIS, map the demand to the order, file a clear written objection on the e-filing portal or to the assessing officer, and consider a stay or appeal if the demand is incorrect. Act fast, keep records, and seek professional help when in doubt.

What’s the real problem in India?

• Your ITR shows a refund, but the e-filing portal or Form 26AS shows an “Outstanding Demand”—and the department offsets the refund under Section 245.
• You didn’t receive clear prior communication, or the demand is for a different AY/PY than the refund (common for business owners and founders).
• The demand is incorrect (TDS mismatch, wrong interest, or a closed AY reopened) and you don’t know how to contest the adjustment quickly.

What people get wrong

Many taxpayers assume a refund is sacrosanct and will be credited to their bank account. In reality, the Income-tax Act (Section 245) lets the assessing officer set off refunds against confirmed or provisional demands. People also often ignore small demands shown in 26AS/AIS thinking they’re immaterial—only to find their refund consumed. Another mistake: responding informally or late. The department expects a written reply to the Section 245 notice or a representation on the e-filing portal; silence usually means acceptance of the adjustment.

A better approach

1. Stop, don’t assume: The moment you see your refund reduced or a Section 245 notice, don’t panic—collect facts first.
2. Map the numbers: Reconcile the refund, the demand shown in Form 26AS/AIS, and the assessment/appeal orders that created the demand.
3. Prepare a targeted objection: Draft a concise written response pointing to why the demand is incorrect or why the refund should not be adjusted (e.g., demand barred by limitation, already paid, or under appeal/stay).
4. File your representation: Upload or submit the objection through the e-filing portal and send a copy to the assessing officer. Retain acknowledgement/screenshots.
5. Escalate if necessary: If the demand is wrongly raised and the AO insists on adjustment, consult a tax professional about appeal routes, stay applications, or deposit options under protest.

Quick implementation checklist

1. Log into your e-filing account and view “Demand Outstanding” and refund status.
2. Download Form 26AS and the Annual Information Statement (AIS) to verify TDS/TCS entries and any auto-generated demands.
3. Obtain copies of the assessment/orders creating the demand (download from e-filing or request from AO).
4. Match the demand amount, AY/PY, and reason (e.g., disallowance, default interest, TDS mismatch).
5. Draft a short written objection addressing: (a) why the demand is incorrect or (b) why the refund should be released pending resolution. Attach supporting documents (bank statements, Form 16, receipts, correspondence).
6. File the objection on the e-filing portal and send/email to the assessing officer; keep evidence of submission.
7. If an appeal or stay is needed, consult a chartered accountant or tax lawyer—note timelines for appeals and provisos for deposits.
8. Monitor 26AS/AIS and the e-filing portal for updates; save all screenshots and acknowledgements.

What success looks like

Success is getting either (a) your refund released in full, (b) a corrected demand (reduced or nullified) and refund released, or (c) a documented stay/order pending which preserves your cash while the issue is decided. For businesses and founders, it also means avoiding unnecessary cash-flow stress and ensuring your books and 26AS reconcile for future AYs.

Risks & how to manage them

Risk: The AO proceeds to adjust the refund without adequate consideration. Mitigation: Submit a prompt written objection with supporting evidence and proof of submission. Keep copies of all communications.

Risk: The demand is valid but you have no liquidity to pay. Mitigation: Consider negotiated payment, installment options, or filing for stay while pursuing appeal—advice from a tax professional is essential.

Risk: You miss appeal timelines. Mitigation: Track the date of the 245 notice and the demand order; if unsure, treat deadlines as urgent and consult a tax adviser immediately.

Tools & data

Use Form 26AS and the Annual Information Statement (AIS) to reconcile credits (TDS/TCS, advance tax) and to spot demands. The income tax india e-filing portal is the primary place to view outstanding demands, notice details, and to upload representations. TRACES and the e-filing dashboard help download demand orders and TDS certificates. Keep your ITR acknowledgements, Form 16, bank statements, invoices and computation of income handy when responding.

FAQs

Q: Can the tax department adjust my refund without sending a Section 245 notice?
A: The department is required to give you an opportunity to be heard before adjusting a refund. If you did not receive a notice, check the e-filing portal and your registered email first, and raise the point immediately with the AO.

Q: Can refunds from one AY be used against a demand for another AY under Section 245?
A: Yes—adjustments under Section 245 commonly occur across AYs. That’s why reconciling which AY the demand relates to in Form 26AS/AIS is critical.

Q: If I’m appealing the demand, will my refund still be adjusted?
A: If a stay or suspension of demand has been granted by a higher authority (CIT(A), ITAT), the AO should not adjust the refund. If no stay exists, the AO may proceed—so ensure you seek appropriate orders promptly.

Q: What documents help my objection succeed?
A: Bank statements, payment receipts, Form 16, TDS certificates, ITR computations, assessment/appeal orders, and proof of prior correspondence. Crisp, fact-based submissions work best.

Next steps

If you received a Section 245 notice or see your refund adjusted on the e-filing portal, don’t wait. Reconcile Form 26AS/AIS, gather supporting documents, and prepare a written objection. If this feels complex, contact Finstory for a quick review — we’ll map the demand, draft the representation, and advise on appeal options so you can protect your cash flow. [link:ITR guide] [link:tax saving tips]

Need help now? Reach out to Finstory—our tax experts handle Section 245 responses daily and can guide you through the fastest, most practical path to recovery.

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