Direct Tax Alert - CBDT prescribes process; monetary and time limits for withholding tax refund

BACKGROUND

Finance Act, 2023 has substituted section 245 of the Income-tax Act, 1961 (IT Act). Section 245(2) of the IT Act grants power to the Tax Officer (AO) to withhold tax refund (where either part refund is adjusted against outstanding demand or there is no outstanding demand), subject to approval from the Principal Commissioner or Commissioner, up to the date of assessment or reassessment is made (as the case may be).

Recently, the Central Board of Taxes (CBDT) has issued an instruction¹ laying down:

• Monetary limits for applicability of section 245 of the IT Act;
• Timelines; and
• Procedure for recording reasons before withholding refunds under section 245(2) of the IT Act.

We, at BDO in India, have analysed and summarised this instruction hereunder:

What is the monetary limit for applicability of section 245(2) of the IT Act?

For withholding refunds under section 245(2) of the IT Act, the monetary limit of refund shall be INR 1 million or more. In other words, AO cannot withhold a refund under section 245(2) of the IT Act if the refund amount is less than INR 1 million.  

What is the procedure that should be followed before withholding a refund under section 245(2) of the IT Act?

• In a case where section 245(2) of the IT Act is applicable, the Faceless Assessing Officer (FAO), on receipt of communication from the Centralised Processing Centre (CPC), shall intimate the Jurisdictional AO about the demand likely to be raised in the pending assessment(s).
• Based on information received from FAO, Jurisdictional AO shall record the reasons in writing with proper application of mind and after analysing the factual matrix of the case which would include:
  • The financial condition of the taxpayer.
  • Past demands,
  • Pendency of appeals etc.
• Jurisdictional AO shall seek approval of the Jurisdictional Principal Commissioner of Income-tax (PCIT).
• Further, the reasons recorded by Jurisdictional AO should not be cursory and should reflect the factual analysis of the case as carried out by him.
• Jurisdictional AO shall communicate the final decision regarding withholding/release of refund to the CPC.

What is the timeline to complete the aforementioned process?

CBDT has laid down the following timeline for completing the above process:

• 20 days for the Faceless Assessment Unit; and
• 30 days for Jurisdictional AO.  

BDO IN INDIA COMMENTS

This is a welcome move by the CBDT. By prescribing the threshold of INR 1 million, it has ensured that where small refunds are there, such refunds are not withheld by the AO. Further, the Instruction also mentions that a detailed workflow will be issued by DGIT (Systems) which should render more clarity in terms of the procedure to be followed by FAO and Jurisdictional AO.

It may be noted that in order to minimise the delay in issuance of a refund to the taxpayer/adjustment of the refund, the time limit of 45 days granted to the AO to respond to CPC by Instruction No. 12/2013 was reduced to 21 days by Instruction No. 01/2023 dated 13 June 2023.