Short answer: Section 245 allows a refund due to you to be set off against an outstanding demand — but only after an intimation in writing of the proposed adjustment and an opportunity to respond. That intimation is mandatory. If you have received one, you generally have 30 days, and silence is treated as acceptance.
This is the mechanism behind the most common version of the question: my refund never arrived.
What has happened
A refund has been computed as due to you for one year. The system also shows an outstanding demand for another year — often much older. Before paying the refund, the Department proposes to apply it against that demand.
The demand itself is frequently one the taxpayer has never registered. It may date from a year in which an intimation raised a small demand that was never paid, or from an assessment whose outcome was not followed through. Because interest under Section 220(2) runs on an unpaid demand, the figure now is usually larger than the original.
The safeguard, and why it matters
Section 245 is not a power to adjust silently. It requires prior intimation of the proposed action and an opportunity for the taxpayer to respond. Courts have treated that requirement as mandatory rather than procedural — an adjustment made without it is challengeable on that basis alone, independent of whether the underlying demand is right.
So the first two questions on receiving an intimation are: was it actually issued before the adjustment, and does it identify the demand clearly enough for you to respond to it.
Responding — and the option not to pick casually
The response is filed on the e-filing portal against the specific demand. In substance the choices are:
| Response | When it applies |
|---|---|
| Demand is correct | You accept it. Note this closes the point — it should not be selected merely to end the process |
| Disagree with demand, wholly or partly | The demand is wrong, with reasons and supporting details |
| Demand is not correct but agree to adjustment | You dispute it but are content for the set-off to proceed meanwhile |
If nothing is filed within the period given, the demand as it stands is taken for adjustment and the refund is applied against it.
Why the demand is so often wrong
In practice, a large proportion of these old demands do not survive examination. The usual causes:
- Challan not matched. Tax was paid, but tagged to the wrong assessment year, wrong major head or wrong PAN, so it never appeared against the demand.
- TDS credit not given. Credit claimed in the return was restricted because the deductor had not filed or had filed against a wrong PAN, and the position was never corrected afterwards.
- Rectification allowed but not given effect. An order under Section 154 was passed but the demand on the system was never revised.
- Appellate order not implemented. The appeal was decided favourably and the consequential effect was never given.
- Demand already paid. Paid once, but against a different demand identification number, so it sits unadjusted.
- Duplicated demand. The same liability appearing twice after a rectification or revised processing.
None of these are exotic, and each is answerable with a document — a challan, a Form 26AS entry, the rectification order, the appellate order. The difficulty is usually that the year is old and the papers have to be found.
Where the demand is genuinely disputed
Two things run in parallel and should not be confused.
Contesting the demand means the appeal or rectification against the underlying order — the route depends on whether it is a mistake apparent from the record or a substantive disagreement, and the distinction is set out in the Section 143(1) intimation guide.
Stopping recovery meanwhile is a separate application under Section 220(6), for the assessee to be treated as not in default while an appeal is pending. Administrative guidance has generally contemplated a partial deposit — commonly 20% of the disputed demand — as the basis on which a stay is granted, with discretion to require more or less depending on the facts. A stay does not follow automatically from having filed an appeal; it has to be sought.
Responding to the Section 245 intimation is not a substitute for either. It addresses the adjustment, not the demand.
A change worth knowing
Refund adjustment has been extended across the two Acts. With the Income-tax Act 2025 in force from tax year 2026-27 while the 1961 Act continues to govern earlier years, provision has been made for a refund arising under one Act to be adjusted against dues under the other. In practical terms, an old demand under the 1961 Act does not become unreachable simply because your later refund arises under the new Act.
Under the Income-tax Act 2025
| Concept | 1961 Act | 2025 Act |
|---|---|---|
| Withholding of refund / set-off against demand | 241A, 245 | 438 |
| Interest on refunds | 244A | 437 |
| Rectification | 154 | 287 |
| Appeal to CIT(A) | 246A | 357 |
The section mapping guide covers the wider renumbering.
What to do now
Find the year the demand relates to, and pull the return, the intimation or assessment order, Form 26AS and the challans for it. In most cases the answer is in one of those documents. Then respond within the window — a considered disagreement filed in time is far easier than unwinding a completed adjustment afterwards.
This note explains the general position on adjustment of refunds under Section 245. Whether a particular demand is sustainable depends on the record for that year, and should be checked against it before a response is filed.