Yes, Income tax department can do such.
Section 245 of the Income-tax Act empowers assessing officer to adjust refund against any pending tax dues.
The above was the answer to your first question, and after understanding your position, I give my advice below.
At first, please understand that
- the email you received is a notice.
- The AO hasn't adjusted your refund against tax dues, till now.
- Generally, he would adjust only after 30 days of giving notice.
Secondly, if you respond to him in 30 days and convince him that there was no tax due then, he would pay you the refund without reducing your tax dues. You can convince him by showing the appellate order.
Here is the bonus advice.
You should separately get the tax dues for the assessment year 2008-09 zeroed or adjusted.
For this, you should try to find out the reason that why tax department records show tax due from you. Perhaps, in your case, the assessing officer didn't consider the appellate order while calculating dues.
The right course for you to follow should be to file a rectification application.