BPCL wins ₹306 crore refund case - IT Dept failed to give mandatory notice before adjustment

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Case Name

Bharat Petroleum Corporation Limited vs Assistant Director of Income Tax & Ors.(High Court of Bombay)

Writ Petition No. 2494 of 2021

Date: 16th November 2021

Key Takeaways

• Procedural compliance is crucial: Even if the tax department has valid demands, they must follow mandatory procedural requirements
• Section 245 notice is non-negotiable: Prior written intimation before set-off is absolutely mandatory, not optional
• Invalid notices don’t count: Notices related to different entities (like merged companies) don’t satisfy the legal requirement
• Stay of demand protects taxpayers: When 20% of disputed demand is paid, recovery proceedings are stayed

Issue

The central legal questions were:

1. Did the Income Tax Department give the mandatory intimation required under Section 245 of the Income Tax Act before adjusting the refund?
2. What’s the legal effect if such notice wasn’t properly given?
3. What should happen to the refund amount?

Facts

BPCL was entitled to a refund of ₹306,70,93,992 (that’s over ₹306 crores!) - this was an admitted fact that even the IT Department didn’t dispute.

The IT Department had some outstanding demands against BPCL for assessment years 2015-16, 2016-17, and 2017-18 totaling ₹620,17,00,418. Instead of paying the refund, they wanted to adjust it against these demands.

The IT Department claimed they had issued notices under Section 245 on January 1, 2021, with a reminder on January 17, 2021. But when the court examined these notices, they found a major problem: these notices were related to Kochi Refineries Limited (before it merged with BPCL) and had nothing to do with the 15 refunds totaling ₹306+ crores that BPCL was claiming.

Arguments

BPCL’s Position:

• They were entitled to the full refund amount
• The IT Department never gave proper notice under Section 245 before making adjustments
• Even if there were outstanding demands, proper procedure must be followed
• They had already paid 20% of disputed demands to get a stay

IT Department’s Position:

• They had valid outstanding demands against BPCL
• They claimed to have issued Section 245 notices on January 1, 2021, and January 17, 2021
• These were automated, computer-generated notices from the Central Processing Centre (CPC)
• BPCL didn’t comply with the notices on the ITBA portal

Key Legal Precedents

The court relied heavily on Jet Privilege Private Limited Vs. Deputy Commissioner of Income Tax-5(2)(1), Mumbai & Ors., which established that:

• Prior intimation under Section 245 is a mandatory requirement
• Failure to give proper notice makes any adjustment “wholly illegal”
• The intimation must be given before the set-off, not simultaneously or after

The court also referenced:

• Suresh B. Jain Vs. A.N. Shaikh, Sixteenth Income-tax Officer
• A.N. Shaikh, Sixteenth Income-tax Officer Vs. Suresh B. Jain
• Hindustan Unilever Limited Vs. Deputy Commissioner of Income-tax-1(1)

These cases reinforced that Section 245 procedures are mandatory, not discretionary.

Judgement

1. Full Refund Ordered: BPCL gets the entire ₹306,70,93,992 plus any accumulated interest within 6 weeks

2. Legal Reasoning:

• The notices dated January 1, 2021, and January 17, 2021, were invalid because they related to Kochi Refineries Limited, not the specific refunds BPCL was claiming
• No proper Section 245 notice was given for the actual refunds in question
• Without proper notice, any adjustment is “wholly illegal”

3. Additional Relief: For another refund of ₹6,50,10,650 related to Kochi Refineries Limited, the court directed the IT Department to give BPCL a personal hearing

FAQs

Q1: Why couldn’t the IT Department just adjust the refund against outstanding demands?

A: Because Section 245 of the Income Tax Act requires them to give written notice before making any adjustment. This isn’t optional - it’s mandatory. Think of it like needing permission before taking money from someone’s account.

Q2: What made the January 2021 notices invalid?

A: Those notices were about Kochi Refineries Limited (before merger) and didn’t relate to the specific 15 refunds totaling ₹306+ crores that BPCL was claiming. It’s like getting a notice about someone else’s tax issues.

Q3: Does this mean companies can avoid paying taxes by claiming procedural violations?

A: Not at all! The court noted that BPCL had already paid 20% of the disputed demand to get a stay, which is the proper procedure. The IT Department can still pursue their demands - they just need to follow proper legal procedures.

Q4: What’s the significance of the 20% payment mentioned?

A: Under Office Memorandum dated 29/02/2015 (amended 25/08/2017), when a taxpayer pays 20% of disputed demand, they get a stay of recovery proceedings. This means they’re not considered in default.

Q5: Can the IT Department appeal this decision?

A: While the judgment doesn’t mention this, typically such decisions can be appealed to higher courts if there are grounds for appeal.

1. Petitioner Bharat Petroleum Corporation Limited (hereinafter

referred to as 'BPCL') has raised a grievance that, admittedly, it is entitled to a refund of Rs.306,70,93,992/- from the Income Tax department. The fact that Petitioner is entitled to this refund of Rs.306,70,93,992/- is an admitted position. Respondents has not refunded this amount. According

to Respondent, it is entitled to adjust this refund amount against the

demand that it has against Petitioner. According to Petitioner, the only

demand that was outstanding in their case was for AY 2015-16, AY 2016-

17 and AY 2017-18 where a total demand of Rs.620,17,00,418/- has been

made. Petitioner denies that any amount is payable by Petitioner to

Respondent. Mr. Mistry states that in any event, Respondent was not

entitled to adjust the admitted refund amount of Rs.306,70,93,992/-

because Respondent has not given the mandatory intimation required

under Section 245 of the Income Tax Act, 1961 (hereinafter referred to as

'the Act') before making any such adjustment.

2. The issues which can be narrowed down are (i) whether

Respondent gave any such intimation required under Section 245 of the

Act, (ii) if such intimation has not been given, the effect thereof and (iii) the consequence of the demand outstanding on the refund to be made to

Petitioner.

As to Issue No.(i), Petitioner has made an averment in the

Petition that no intimation under Section 245 of the Act was given before

making any adjustment. In its Affidavit-in-Reply, Respondent No.1 states

that the said averment of Petitioner relates to Respondent No.2 and it is

for Respondent No.2 to respond. Respondent No.1 therefore does not

deny the averment of Petitioner that no such notice was issued.

Respondent No.2, in its Affidavit-in-Reply, states that notices under

Section 245 of the Act have to be issued by Central Processing Centre

('CPC') to Petitioner proposing the adjustment of demand, the notices

under Section 245 are automated and computer generated notices and in

Petitioner's case, notices under Section 245 of the Act were issued on

01/01/2021 with reminder on 17/01/2021 for compliance but Petitioner

did not comply on the ITBA portal and in the mode decided by CPC.

Accordingly, CPC proceeded to adjust the outstanding demand.

3. If one considers this notice dated 01/01/2021 and reminder

dated 17/01/2021, it does not relate to any of the 15 refunds totalling to

Rs.306,70,93,992/- mentioned by Petitioner in the Petition. These notices

issued by Respondent pertain to Kochi Refineries Limited before Kochi

Refineries Limited was merged with Petitioner. Even the outstanding

demand table annexed to the said notice dated 01/01/2021 does not

pertain to any of the 15 refunds totalling to Rs.306,70,93,992/- to be

given to Petitioner as stated in the Petition. Therefore, our answer to

Issue No.(i) is in negative, the notice as required under Section 245 of the

Act has not been given.

4. As regards the Issue No.(ii) the effect of failure to give such

notice, it is settled law that non-giving of intimation in writing prior to

setting off of the amount payable against the amount to be refunded is

fatal. This Court, in Jet Privilege Private Limited Vs. Deputy

Commissioner of Income Tax-5(2)(1), Mumbai & Ors.

1, has held that the requirement of prior intimation under Section 245 of the Act was a mandatory requirement and failure to comply with this mandatory requirement of prior intimation would make the entire adjustment as wholly illegal and therefore Respondents could not have made the

adjustment as they wanted to. Paragraphs 7, 8 and 9 of Jet Privilege

Private Limited (supra) read as under :

"7. For ease of reference, we shall quote Section 245 of the

Act, which read as under ;

245. Set off of refunds against tax remaining

payable 2 Where under any of the provisions of this

Act, a refund is found to be due to any person, the

[Assessing] Officer, Deputy Commissioner

(Appeals)], Commissioner (Appeals)] or Chief

Commissioner or Commissioner], as the case may

be, may, in lieu of payment of the refund, set off the

amount to be refunded or any part of that amount,

against the sum, if any, remaining payable under this

Act by the person to whom the refund is due, after

giving an intimation in writing to such person of the

action proposed to be taken under this section.

8. Mere perusal of the section makes it clear that the

officers mentioned in the section, as the case may be, may, in

lieu of payment of the refund, set off the amount to be

refunded or any part of that amount, against the sum, if any,

remaining payable under the Act by the assessee to whom the

refund is due. The officer may set off the amount to be

refunded or any part of that amount only after giving an

intimation in writing to the assessee of the action that he

proposed to take under this section. Therefore, it clearly

requires the intimation to be given prior to the officer sets off

the amount payable against the amount to be refunded. It can

be neither simultaneous nor subsequent.

We find support for this view in Suresh B. Jain Vs. A.N.

Shaikh, Sixteenth Income-tax Officer, confirmed by the

Division Bench of this court in A.N. Shaikh, Sixteenth Income-

tax Officer Vs. Suresh B. Jain and in Hindustan Unilever

Limited Vs. Deputy Commissioner of Income-tax-1 (1)

relied upon by Mr. Pardiwalla.

9. The fact that respondent has not followed the

mandatory prior requirement of intimation under Section 245

of the Act would make the adjustment wholly illegal and

therefore, respondent was clearly in error in not refunding the

amount."

5. In the circumstances, as a consequence, answering Issue No.

(iii), Petitioner will be entitled to the refund of the entire amount of

Rs.306,70,93,992/- together with accumulated interest, if any, in

accordance with law. This refund shall be given within 6 weeks from

today.

6. In any event, on the demand of Respondent in the cases

outstanding against Petitioner, according to Petitioner, only cases for 3

years, i.e., AY 2015-16, AY 2016-17 and AY 2017-18 are pending where a

demand of Rs.620,17,00,418/- is pending. Petitioner has stated that it

has paid 20% of the demand for grant of stay and that application is

pending in this Court.

7. As per the Office Memorandum (F No.404/72/93 - ITCC)

dated 29/02/2015, amended by another Office Memorandum dated

25/08/2017, the AO shall grant stay of demand where the outstanding

demand is disputed on Assessee paying 20% of the disputed demand.

Therefore, there is a stay of demand in force. As held by this Court in

Hindustan Unilever Limited Vs. Deputy Commissioner of Income-tax-

, the effect of this deposit would mean that the time to make the

payment stands extended and Petitioner is not deemed to be an Assessee

in default for the recovery provisions to be set in motion.

8. As regards the other issue in the Petition, viz., refund of

Rs.6,50,10,650/- pertaining to Kochi Refineries Limited, Respondent No.2

is directed to give a personal hearing to Petitioner and after hearing

Petitioner and considering the communications etc. / written submissions

to be filed by Petitioner, may pass such orders in accordance with law. If

Respondent No.2 is not the competent authority to grant personal hearing

and pass order on the refund application of Petitioner pertaining to Kochi

Refineries Limited, Respondent No.2 shall forward the file to the

appropriate authority under advise to Petitioner and such appropriate

authority will comply with the directions as mentioned hereinabove.

9. Petition disposed.

(AMIT B. BORKAR, J.) (K. R. SHRIRAM, J.)