Section 438 — Set-off and Withholding of Refunds | ITA 2025

Section 438 — - SET-OFF AND WITHHOLDING OF REFUNDS

Section 438 of the Income-tax Act, 2025 corresponds substantively to sections 245 (set-off of refund against demand) and 241A (withholding of refund pending assessment) of the Income-tax Act, 1961. It empowers AO to (a) set off any refund against any sum remaining payable by the assessee, and (b) withhold refund where regular assessment is pending and grant of refund is likely to adversely affect Revenue.

Statutory text — Income-tax Act, 2025

( 1) Where a refund becomes due or is found to be due to any person u nder this Act, the Assessing Officer or Commissioner or Principal Commis- sioner or Chief Commissioner or Principal Chief 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 4[the Income-tax Act, 1961 (43 of 1961), or] this Act by such person.

(2) Any action under sub-section (1) shall be taken after giving an intimation in writing to such person of the action proposed to be taken.

(3) Where,––

(a) a part of the refund is set off under sub-section (1); or

(b) no such amount as referred to in clause (a) is set off, and refund becomes due to a person, and the Assessing Officer, having regard to the fact that proceedings for assessment or reassessment are pending in the case of such person, may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner, withhold the refund up to sixty days from the date on which such assessment or reassessment is made. CHAPTER XXI PENALTIES Penalty for under-reporting and misreporting of income.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
2025 provision	1961 counterpart
s. 438(1) -- Set-off of refund against demand	s. 245 (FA 1987)
s. 438(2) -- Withholding of refund pending assessment	s. 241A (FA 2017 from 1-4-2017)

STATUTORY ARCHITECTURE -- SET-OFF (s. 245)

AO may set off refund due to the assessee against any tax / interest / penalty / other sum payable by him under any direct tax law (Income-tax, Wealth-tax). Pre-condition: intimation to assessee with reasons. The intimation is appealable; if assessee disputes the underlying demand, set-off is held in abeyance pending stay or appeal.

STATUTORY ARCHITECTURE -- WITHHOLDING (s. 241A)

Where return is selected for scrutiny u/s 270 [s. 143(2)] and refund has been determined under s. 270(1) intimation processing, AO -- with prior approval of Principal Commissioner / Commissioner -- may withhold the refund where its grant 'is likely to adversely affect the revenue'. Maximum withholding: 60 days from date of regular assessment. Reasons must be recorded in writing.

CONSTITUTIONAL & PROCEDURAL SAFEGUARDS

Vodafone Idea Ltd. v. ACIT (2020) 425 ITR 471 (SC) clarified that withholding under s. 241A is a discretionary power requiring (a) issuance of s. 143(2) notice, (b) recording of reasons, (c) likely adverse impact on revenue -- mere selection for scrutiny is not enough. The 60-day cap is mandatory.

PRACTITIONER PLANNING NOTES

Set-off intimation u/s 245: respond within 30 days disputing the demand if not bona fide; failure -- set-off proceeds.
Demand under stay: file fresh stay application before AO immediately on receiving s. 245 intimation; obtain order BEFORE adjustment; relief via writ if AO insists.
Withholding without recorded reasons: file writ; Vodafone Idea ratio applies -- mandatory reasons + adverse-revenue-impact finding.
Refund interest u/s 437 [244A] continues to accrue during withholding period; 60-day cap binds AO to release within timeline.
Where set-off is against erroneously-raised demand: file rectification u/s 287 [154] for the original demand; once rectified, set-off must be unwound + refund + interest.
Cross-AY refund/demand: practitioner must reconcile across AYs in pre-rectification audit; CPC's automated set-off picks any open demand, including stay-protected ones -- challenge.

CASE-LAW

Vodafone Idea Ltd. v. ACIT (2020) 425 ITR 471 (SC) -- s. 241A withholding requires recorded reasons and likely-adverse-impact finding.
Hindustan Unilever Ltd. v. DCIT (2015) 372 ITR 1 (Bom) -- s. 245 set-off requires prior intimation and reasons.
Maruti Suzuki India Ltd. v. CIT (2014) 365 ITR 481 (Del) -- adjustment of refund against pending stay-protected demand impermissible.

CROSS-REFERENCES

s. 270 [143(1)] -- intimation determining refund.
s. 437 -- interest on refund.
s. 412(6) [220(6)] -- stay of demand.

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