Section 438 — Set off and withholding of refunds in certain cases. Successor to s.245 of the 1961 Act.
Section 438 is in Chapter XX — Refunds, which runs from section 431 to section 438.
Sub-section (1) allows a refund to be applied rather than paid. Where a refund becomes due or is found to be due to any person under the Act, the Assessing Officer, Commissioner, Principal Commissioner, Chief Commissioner or Principal Chief Commissioner may, in lieu of payment, set off the whole or part of it against any sum remaining payable by that person under the Income-tax Act, 1961 — those words having been inserted by Act No. 4 of 2026 with effect from 1 April 2026 — or under this Act. Sub-section (2) requires that any such action be taken after giving the person an intimation in writing of the action proposed.
Sub-section (3) covers what happens to the balance. Where part of the refund has been set off under sub-section (1), or no set off has been made, and a refund becomes due, the Assessing Officer, having regard to the fact that assessment or reassessment proceedings are pending in that person's case, may withhold the refund up to sixty days from the date on which such assessment or reassessment is made — but only for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner.
Paying out a refund while the same person owes tax, or while a proceeding that may itself produce a demand is under way, simply moves money that will have to be recovered again. Sub-section (1) nets the two off across both the 2025 Act and, since 1 April 2026, the Income-tax Act, 1961. Sub-section (3) is the narrower power to hold rather than net, and it is hedged with recorded reasons, an approval and a fixed end date so that it cannot become an indefinite freeze.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Outer limit for withholding a refund | Up to sixty days from the date on which the assessment or reassessment is made | Only where assessment or reassessment proceedings are pending, with reasons recorded in writing and the previous approval of the Principal Commissioner or Commissioner | Sub-section (3) |
The two powers are different and only one needs approval. A set off under sub-section (1) can be made by any of five ranks and requires only a prior written intimation of the proposed action under sub-section (2). Withholding under sub-section (3) is for the Assessing Officer alone, needs reasons recorded in writing and the previous approval of the Principal Commissioner or Commissioner, and is available only while assessment or reassessment proceedings are pending. The sixty days run from the date the assessment or reassessment is made, not from the withholding order. Since 1 April 2026 the set off also reaches sums payable under the Income-tax Act, 1961, so an old demand under that Act can absorb a refund arising under this one.
An individual is due a refund of Rs. 6 lakh and has an outstanding demand of Rs. 4 lakh under the Income-tax Act, 1961. After an intimation in writing of the proposed action, the Rs. 4 lakh is set off under sub-section (1) as amended with effect from 1 April 2026, leaving Rs. 2 lakh. If a reassessment is pending, the Assessing Officer may withhold that Rs. 2 lakh, but only for reasons recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, and only up to sixty days from the date the reassessment is made.
A taxpayer meets this section as the written intimation that his refund is proposed to be adjusted against an outstanding demand, and as the absence of a refund he expected where an assessment or reassessment is pending in his case.
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 Income-tax Act, 1961 (43 of 1961), or
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
See the full 1961 to 2025 concordance.
See the notifications index.