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Facts
The assessee filed its return of income, and the CPC/AO issued a rectification order under Section 154 of the Act without providing a prior notice or opportunity to be heard. This order enhanced the assessee's income and reduced the refund. The assessee's appeal against this order was dismissed by the CIT(A).
Held
The Tribunal held that the rectification order passed by the CPC/AO under Section 154 of the Act was bad in law as it was passed without providing the assessee with a reasonable opportunity of being heard, violating the principles of natural justice and the provisions of Section 154(3) of the Act. Therefore, the rectification order was quashed.
Key Issues
Whether a rectification order passed under Section 154 of the Income Tax Act, which enhances assessment or reduces refund, is valid if issued without providing the assessee with a reasonable opportunity of being heard.
Sections Cited
154, 250, 143(1), 143(2), 143(3), 36(1)(va), 43B, 244A, 156, 155, 186, 155
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI ARUN KHODPIA
आदेश / ORDER PER ARUN KHODPIA, AM:
The present appeal filed by the assessee is directed against the order passed by the Ld. CIT(Appeals)/NFAC, Delhi dated 23.03.2025 which in turn arises from the order passed by Centralized Processing Centre (CPC)/A.O u/s. 154 of the Act, dated 24.09.2021 for the assessment year 2020-21 as per the following grounds of appeal:
“Ground No. 1 On the facts and circumstances of the case and in law, learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre ('Ld.CIT(A)') has erred in dismissing the appeal by passing an ex-parte order under section 250 of the Income-tax Act,1961 ("the Act'), thereby confirming the additions of Rs.90,79,250 to the total income of the Appellant, made by Learned Centralized Processing Centre, Income Tax Department, Bengaluru (Ld. CPC) vide rectification order under section 154 of the Act dated 24 September 20. (‘Rectification Order'), without providing adequate opportunity of being heard. The Appellant prays that the order passed by the Ld. CIT(A) is in violation of principles of natural justice and thus, had in law and ought to be quashed. Ground 2 On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in dismissing the appeal instead of adjudicating the case on its merits by stating that in the assessment order dated 22 September 2022, passed under section 143(3) of the Act, the Assessing Officer upheld the Rectification Order, without appreciating that the assessment order did not adjudicate the additions made by the Ld. CPC. The Appellant prays that the impugned order passed by the Ld. CIT(A) is bad in law and ought to be quashed. Ground 3
On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not holding that the Rectification Order is bad in law in so far as it may concern that the Ld. CPC or the Income tax department has not issued any intimation or the original order respectively under the provisions of the Act, before issue of the Rectification Order. Ground 4 On the facts and circumstances of the case and its law, the Id. C1T(A) erred in not holding that the 14. CPC has made adjustments in the Rectification Order whirls are outside the purview of section 154 of the Act. Ground 5 Without prejudice to Ground No 4, on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not holding that the Rectification Order is bad in law as it was passed without issuing any notice under the provisions of the Act and not providing the Appellant an opportunity of being heard. Addition to the income under the head "Income from Business or Profession" Ground 6 Without prejudice to Orotund 4, on the facts and circumstances of the case and its law, the Ld. CIT(A) erred its upholding the action of Ld. CPC in waking the addition of Rs. 90,79,250 to the income under the head "Income from Business or Profession". Ground 7 Without prejudice to Ground 4, on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of Ld. CPC its disallowing the amount of Rs. 216 under section 36(1)(va) of the Act pertaining to the employees' contribution to the welfare fund for the month of December 2019, even though the same was deposited before the due date for payment of the contributions to the welfare fund. Ground 8 Without prejudice to Ground 4, on the facts and circumstances of the case and its law, the Ld. CIT(A) erred in upholding the action of Ld. CPC in disallowing the amount of Rs. 64,06,248 being paid as gratuity to the employees on or before the due date of filing the return of income while computing the amount allowed as deduction on payment basis under section,438 of the Act. Ground 9 Without prejudice to Ground 4, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of W. CPC in disallowing a deduction pertaining to provident fund and leave encashment amounting to Rs. 12,67,742 and Rs. 13,93,333 respectively paid to the employees on or before the clue date of filing the return of income while computing the amount allowed as deduction on payment basis under section 43B of the Act. Ground 10 Without prejudice to Ground 4, on the facts and circumstances of the case and in law, the Ld. it IA) erred in upholding the action of Ld. CPC in disallowing an amount Rs. 11,711 pertaining to interest paid on TDs twice in the Rectification Order. Other Grounds Ground 11 On the fact and circumstances of the case and in law, the Dl. CIT(A) has erred in not directing the Ld. CPC to grant applicable interest on income-tax refund under section 244A of the IT Act to the Appellant. The Appellant craves leave to add. to amend, to alter. to substitute and to withdraw the above grounds of appeal at any stagy of the proceedings.”
The brief facts in this case are that the assessee had filed its return of income for A.Y.2020-21 on 28.01.2021, declaring total income of Rs.14,16,17,380/-. Thereafter, a suo-motto order of rectification u/s. 154 of the Act was issued by the CPC/A.O on 24.09.2021, wherein certain upward adjustments were made to the income of the assessee which as stated by the Ld. Counsel are on account of mismatch in tax audit and income tax return figures of the assessee. It is further brought to our notice that before the aforesaid rectification order, there was no intimation u/s. 143(1) of the Act was issued by the department to the assessee, which though was opposed and stated to be impossible under the computerized processing system by the Ld. Sr. DR representing the revenue. However, no evidence could be placed to prove that any intimation u/s. 143(1) of the Act was issued to the assessee. As certain adjustments were made vide rectification order u/s. 154 of the Act dated 24.09.2021, the income of the assessee has been enhanced to Rs.15,06,96,630/-, consequently, the income tax refund computed by the assessee for Rs.1,16,95,770/-, has been scaled down to Rs.99,25,670/-.
Being aggrieved with the rectification order u/s. 154 of the Act, dated 24.09.2021, the assessee preferred an appeal before the first appellate authority. However, assessee before the first appellate authority failed to convince the Ld. CIT(Appeals)/NFAC, who resultantly dismissed the appeal of the assessee, observing as follows:
“5. DISCUSSION, REASONS DECISION: I have considered The grounds of appeal written submission of the appellant and the facts of the case, For the FY 2019-20 relevant to AY 2020-21, the appellant had filed its Income Tax Return on 28-01-2021 declaring a Total Income of Rs. 14,16,17,380/-, and claimed refund of Rs.1,16,95,770/-. After that the appellant received a notice u/s.143(2) of the Income-tax Act 1961 on 29-06-2021 for providing certain clarifications In response to the said notice the appellant filed his reply on 12-07-2021. As per the appellant no order u/s 143(3) of the Act or intimation under section 143(1) of the Act had been received by the Appellant. Further the CPC. Bengaluru passed a Rectification Order u/s.154 of the Act on 24-09-2021 assessing the total income of the Appellant at Rs. 15,06,96,630/- and made an addition of Rs.90,79,250/-, determining a refund of Rs.94,10,712/- as against a refund of Rs. 1,16,95,770, as claimed by the Appellant. Aggrieved from the above, the appellant has preferred the instant appeal. The Grounds of Appeal, Written Submission of the appellant and Statement of Facts of the appellant have been produced in the earlier paragraphs. It is seen from the CPC 2.0 the scrutiny assessment u/s 143(3)of the Act for the AY 2020-21 has been passed on 22.09.2022 and the AO has upheld the rectification order u/s. 154 of the Act dated 24/09/2021 passed by the CPC. Keeping in view of the above factual position, the appeal of the appellant is dismissed.”
4. The appeal of the assessee has been dismissed by the Ld. CIT(Appeals)/NFAC observing that scrutiny assessment u/s 143(3) of the Act for the AY 2020-21 has been passed on 22.09.2022 and the AO has upheld the rectification order u/s. 154 of the Act dated 24/09/2021 passed by the CPC, therefore, the appeal of the assessee could not be sustained.
Aggrieved with the order of the Ld. CIT(Appeals)/NFAC, the assessee carried the matter in appeal before us, wherein referring to Ground of appeal No.4 & No. 5 of the present appeal, the Ld. Counsel raised a controversy that whether the CPC/A.O is empowered to make adjustments by way of rectification order, which are outside the purview of Section 154 of the Act. Also the adjustment was made without issuing any notice to the assessee, which is mandatory as per the provisions of Act and also following the principle of natural justice. Before proceeding any further, we deem it fit to cull out the provisions of Section 154 of the Act which reads as follows:
“154. Rectification of mistake.
- [(1) With a view to rectifying any mistake apparent from the record an income-tax authority referred to in section 116 may,- (a) amend any order passed by it under the provisions of this Act;] (b)[ amend any intimation or deemed intimation under sub-section (1) of section 143.] [ Substituted by Act 27 of 1999, Section 65, for Clause (b) (w.e.f. 1.6.1999).] (d)[ amend any intimation under sub-section (1) of section 206CB.] [Inserted by Finance Act, 2015 (No. 20 of 2015), dated 14.5.2015.] [(1-A) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.] [ Inserted by Act 31 of 1964, Section 7 (w.e.f. 6.10.1964).] (2)Subject to the other provisions of this section, the authority concerned- (a)may make an amendment under sub-section (1) of its own motion, and (b)shall make such amendment for rectifying any such mistake which has been brought to its notice by the assessee, and where the authority concerned is the [* * *] [ Certain words omitted by Act 21 of 1998, Section 65 (w.e.f. 1.10.1998).] [Commissioner (Appeals)] [ Inserted by Act 29 of 1977, Section 29 (w.e.f. 10.7.1978).], by the [Assessing Officer] [ Substituted by Act 4 of 1988, Section 2, for " Income-tax Officer"
(w.e.f. 1.4.1988).] also.[* * *] [ Proviso omitted by Act 32 of 1994, Section 38 (w.e.f. 1.6.1994).] (3)An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this section unless the authority concerned has given notice to the assessee of its intention so to do and has allowed the assessee a reasonable opportunity of being heard. (emphasis supplied by us) (4)Where an amendment is made under this section, an order shall be passed in writing by the income-tax authority concerned. (5)Subject to the provisions of section 241, where any such amendment has the effect of reducing the assessment, the [Assessing Officer] [ Substituted by Act 4 of 1988, Section 2, for " Income-tax Officer" (w.e.f. 1.4.1988).] shall make any refund which may be due to such assessee. (6)Where any such amendment has the effect of enhancing the assessment or reducing a refund already made, the [Assessing Officer] [Substituted by Act 4 of 1988, Section 2, for " Income-tax Officer" (w.e.f. 1.4.1988).] shall serve on the assessee a notice of demand in the prescribed form specifying the sum payable, and such notice of demand shall be deemed to be issued under section 156 and the provisions of this Act shall apply accordingly. (7)Save as otherwise provided in section 155 or sub-section (4) of section 186, no amendment under this section shall be made after the expiry of four years [from the end of the financial year in which the order sought to be amended was passed] [ Substituted by Act 67 of 1984, Section 29, for " from the date of the order sought to be amended" (w.e.f. 1.10.1984).]. (8)[ Without prejudice to the provisions of sub-section (7), where an application for amendment under this section is made by the assessee on or after the 1st day of June, 2001 to an income-tax authority referred to in sub-section (1), the authority shall pass an order, within a period of six months from the end of the month in which the application is received by it,- (a)making the amendment; or (b)refusing to allow the claim.]”
On a perusal of the aforesaid provisions of the Act, Sub-section (3) to Section 154 of the Act provides that “(3)An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this section unless the authority concerned has given notice to the assessee of its intention so to do and has allowed the assessee a reasonable opportunity of being heard.” which as per the Ld. Counsel was never provided to the assessee in the present case. To support her aforesaid contentions, the Ld. Counsel had relied on the following judicial pronouncements:
(i)M. Chocklingam and Meyyappan Vs. CIT (1963) 48 ITR 34 (SC) (ii) Appolo Specialty Hospitals (P) Ltd. Vs. DCIT (2024) 162 taxmann.com 2 (Telegana HC) (iii) Arun Kumar Bose Vs. ITO (2025) 173 taxmann.com 853 (Calcutta HC) (iv) ADIT Vs. Linklaters (2014) 151 taxmann.com 412 ( Mumbai- Trib) (v) M/s. ILJIN Automotive Pvt. Ltd. Vs. ACIT , to 1496/CHHY/2024 (vi) Aivaa Expert Pvt. Ltd. Vs. ITO, (Del-Trib)
Ld.Sr. DR on the other hand supported the order of Ld CIT(A).
We have heard the rival submissions of parties herein and perused the material available on record as well as case laws relied upon by the assessee. As per the facts on record, it is the factual position that the return of income of the assessee was not processed u/s. 143(1) of the Act.
Further, the CPC/A.O had suo motto made rectification vide order u/s. 154 of the Act dated 24.09.2021, wherein no instance regarding opportunity providing to the assessee could be brought on record by the revenue. This goes to the contravention of principle of natural justice as well as violation of provisions of sub section (3) to section 154 of the Act. We, therefore, are of considered view that, in absence of reasonable opportunity as contemplated under sub-section (3) to Section 154 of the Act, the said order u/s. 154 of the Act is liable to be set-aside being in violation of statutory mandate of the Act.
7.1 Our aforesaid view is fortified by the judgment of the Hon’ble Supreme Court in the case of M. Chocklingam and Meyyappan Vs. CIT (supra),wherein it has been held that the action u/s. 35 for rectification of mistake apparent from record may be taken in favor of the tax payer without any notice to him but if the action has the effect of enhancing an assessment or reducing the refund the ITO, acting u/s. 35 must send a notice to the assessee and give him a reasonable opportunity of being heard.”
Further the Hon’ble High Court of Calcutta in the case of Arun 7.2 Kumar Bose Vs. ITO (supra) has held that where rectification order was passed without serving notice and affording opportunity of hearing to the assessee, same was in violation of provision laid down u/s. 154(3) and thus, said order was to be set aside.
Also, the ITAT, Mumbai in the case of ADIT Vs. Linklaters (supra) 7.3 has held that enhancement of assessment in rectification proceedings u/s. 154 without giving notice to the assessee is unsustainable.
In the backdrop of the aforesaid facts and circumstances, respectfully following the aforesaid judicial pronouncements, we find force in the contention raised by Ld AR, thus hold that the rectification order suo motto passed u/s. 154 of the Act dated 24.09.2021, without giving reasonable opportunity of hearing to the assessee as per mandate of sub section (3) to section 154 of the Act is liable to be quashed. We order accordingly.
As the rectification order passed u/s. 154 of the Act dated 24.09.2021 is quashed by us,Ground No 4 &5 of the present appeal of assessee are allowed and remaining grounds challenging the order of Ld. CIT(A) on issues as per ground of appeal by the assessee becomes academic only.
In the result, appeal of the assessee is allowed, as per our aforesaid 10. observations.
Order pronounced in the open court on 21st August, 2025.