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Facts
The assessee filed a revised return claiming higher leave encashment exemption of Rs.9,00,505/- instead of the Rs.3,00,000/- allowed by the employer. The CPC processed this revised return under Section 143(1) and disallowed the excess claim of Rs.6,00,501/- without issuing a prior intimation, restricting the exemption to Rs.3,00,000/-. The CIT(A) dismissed the assessee's appeal, holding that ONGC employees are not government employees for full exemption under Section 10(10AA)(i) and the Rs.3,00,000/- limit for Section 10(10AA)(ii) was valid.
Held
The Tribunal held that the adjustment made by the CPC under Section 143(1)(a) was procedurally defective and legally unsustainable due to the non-issuance of prior intimation or notice to the assessee as mandated by the first proviso to Section 143(1)(a). Following judicial precedent, the Tribunal quashed the intimation to the extent of the adjustment of Rs.6,00,501/- and set aside the CIT(A)'s order on procedural grounds, without adjudicating the merits of the exemption claim.
Key Issues
Whether the adjustment made by the CPC under Section 143(1)(a) for disallowing excess leave encashment exemption without issuing prior intimation to the assessee was legally valid.
Sections Cited
139(1), 139(5), 143(1), 143(1)(a), 10(10AA), 10(10AA)(i), 10(10AA)(ii), 250, 89(1)
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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: MS.SUCHITRA R. KAMBLE & SHRI MAKARAND V.MAHADEOKARShri Bhupendra C. Mehta, Advocate Shri Amit Pratap Singh Sr.DR
आदेश आदेश/O R D E R आदेश आदेश
PER MAKARAND V.MAHADEOKAR, AM:
This appeal filed by the assessee is directed against the order dated 22.11.2024 passed by the Learned Additional Joint Commissioner of Income Tax (Appeals)-4, Chennai from the Office of Commissioner of Income Tax (Appeals) [hereinafter referred to as “CIT(A)”] under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”], for the assessment year 2021–22, whereby the Ld. CIT(A) confirmed the adjustment made by the Centralized Processing Centre (CPC), Bengaluru under section 143(1) of the Act, restricting the claim of exemption under section 10(10AA)(ii) to Rs.3,00,000/- and thereby disallowing the excess claim of Rs.6,00,501/- made by the assessee in respect of leave encashment on retirement.
Facts of the Case 2.1 The brief facts of the case, as emanating from the record, are that the assessee, an individual and a resident, filed his original return of income under section 139(1) of the Act for the A.Y. 2021–22 on 30.12.2021, declaring a total income of Rs.38,32,290/-, which included gross salary income of Rs.38,34,594/-. Based on the said return, the CPC processed the same under section 143(1) of the Act vide intimation dated 24.03.2022, accepting the returned income and issuing refund of Rs.46,720/-.
2.2 Thereafter, the assessee filed a revised return of income (RROI) under section 139(5) of the Act on 26.03.2022, declaring a revised total income of Rs.32,31,770/-, consisting of gross salary income of Rs.32,34,090/- and income from other sources of Rs.2,13,999/-. In the said return, the assessee claimed exemption of Rs.9,00,505/- under section 10(10AA)(ii) of the Act in respect of leave encashment received on retirement, as against the exemption of Rs.3,00,000/- granted by the employer and reflected in the Form 16. The CPC, however, processed the revised return under section 143(1) of the Act vide intimation dated 30.11.2022 and made an adjustment under clause (a) of section 143(1) by disallowing Rs.6,00,501/-, restricting the exemption to Rs.3,00,000/-, thereby assessing the total income at Rs.38,32,280/- and raising a resultant demand of Rs.6,00,501/-.
2.3 The assessee preferred an appeal before the Ld. CIT(A), contending inter alia that the said adjustment was made without issuing notice under section 143(1)(a), thereby violating principles of natural justice and the express statutory mandate. The assessee further contended that as a retired employee of Oil and Natural Gas Corporation Limited (ONGC)—a public sector undertaking—the entire amount of leave encashment on retirement ought to be exempt under section 10(10AA)(i), or in the alternative, at least the relief under section 89(1) ought to have been allowed.
2.4 The Ld. CIT(A), after considering the submissions and legal provisions, dismissed the appeal. In doing so, he held that ONGC being a public sector undertaking (PSU), the assessee could not be treated as a Government employee within the meaning of section 10(10AA)(i). He relied upon the judgment of the Hon’ble Delhi High Court in Kamal Kumar Kalia v. Union of India (2019), wherein it was held that employees of PSUs and nationalised banks, though considered as “State” under Article 12 of the Constitution for the purposes of public law remedies, do not acquire the status of Central or State Government employees for the purpose of exemption under section 10(10AA)(i). The Ld. CIT(A) also noted that the limit of Rs.3,00,000/- for exemption under clause (ii) of section 10(10AA) has been prescribed by the Central Government vide Notification No. SO 588(E) dated 31.05.2002, and was in force during the year under consideration. Accordingly, he held that the CPC’s action in restricting the exemption to Rs.3,00,000/- was in accordance with law and did not suffer from any infirmity.
2.5 Aggrieved, the assessee is now before us raising following grounds of appeal: 1. 143(1)(a): The Ld. Addl. JCIT(A) grossly erred on facts and in law in dismissing the appeal without adjudicating the preliminary issue raised regarding the violation of statutory provision of section 143(1)(a) of the Income-tax Act, 1961 in the form of non-issue and service of the notice by the Ld. AO u/s 143(1)(a) of the Act before making the adjustment of Rs. 6,00,501/-.
2. Section 143(1): The Ld. Addl. JCIT(A) grossly erred on facts and in law in not considering and adjudicating the raised ground in the appeal that the addition made by the Ld. AO is without jurisdiction and authority of law.
3. Section 10(10AA)(ii) wrongly disallowed: The Ld. Addl. JCIT(A) has grossly erred in law and is not justified in confirming the addition made by the Ld. AO without deciding the involved question of law and not allowing the exemption exceeding Rs. 3 lakhs u/s 10(10AA)(ii) of the Act considering the invalid Gazette Notification No. SO 588(E) dated 31.05.2002 issued by CBDT effective 01.04.1998.
4. Section 10(10AA)(ii):
On merits also, the exemption claimed by the appellant exceeding Rs. 3 lakhs is allowable. 5. General ground: The appellant craves leave to add, amend, alter, or withdraw any ground of appeal.
2.6 During the course of hearing, the learned Authorised Representative (AR) appearing on behalf of the assessee placed on record detailed written submissions, reiterating the grievances raised in the grounds of appeal and inviting attention of the Bench to the alleged violation of section 143(1)(a) of the Act. It was submitted that the impugned adjustment of Rs.6,00,501/- made by the CPC by restricting the claim of exemption under section 10(10AA)(ii) to Rs.3,00,000/- was without prior issuance of any intimation or notice under section 143(1)(a). The assessee contended that such adjustment, made without affording an opportunity of being heard, is in clear violation of the principles of natural justice. It was pointed out that the appellant had specifically raised this legal issue before the CIT(A), urging that no notice proposing the said adjustment was issued, as mandated under section 143(1)(a). However, the Ld. CIT(A) chose not to adjudicate this ground and instead proceeded mechanically to confirm the adjustment made by CPC, without appreciating the foundational procedural lapse.
2.7 In support of these submissions, the AR placed reliance on the following decisions of Co-ordinate Bench in case of Harshvadan Natvarlal Chavda (ITA No. 794/Ahd/2025) where on the similar grounds the relief was granted to the assessee. On the merits, the AR also placed reliance on the decision of Co-ordinate Bench in case of Suman Kumar Jha (ITA No. 1179/Ahd/2024).
On the other hand, the learned Departmental Representative (DR) appeared and relied heavily upon the order of the Ld. CIT(A).
We have carefully considered the contentions raised by the assessee in the grounds of appeal and the submissions advanced during the hearing, perused the orders of the lower authorities, and examined the legal provisions and judicial precedents brought to our notice. The appeal raises two principal issues for adjudication:
(i) whether the adjustment of Rs.6,00,501/- under section 143(1)(a) was vitiated in law due to non-issuance of statutory intimation; and (ii) whether the assessee, being a retired employee of a Public Sector Undertaking (ONGC), is entitled to claim full exemption of leave encashment under section 10(10AA) beyond the notified limit of Rs.3,00,000/-.
4.1 The assessee has emphatically contended that the CPC made the adjustment of Rs.6,00,501/- to the revised return of income without issuance of any prior notice under section 143(1)(a). This contention is supported by material on record including a portal printout evidencing the absence of such intimation. The Ld. DR did not place any evidence to contradict this assertion or demonstrate that intimation as required under the proviso to section 143(1)(a) was indeed served.
4.2 We find considerable force in the assessee’s submission. The statutory framework under the first proviso to section 143(1)(a) mandates that no adjustment shall be made unless an intimation is given to the assessee either in writing or in electronic mode, and that the response received from the assessee, if any, shall be considered before making any adjustment. The absence of such intimation renders the adjustment procedurally defective and legally unsustainable. In this regard, we draw support from the recent coordinate bench decision of ITAT Ahmedabad in Harshvadan Natvarlal Chavda v. DCIT (ITA No. 794/Ahd/2025, order dated 17.07.2025). The relevant paras of the order are reproduced hereunder – 8. As per the provisions of the Act, an intimation has to be given to the assessee whether in writing or in electronic mode before making such adjustments. Here, in this case, the assessee was not given any intimation as per 1st proviso to section 143(1)(a) of the Act and CPC straight away made adjustments in 143(1) proceedings and communicated to the assessee by reducing the refund claimed by the assessee which is against the prescribed procedure laid down in the Act. Hence, the appeal of the assessee is hereby allowed owing to procedural lapse on account of failure to intimate the assessee of such adjustments either in writing or in electronic mode.
In the result, the appeal of the assessee is allowed.
4.3 Respectfully following the above binding precedent, we hold that the adjustment made in the present case under section 143(1)(a), being in violation of the statutory safeguards and principles of natural justice, cannot be sustained in law. We accordingly refrain from adjudicating the merits of the assessee’s claim under section 10(10AA), since the adjustment itself is unsustainable on procedural grounds.
4.4 Accordingly, the intimation under section 143(1) dated 30.11.2022 is quashed to the extent of the adjustment of Rs.6,00,501/-. Consequently, the impugned order passed by the Ld. CIT(A) is also set aside.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Court on 1st August, 2025 at Ahmedabad.