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Facts
The assessee claimed an exemption of Rs. 14,63,550/- under Section 10(10AA)(ii) for leave encashment, but the Assessing Officer made an adjustment of Rs. 11,63,550/- to the declared income without issuing a statutory notice. This adjustment was confirmed by the CIT(A), leading to the current appeal.
Held
The Tribunal held that the adjustment made by the CPC under Section 143(1)(a) was procedurally invalid as no prior intimation was given to the assessee, which is a mandatory requirement as per the first proviso to Section 143(1) of the Act. Therefore, the appeal was allowed due to this procedural lapse.
Key Issues
Whether an adjustment made under Section 143(1)(a) is valid if no prior intimation is given to the assessee, and whether the disallowance of the exemption claimed under Section 10(10AA)(ii) was justified.
Sections Cited
143(1), 143(1)(a), 10(10AA)(ii), 250, 139, 142, 89(1), 90, 90A, 91
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: DR. B.R.R. KUMAR, VICE-Ms. SUCHITRA KAMBLE
PER DR. B.R.R. KUMAR, VICE-PRESIDENT:-
The captioned appeal has been filed by the assessee against the order dated 21.02.2025 passed by the Ld. ADDL/JCIT(A), Kanpur (hereinafter referred to as "CIT(A)" for short), passed u/s 250 of the Income-tax Act, 1961, (hereinafter referred to as "the Act" for short) for the Assessment Year (AY) 2020-21.
The assessee has raised the following grounds of appeal:
“1. The order of the Ld AO passed u/s 143(1) of the Act is without jurisdiction and authority of law and therefore deserves to be quashed.
2. The Ld Addl. JCIT(A) has grossly erred in law and is not justified in confirming the addition made by the Ld AO and not allowing the exemption exceeding Rs. 3 lakhs u/s 10(10AA)(ii) of the Act considering the invalid Gazette Notification No.50588 E dated 31.05.2002 issued by CBDT effective 01.04.1998 3. On merit also, the exemption claimed by the appellant exceeding Rs. 3 lakhs is allowable.”
In this case, the assessee filed the return of income for the year under consideration on 16.10.2020, declaring a total income of Rs.23,87,860/-, which included Gross Salary Income of Rs.19,29,606/- and Income from Other Sources of Rs.5,08,612/-. A refund of Rs.1,63,720/- was claimed by the assessee.
The Assessing Officer made an adjustment of Rs.11,63,550/- to the declared income without issuing the statutory notice as required under the proviso to Section 143(1)(a) of the Act. This adjustment was made based on the difference between the declared gross taxable salary of Rs.19,29,606/- and the assessed salary of Rs.30,93,156/-, as per the intimation order dated 29.10.2021 received via email on 30.10.2021, which is now under appeal.
The adjustment relates to the exemption of Rs.14,63,550/- claimed under Section 10(10AA)(ii) on account of leave encashment received on retirement amounting to Rs.24,97,578/-, of which only Rs.3,00,000/- was exempted by the employer as per the salary certificate forming part of the Return of Income. The excess exemption claimed is backed by the Writ Petition No. 11846 of 2019 before the Hon’ble Delhi High Court, wherein the Court has prima facie acknowledged that the exemption limit under Section 10(10AA)(ii), not being revised since 1998, appears unjustified considering rising inflation and pay scale revisions. It was submitted that any taxed portion of leave encashment or other retiral benefits qualifies for relief under Section 89(1) of the Act.
Aggrieved by the intimation order dated 29.10.2021 making adjustment of Rs.11,63,550/-, the assessee filed appeal before the Ld. CIT(A) who dismissed the appeal of the assessee.
On going through the record, we find that an adjustment of Rs.11,63,550/- has been made by the CPC, Bangalore u/s.143(1) of the Act. The Ld. Counsel for the assessee argued that before making adjustment u/s.143(1)(a) of the Act, no notice has been given to the assessee. The Ld. DR could not bring anything on record to prove that any prior intimation has been issued to the assessee before making the adjustment.
We have gone through the provisions of Section 143(1) of the Act which reads as under:
“143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—
(a) the total income or loss shall be computed after making the following adjustments, namely:—
(i) any arithmetical error in the return;
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;
(iv) disallowance of expenditure 82[or increase in income] indicated in the audit report but not taken into account in computing the total income in the return;
(v) disallowance of deduction claimed under 83[section 10AA or under any of the provisions of Chapter VI-A under the heading "C.—Deductions in respect of certain incomes", if] the return is furnished beyond the due date specified under sub-section (1) of section 139; or (vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:
Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:
Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:
Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018;
(b) the tax, interest and fee, if any, shall be computed on the basis of the total income computed under clause (a);
(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax, interest and fee, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, 84[any relief allowable under section 89,] any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax, interest or fee;
(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and (e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee: …...."
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.
The order is pronounced in the open Court on 17.07.2025