2024 (11) TMI 1491 - AT - Income Tax

Intimation under s.143(1) dated 31.03.2023 quashed for failure to follow proviso and natural justice in leave encashment adjustment

Khilav Rajendrakumar Joshi Versus The DCIT, Central Processing Centre (CPC), Bangaluru

ITAT SURAT-AT held that the intimation issued u/s 143(1) dated 31.03.2023 is invalid and quashed. The AO adjusted leave encashment without giving the ... Denial of claim u/s 10(10AA)(ii) - intimation issued u/s 143(1) - as argued DR has not informed about the issue of intimation to the assessee prior to adjustment u/s 143(1). HELD THAT:- In the present case, the appellant has submitted that no such intimation was given by the AO before making adjustment on account of leave encashment. The appellant has raised grounds of appeal on this issue before the CIT(A) who has not decided the ground despite the specific ground and written submission in this regard. He has directly decided the ground relating to disallowance of claim of leave encashment. Therefore, it is cleared that there has been violation of statutory provisions, being proviso to section 143(1)(a) of the Act as well as the principles of natural justice. Therefore, the intimation issued u/s 143(1), dated 31.03.2023, is against the first proviso to section 143(1)(a) and, therefore, the entire proceedings u/s 143(1) is invalid in law. The Coordinate Bench of Ahmedabad in the case of Devendra Singh Bhaskar [2023 (12) TMI 701 - ITAT AHMEDABAD] has decided the issue in favour of assessee after following the earlier decision of Arham Pomps [2022 (5) TMI 608 - ITAT AHMEDABAD] We hold that the entire proceedings u/s 143(1) is vitiated and is invalid in law. Consequently, the intimation u/s 143(1) of the Act by CPC is quashed. ISSUES PRESENTED AND CONSIDERED 1. Whether adjustments made by the Assessing Officer under section 143(1)(a) of the Income-tax Act without first giving an intimation to the assessee (as required by the first proviso to section 143(1)(a)) render the processing/intimation under section 143(1) invalid. 2. Whether the Appellate Commissioner erred in dismissing the appeal without deciding the preliminary jurisdictional issue concerning non-issue/non-service of intimation under section 143(1)(a). 3. Whether the allowance/exemption of leave encashment under section 10(10AA)(ii) was correctly restricted to Rs.3,00,000 and whether the disallowance/excess disallowance requires adjudication (not decided on merits due to issue (1)). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of adjustments under section 143(1)(a) without intimation (legal framework) Legal framework: Section 143(1) provides for processing of returns and lists limited adjustments in sub-clauses (i)-(vi). The first proviso to section 143(1)(a) mandates 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'; the proviso further requires consideration of any response within thirty days before making adjustments. Precedent treatment: The Tribunal referred to coordinate-bench decisions (Ahmedabad Bench) which held that processing/adjustments made without issuance of the required intimation are vitiated. Those decisions (including earlier Ahmedabad decisions cited) were followed by the Tribunal in this judgment. Interpretation and reasoning: The Tribunal held that the statutory scheme makes issuance of the intimation a mandatory pre-condition to any adjustment under section 143(1)(a). The absence of such intimation prior to processing means the statutorily prescribed opportunity to respond (and thereby the principles of natural justice) is denied. On the facts, the return was processed by CPC with an adjustment of leave-encashment amount without evidence of prior intimation to the assessee; the Revenue did not demonstrate issuance/service of intimation when afforded opportunity in proceedings. Consequently, the processing/intimation dated 31.03.2023 was held to be contrary to the first proviso to section 143(1)(a). Ratio vs. Obiter: The holding that adjustments under section 143(1)(a) made without the mandatory intimation are invalid is ratio, grounded on statutory text and affirmed by reliance on coordinate-bench precedents. Observations about natural justice and the requirement to consider any response are ratio insofar as they explain the mandatory nature of the proviso. Conclusion: The Tribunal quashed the entire intimation/proceedings under section 143(1) insofar as the adjustment was made without issuance of the required intimation; the section 143(1) processing was declared vitiated and invalid in law. Issue 2 - Failure of the first appellate authority to adjudicate the preliminary jurisdictional issue Legal framework: An appellate authority is required to consider and decide grounds of appeal raised by the assessee, including jurisdictional or procedural grounds challenging the validity of assessment/intimation actions. Precedent treatment: The Tribunal relied on the fact that lower authorities and coordinate benches have addressed jurisdictional defects in section 143(1) intimation when raised by the assessee. Interpretation and reasoning: The Tribunal noted that the assessee specifically raised, and submitted on, the statutory violation under section 143(1)(a) (non-issue/non-service of intimation). The CIT(A) did not decide that preliminary ground but proceeded to decide the substantive claim of disallowance under section 10(10AA)(ii). The Tribunal treated the non-adjudication of the jurisdictional preliminary issue as a material omission because, if the intimation/proceedings are invalid, the substantive adjudication becomes otiose. Ratio vs. Obiter: The observation that appellate authorities must consider and decide jurisdictional challenges raised before them is ratio to the extent it guided the Tribunal to quash the proceedings; the specific treatment of CIT(A)'s omission is applied to the facts and forms part of the operative reasoning. Conclusion: Because the jurisdictional defect (absence of statutory intimation) was neither rebutted by the Revenue nor decided by CIT(A), and because that defect vitiates the entire section 143(1) processing, the Tribunal allowed the appeal on this ground without deciding substantive merits. Issue 3 - Merits of disallowance of leave-encashment exemption under section 10(10AA)(ii) Legal framework: Section 10(10AA)(ii) (as invoked in the proceedings) deals with exemption of certain leave-encashment amounts; the return claimed a larger exemption with the Assessing Officer restricting exemption to Rs.3,00,000 and adding the balance. Precedent treatment: The Tribunal noted the decision relied upon by the assessee but did not proceed to adjudicate the substantive correctness of the disallowance because the preliminary defect rendered the intimation invalid. Interpretation and reasoning: The Tribunal expressly refrained from deciding the substantive issue of entitlement under section 10(10AA)(ii) once it concluded that the processing under section 143(1) was vitiated by non-issuance of intimation. The Tribunal's decision to quash the intimation means the merits are left open for fresh consideration in accordance with law and procedure if and when appropriate. Ratio vs. Obiter: Any remarks regarding correctness of the leave-encashment disallowance are obiter, as the Tribunal did not adjudicate the substantive claim; the refusal to decide merits is part of the operative disposition. Conclusion: The Tribunal did not decide whether the restriction of exemption under section 10(10AA)(ii) was correct; the substantive issue remains undecided due to quashing of the section 143(1) intimation. Cross-reference and operative disposition The conclusions on Issue 1 and Issue 2 are interlinked: because the Tribunal concluded (following statutory text and coordinate-bench precedents) that the first proviso to section 143(1)(a) was not complied with, the impugned intimation/processing under section 143(1) was quashed, and consequently the Tribunal did not adjudicate the substantive ground relating to section 10(10AA)(ii). The appeal was allowed on the basis of the jurisdictional/procedural defect.