2025 (1) TMI 1721 - AT - Income Tax

Processing income-tax returns: disallowing s.10(38) long-term capital gains exemption and Chapter VI-A deductions via s.143(1) intimation quashed

The dominant issue was whether, under s.143(1) as it stood prior to the Finance Act, 2008 (w.e.f. 01/04/2008), the AO could, while processing a return, ... Validity of intimation u/s. 143(1) - Scope prior to amendment by the Finance Act, 2008 w.e.f. 01/04/2008 - AR submitted that the ITO, Ward-12(2), Mumbai, while processing the return of income filed by the assessee vide intimation u/s 143(1) disallowed the exemption claimed u/s 10(38) in respect of long-term capital gains earned by the assessee and also disallowed deduction claimed under Chapter-VIA of the Act, which is outside the purview of section 143(1) as it existed prior to its amendment by the Finance Act, 2008 w.e.f. 01/04/2008. HELD THAT:- These disallowances are completely outside the ambit of adjustment as contemplated under the aforenoted provisions of section 143(1) of the Act. Since the AO has transgressed the authority granted under the Act to make the adjustment to the return of income filed by the assessee and issued intimation under section 143(1) of the Act contrary to the provisions of the section, the intimation dated 30/08/2007 issued under section 143(1) of the Act is hereby quashed. As a result, the additional ground of appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether, on the law applicable at the time of processing, an intimation under section 143(1) could lawfully make adjustments by disallowing exemption of long-term capital gains under section 10(38) and by denying deductions claimed under Chapter-VIA, thereby varying the returned income. ISSUE-WISE DETAILED ANALYSIS Issue 1: Permissibility and scope of adjustments under section 143(1) (as it stood prior to amendment w.e.f. 01/04/2008) to disallow section 10(38) exemption and Chapter-VIA deductions Legal framework: The Court examined section 143(1) as it existed on the date of issuance of the intimation. On that text, section 143(1) contemplated sending an intimation based on the return (including tax/interest payable or refund due) after specified adjustments relating to taxes paid/credited, without providing for substantive disallowances of exemption or deductions at the processing stage. Interpretation and reasoning: The Court held that, on a plain reading of the then-applicable section 143(1), the disallowance of exemption on long-term capital gains and the denial of Chapter-VIA deduction were 'completely outside the ambit of adjustment' contemplated under that provision. Since the authority under section 143(1) did not extend to such variations of returned income through these disallowances, the processing officer was found to have transgressed the authority granted by the Act. Conclusions: Because the intimation under section 143(1) was issued contrary to the permissible scope of that provision, the Court quashed the intimation dated 30/08/2007. The additional ground challenging the legality of the adjustments was allowed, and, as a consequence, the remaining grounds (including those relating to rectification and limitation under section 154) were held to be academic and were left open without adjudication.