Adjustment under Section 143(1)(a) without prior notice violates natural justice and is legally unsustainable

The ITAT Ahmedabad held that an adjustment under section 143(1)(a) denying exemption u/s 10(10AA)(ii) without prior issuance of intimation or notice violates the statutory requirement and principles of natural justice. The first proviso to section 143(1)(a) mandates issuance of intimation and consideration of the assessee's response before making any adjustment. The absence of such intimation renders the adjustment procedurally defective and legally unsustainable. Accordingly, the adjustment was set aside, and the appeal filed by the assessee was allowed.

---

---

ISSUES:

Whether the adjustment of Rs. 6,00,501/- under section 143(1)(a) of the Income Tax Act, 1961 was valid despite the non-issuance of statutory intimation or notice prior to making the adjustment.Whether a retired employee of a Public Sector Undertaking (PSU) is entitled to claim full exemption on leave encashment under section 10(10AA) beyond the notified limit of Rs. 3,00,000/-.

RULINGS / HOLDINGS:

The adjustment made under section 143(1)(a) without issuance of intimation as mandated by the first proviso to section 143(1)(a) is "procedurally defective and legally unsustainable," and therefore cannot be sustained in law.The exemption limit of Rs. 3,00,000/- under section 10(10AA)(ii), as prescribed by the Central Government vide Notification No. SO 588(E) dated 31.05.2002, applies to employees of Public Sector Undertakings, and such employees do not qualify as "Government employees" under section 10(10AA)(i); hence, the excess exemption claimed beyond Rs. 3,00,000/- was rightly disallowed by the authorities.Since the adjustment under section 143(1)(a) is invalid on procedural grounds, the Tribunal refrained from adjudicating the merits of the exemption claim under section 10(10AA).

RATIONALE:

The Tribunal applied the statutory framework of section 143(1)(a) of the Income Tax Act, 1961, which mandates that "no adjustment shall be made unless an intimation is given to the assessee either in writing or in electronic mode," and that any response from the assessee must be considered before making adjustments.The Tribunal relied on a coordinate bench decision which held that failure to provide such intimation before adjustment constitutes a violation of the prescribed procedure and principles of natural justice.Regarding the exemption under section 10(10AA), the Tribunal followed the precedent that employees of Public Sector Undertakings do not acquire the status of Central or State Government employees for the purpose of exemption under section 10(10AA)(i), as per the judgment of the Delhi High Court in Kamal Kumar Kalia v. Union of India.The Tribunal noted that the exemption limit of Rs. 3,00,000/- under section 10(10AA)(ii) is prescribed by a valid Central Government notification in force during the relevant assessment year.The Tribunal's decision represents no doctrinal shift but reinforces adherence to procedural safeguards and established legal interpretations regarding exemption eligibility.

---