2025 (11) TMI 42 - AT - Income Tax

Adjustment under s.143(1) without first proviso notice invalidated; leave-encashment exemption under s.10(10AA) restored, intimation quashed

Kriteshwar Prasad Singh Versus The Asst. /Dy. CIT Circle-2 (1) (1) Vadodara

ITAT, Ahmedabad held that the CPC Bengaluru's adjustment under s.143(1) reducing a claim of exemption under s.10(10AA) for leave encashment was invalid ... Adjustment/Intimation u/s 143(1) - addition related to the claim of exemption u/s 10(10AA) in respect of leave encashment on superannuation - whether the Centralized Processing Centre (CPC), Bengaluru, was justified in making an adjustment u/s 143(1) of the Act, restricting the assessee’s claim of exemption under section 10(10AA) of the Act without issuing any prior intimation as required under the first proviso to section 143(1)(a) - HELD THAT:- Section 143(1)(a) of the Act mandates that before making any adjustment to the returned income, the assessee must be given an intimation in writing or in electronic mode, setting out the nature of the proposed adjustment and providing an opportunity to respond within 30 days. The provision is couched in mandatory terms, and its object is to ensure adherence to the principles of natural justice, namely audi alteram partem—that no one should be condemned unheard. In this regard, the issue is squarely covered in favour of the assessee by several decisions of various Benches of the Tribunal. See Devendra Singh Bhaskar [2023 (12) TMI 701 - ITAT AHMEDABAD] Similarly, in Khilav Rajendrakumar Joshi [2024 (11) TMI 1491 - ITAT SURAT] held that any adjustment made under section 143(1) of the Act without issuance of a prior intimation as contemplated under the first proviso to section 143(1)(a) of the Act is contrary to the statutory mandate and violative of natural justice, thereby rendering such intimation invalid in law. In Camellia Educare Trust [2023 (8) TMI 76 - ITAT KOLKATA] it was held that in respect of any proposed adjustment, a prior intimation to the assessee in writing or electronically is mandatory, and any adjustment made without following this requirement is invalid. The Tribunal observed that the failure to issue such prior intimation amounts to denial of natural justice and renders the entire adjustment proceedings unsustainable in law. As no prior intimation was issued to the assessee before making the impugned adjustment, we hold that the intimation issued by CPC, Bengaluru, under section 143(1) of the Act is invalid in law, being in violation of the first proviso to section 143(1)(a) of the Act and the fundamental principle of audi alteram partem. Accordingly, the intimation issued under section 143(1) of the Act is quashed. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an adjustment made by the Centralized Processing Centre (CPC) under section 143(1) of the Income-tax Act without issuance of the prior intimation mandated by the first proviso to section 143(1)(a) is valid. 2. Whether an adjustment involving a debatable question of law (specifically restriction of exemption under section 10(10AA)) can be validly made by CPC under section 143(1) without following the procedural safeguard of prior intimation and opportunity to respond. 3. (Raised but not adjudicated) Whether an employee of a Central Government undertaking is entitled to full exemption under section 10(10AA)(i) as if a Government employee - i.e., the substantive question of entitlement to leave-encashment exemption beyond Rs. 3,00,000 for the year in issue. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of CPC adjustment under section 143(1) absent prior intimation under first proviso to section 143(1)(a) Legal framework: Section 143(1) and the first proviso to section 143(1)(a) require that before making any adjustment to returned income, the assessee must be given an intimation in writing or electronic mode setting out the nature of the proposed adjustment and an opportunity to respond within 30 days. The proviso is couched in mandatory terms and embodies the audi alteram partem principle. Precedent Treatment: The Tribunal relied on several coordinate-bench decisions holding that any adjustment under section 143(1) made without complying with the first proviso is contrary to statute and violative of natural justice; such intimation is thereby invalid and vitiates the entire 143(1) proceedings. Prior orders of the same Bench (referenced and followed) explicitly quashed CPC intimations on identical grounds. Interpretation and reasoning: The Court examined the record and found no evidence of a prior intimation being issued by CPC before effecting the adjustment. The Departmental Representative conceded absence of such intimation. Given the mandatory wording of the proviso and its purpose to secure a hearing before unilateral adjustments, the Tribunal concluded that non-compliance defeats the statutory procedure and fundamental fairness. The Court treated the proviso not as directory but as mandatory, and emphasized that failure to afford the prescribed opportunity renders the 143(1) intimation invalid. Ratio vs. Obiter: Ratio - Failure to issue the prior intimation as mandated by the first proviso to section 143(1)(a) vitiates and renders the CPC intimation under section 143(1) invalid in law. The holding that the entire 143(1) proceedings are unsustainable without such prior intimation constitutes the operative ratio. Conclusion: The intimation issued by CPC under section 143(1) was quashed for non-compliance with the first proviso to section 143(1)(a); the 143(1) proceedings are invalidated on grounds of denial of audi alteram partem. Issue 2: Competence of CPC to make adjustments on debatable questions of law under section 143(1) without prior intimation Legal framework: The same statutory mandate (first proviso to section 143(1)(a)) governs any adjustment contemplated under section 143(1), including those touching legal questions or claims whose correctness is not immediately apparent from the return. The proviso requires written/electronic intimation and an opportunity to reply before any adjustment is made. Precedent Treatment: Coordinate Bench decisions referred to by the Tribunal have held that CPC cannot mechanically make adjustments on debatable legal issues without issuing the statutory prior intimation and considering the taxpayer's response; failure to do so renders the adjustment unlawful. Interpretation and reasoning: The Tribunal observed that the impugned restriction of exemption under section 10(10AA) involved a debatable legal question (entitlement and limits of exemption). Given the mandatory proviso and absence of prior intimation, the Tribunal found that CPC exceeded the permissible procedural scope by unilaterally making the adjustment. The objective of the proviso - ensuring meaningful opportunity to contest proposed adjustments - applies with full force where the correctness of a claim is debatable. Ratio vs. Obiter: Ratio - CPC is not justified in making adjustments on debatable legal questions under section 143(1) without compliance with the first proviso; such adjustments are procedurally vitiated. This follows as part of the primary holding quashing the intimation. Conclusion: The adjustment impinging on a debatable legal claim (section 10(10AA) exemption) could not validly be made by CPC without prior intimation and opportunity to respond; the adjustment is therefore set aside along with the 143(1) intimation. Issue 3: Merits - entitlement to exemption under section 10(10AA) (raised but not adjudicated) Legal framework: Section 10(10AA) prescribes exemption for leave encashment on superannuation/retirement subject to specified statutory limits; different sub-clauses distinguish Government employees from others, with limits applicable accordingly. Notifications of the Board may affect quantum prospectively. Precedent Treatment: The assessing and appellate authorities considered judicial authorities and CBDT notifications in their merit-level analysis; however, the Tribunal expressly refrained from adjudicating the merits in view of its primary finding on procedural invalidity. Interpretation and reasoning: Because the intimation under section 143(1) was quashed for procedural non-compliance, the Tribunal held that merit issues (including whether employees of a Central Government undertaking qualify for full exemption under the relevant sub-clause and the temporal applicability of Board notifications) became academic for purposes of the present appeal and were not decided. Ratio vs. Obiter: Obiter - Any observations touching the substantive entitlement under section 10(10AA) are not part of the ratio; the Tribunal explicitly withheld adjudication of those merits. Conclusion: Merits regarding entitlement to leave-encashment exemption beyond Rs. 3,00,000 were not adjudicated and remain open for future proceedings if the statutory procedure (prior intimation and opportunity to respond) is complied with. Cross-references and Practical Consequence Where an adjusting authority (including CPC) effects changes under section 143(1) without issuing the prior intimation required by the first proviso to section 143(1)(a), such action is contrary to statute and natural justice and will be quashed; consequent merits of the adjustment need not be decided in such cases and must be reopened only after compliance with the proviso. The Tribunal follows and applies coordinate-bench precedents reaching the same conclusion.