Suo motu CPC rectification under sections 143(1) and 154(3) quashed for lack of mandatory prior notice

The ITAT Pune held that while CPC is empowered to rectify an intimation issued under section 143(1), any suo motu rectification under section 154 must comply with section 154(3), which mandates prior notice to the assessee. In this case, CPC passed a rectification order without issuing such notice and incorrectly recorded that the rectification was done at the assessee's instance. The Tribunal found this procedure contrary to law, set aside the order of CIT(A), and directed the AO/CPC to cancel the rectification order. The assessee's appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the rectification intimation under section 154 reducing the exemption claimed under section 10(10AA) and thereby enhancing the assessee's tax liability, could validly be passed by the CPC without issuing prior notice and affording reasonable opportunity of being heard as mandated by section 154(3).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of suo motu rectification under section 154 without notice under section 154(3)

(a) Legal framework

2.1 The Court extracted and relied on section 154 of the Income-tax Act, 1961, particularly sub-sections (1), (2) and (3), noting that: (i) an income-tax authority may amend any intimation under section 143(1) to rectify a mistake apparent from the record; (ii) such amendment may be made on its own motion or on an application by the assessee; and (iii) any amendment which enhances an assessment, reduces a refund or otherwise increases the liability of the assessee shall not be made unless notice of intention to do so is given and a reasonable opportunity of being heard is allowed under section 154(3).

(b) Interpretation and reasoning

2.2 The Court recorded the factual sequence: the original return with partial exemption was processed; a rectification request dated 01.03.2021 was filed only for correction of tax credit, which was acted upon by the CPC on 18.03.2021; thereafter a revised return was filed on 31.03.2021 claiming higher exemption under section 10(10AA); this revised return was accepted and refund granted vide intimation dated 14.04.2021; subsequently, on 06.04.2022, the CPC issued a rectification intimation under section 154 restricting the exemption to Rs. 3,00,000/-, purporting to act on the earlier rectification request dated 01.03.2021.

2.3 The Court accepted the assessee's contention, and the Revenue's admission, that: (i) the later rectification dated 06.04.2022 was made suo motu by the CPC and not on any rectification request relating to the revised return; and (ii) no notice under section 154(3) was issued to the assessee before passing the impugned rectification, notwithstanding that the rectification had the effect of reducing the refund and increasing the assessee's tax liability.

2.4 On a plain reading of section 154(3), the Court held that issuance of notice and granting a reasonable opportunity of being heard is mandatory before making any rectification that enhances assessment, reduces refund or otherwise increases the assessee's liability. The Court noted that the CPC's statement in the rectification intimation that it was acting on the assessee's rectification request dated 01.03.2021 was factually untenable, since that request had already been disposed of and pre-dated the revised return which was subsequently processed and accepted.

2.5 The Court held that, in the facts, the rectification was clearly suo motu and, in absence of the mandatory notice under section 154(3), the rectification order was not in accordance with law.

(c) Conclusions

2.6 The Court concluded that the rectification intimation dated 06.04.2022 passed under section 154, reducing the exemption claimed under section 10(10AA) and thereby reducing refund/increasing liability, without issuing any notice and without affording an opportunity of being heard as required by section 154(3), was illegal and invalid.

2.7 The Court set aside the order of the appellate authority and directed the Assessing Officer/CPC to cancel the rectification order dated 06.04.2022.

2.8 Having allowed the appeal on this legal ground, the Court treated the remaining grounds, including on the quantum and scope of exemption under section 10(10AA), as academic and did not adjudicate them.

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