Direct Tax

May 2024

Mumbai Tribunal upholds the validity of a non-speaking intimation under section 143(1); overlooks the earlier decision

I.     Preliminary issue of parties before the ITAT:

1.    Whether intimation issued u/s. 143(1) in a non-speaking manner i.e. without assigning reasons for rejecting assessee’s response against proposed adjustments is a valid one. 

2.   The Assessee contended that:

i)  the Tax Auditors of the Assessee merely made a disclosure under clause 21(a) in the tax audit report, giving details of expenditure by way of penalty or fine for violation of law for time in being in force in respect of amount paid to Tata Memorial Hospital pursuant to the directions of the Bombay High Court. 

ii)  the said amount did not represent any penalty for violation of any law for the time being in force.

iii) intimation u/s. 143(1) has been issued without dealing with the Assessee’s response to 143(1) explaining the nature of expenditure and why no adjustment is required merely based on the disclosure in the tax audit report.

iv) decision of the co-ordinate bench of Mumbai ITAT supports the contention that a non-speaking intimation u/s.  143(1) is invalid.


       3.    The Revenue contended that:

i)  CPC has limited jurisdiction for making a prima facie adjustment in the return of income. 

ii)  CPC communicated to the Assessee about the proposed adjustment not only once but twice.

iii) considering the response filed by the Assessee, the CPC made adjustment to the returned income.

 II.  Summary of ITAT decision:


1.  ITAT upheld the CIT(A)’s decision and held that the intimation u/s. 143(1) need not be a speaking one since the section itself requires mere intimation of the proposed adjustment to the assessee which the CPC has done twice.

2. The CPC has intimated the reasons for the proposed adjustment to the assessee. 

3. Relies upon and follows the decision of the Supreme Court in Rajesh Jhaveri Stock Brokers to distinguish between an ‘intimation’ and an ‘order to support the argument that the intimation need not be speaking.

4. Distinguishes the decision of co-ordinate Bench of ITAT in P. R. Packaging on the count that in the said decision the Tax Auditor had not clearly reported as to whether the amount was disallowable unlike in the present case.

III.   Our Comments:

1.  ITAT overlooks the application of second proviso to s. 143(1) which mandates for issuing a prior intimation to the assessee and granting an opportunity to the assessee to respond to the proposed adjustment within 30 days. The AO is duty bound not only to receive the response of the assessee but also to consider the same before making any adjustment to the returned income.

2.  The legislative intent behind such prior intimation and seeking of assessee’s response cannot be to put in place just an empty formality. 

3.  Prior intimation to assessee and obtaining response from the assessee before issuing the intimation u/s. 143(1) ensures following the principles of natural justice while discharging the quasi-judicial functions of the AO. 

4.  If reasoning of the CPC is not warranted prior to making of any adjustments to the returned income in the intimation, the same would lead to a carte- blanche adjustments and the only remedy available to the assessee would be to prefer an appeal against such adjustments which could be avoided at CPC level itself.

5.  Although ITAT has distinguished the decision of Mumbai ITAT in P. R. Packaging, it is not clear as to whether the earlier Mumbai ITAT decision in Kalpesh Synthetics was relied upon by the assessee. Since the soul of the decision in P. R. Packaging is the ratio in Kalpesh Synthetics, the same has been completely ignored. In Kalpesh Synthetics, Mumbai ITAT has not only dealt with the nuances of intimation u/s. 143(1) threadbare, especially the significance of a speaking intimation, but it has also been held that mere disclosure in the tax audit report cannot be the basis for adjustment in the intimation u/s. 143(1) having recourse to clause (iv) to sub-section 143(1)(a). Since, P. R. Packaging has followed the decision in Kalpesh Synthetics and therefore, ITAT ought to have referred the issue to a larger bench if it was not in agreement with the view taken in Kalpesh Synthetics in order to ensure judicial discipline.  To that extent, this decision, with due respect, is per-incuriam.   


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