ORDER
Sudhanshu Srivastava, Judicial Member.- This appeal is preferred by the assessee against order dated 03/09/2025 passed by learned Commissioner of Income Tax (Exemptions), Lucknow/ National Faceless Appeal Centre, Delhi [hereinafter called the “CIT(E”)] for AY 2018-19.
2. The brief facts of the case are that the assessee was running an School and Library along with a dispensary for the poor since the year 1960. The assessee had filed its return of income in ITR – 7 claiming exemption under section 10(23C)(vi) of the Income Tax Act, 1961 (hereinafter called the “Act”) on 30.09.2018 for the captioned assessment year. The turnover declared was Rs. 12,58,167/- and accordingly after claiming the exemption under section 10(23C)(vi) of the Act, the return was filed at Nil income. Subsequently on 28.09.2019 assessment proceedings were initiated by issuance of notice under section 143(2) of the Act. Further intimation under section 143(1) of the Act (after processing the return) was passed on 09.02.2020. Subsequently, the assessee realized that there was an apparent mistake committed while filing return of income by claiming exemption under section 10(23C)(vi) of the Act whereas the assessee’s case fell within the provision of section 10(23C)(iiiad) of the Act as the assessee’s gross receipts were less than Rs. 1 crore. However, the rectification application moved by the assessee came to be rejected and a demand of Rs. 3,88,775/-came to be raised against the assessee. Thereafter, the assessment order was passed under section 143(3) of the Act on 17.03.2021 wherein the income as per the intimation under section 143(1) of the Act was accepted without making any further addition under section 143(3) of the Act.
2.1 Aggrieved, the assessee carried the matter to the learned First Appellate Authority (hereinafter called the learned “NFAC”) challenging the assessment order passed under section 143(3) of the Act by mechanically retaining the adjustment made by the CPC, Bangalore and by passing a nonspeaking order. The assessee also submitted before the learned NFAC that the AO had failed to appreciate the replies and supporting documents submitted during the course of hearings before the AO which entitled the assessee to exemption under section 10(23C)(iiiad) of the Act. However, the learned FAA dismissed the assessee’s appeal by holding that the assessee could not have claimed exemption without having a valid registration under section 12A of the Act and that the failure to produce the registration certificate under section 12A of the Act by the assessee would not entitle the assessee to claim any kind of exemption under section 10(23C)(iiiad) of the Act.
2.2 Against the order of the learned FAA the assessee is now before this Tribunal and has raised the following grounds of appeal:
“1. Because the assessing officer erred in making addition of gross receipts of Rs.12,58,167/- wrongly deeming the addition made in the Intimation issued by the IT department u/s 143(1) as assessed income though the return filed by the assessee was of nil income.
2. Because the Assessing Officer failed to appreciate the replies along with relevant attachments filed by the assessee during the course of hearing on 24/02/2021 and later on 26/02/2021 having all material facts and various provisions and legal citations contained therein.
3. Because the assessing officer wrongly considered the addition as assessed income made in the Intimation issued u/s 143(1) of the IT Act, 1961 ignoring the fact that such Intimation can never be recognized as assessment order for making any addition.
4. Because the assessing officer ignored the rectification of such erroneous Intimation (filed online) though it was rejected by the department without assigning any reason.
5. The appellant craves leave to add/alter grounds of appeal before or at the time of hearing.”
3. The learned Authorized Representative (AR) drawn my attention to the grounds of appeal and submitted that the learned NFAC had failed to appreciate that the assessee was an Educational Institution with gross receipts well below Rs. 1 crore and was, therefore, eligible for blanket exemption under section 10(23C)(iiiad) of the Act for which registration under section 12A of the Act was not required at all. The learned Authorized Representative (hereafter called the ‘learned AR’) further submitted that moreover the AO had passed a non-speaking order under section 143(3) of the Act by mechanically retaining the adjustment made by the CPC, Bangalore in the intimation under section 143(1) of the Act which was devoid of any reasons and was passed by completely ignoring the submissions of the assessee.
3.1 It was further argued by the learned AR that it was completely illegal on the part of the AO to adopt the adjustment made under section 143(1) of the Act in the order passed under section 143(3) of the Act, although notice under section 143(2) of the Act was issued prior to the passing of intimation under section 143(1) of the Act. Inviting my attention to the dates in this regard, it was submitted that the notice under section 143(2) of the Act was issued on 28.09.2019 whereas the intimation under section 143(1) of the Act was passed on 09.02.2020 and the assessment order under section 143(3) of the Act incorporating the prima-facie adjustment made under section 143(1) of the Act was passed on 17.03.2021 which was against the settled law in this regard. It was submitted that the issue as to whether any intimation passed under section 143(1) of the Act after selection of a case for scrutiny is valid or not is no longer res-integra and there have been numerous decisions of the Tribunal wherein it has been held that once the case has been selected for scrutiny proceedings, the intimation under section 143(1) of the Act cannot be passed validly. He placed reliance on the judgment of the Hon’ble C.E.S.C. Ltd. v. Dy. CIT 647/[2003] 262 ITR 243 (Calcutta) and submitted that once a notice under section 143(2) of the Act is issued, the intimation under section 143(1) of the Act of the would no longer exist. He prayed that in view of the settled judicial precedents as aforesaid, the intimation under section 143(1) of the Act was bad-in-law and should be quashed and that resultantly the assessment under section 143(3) was also to be quashed.
4. Per contra, the learned Senior Departmental Representative (hereafter called the Learned Sr. DR) submitted that the assessee had initially committed a mistake by claiming exemption under section 10(23C)(vi) of the Act instead of section 10(23C)(iiiad) of the Act and, therefore, undisputedly a mistake had been committed by the assessee and if the rectification application under section 154 of the ACT came to be dismissed, the assessee should have been gone into appeal against the order rejecting the rectification application of the assessee and should not have raised the legality of the assessment proceedings at this stage. Learned Sr. DR submitted that it is also undisputed that the assessee does not enjoy any registration under section 12A of the Act and, therefore, to serve the interest of justice, the file should be restored to the office of the AO to reconsider and re-adjudicate all the above issues raised by the assessee.
5. I have heard the rival submissions and have also perused the material on record. It is seen that the notice under section 143(2) of the Act was issued on 28.09.2019 whereas the intimation under section 143(1) of the Act was passed on 09.02.2020 and the assessment order under section 143(3) of the Act incorporating the prima-facie adjustment made under section 143(1) of the Act was passed on 17.03.2021. Thus, it remains undisputed that the intimation under section 143(1) of the Act was issued subsequently to the issuance of notice under section 143(2) of the Act which, as per settled law, is not legally permissible. It is seen that the case of the assessee is squarely covered by the judgment of the Hon’ble Calcutta High Court in the case of C.E.S.C. Ltd. (supra) wherein the operative part is extracted below:
“5. After the AO issued the notices u/s 143(2) for A.Y.2016-17 & 201718 the CPC passed the impugned orders u/s 143(1) on 21.02.2018 & 31.03.2019 respectively. Therefore, the impugned orders passed by the CPC u/s 143(1) are subsequent to the returns of income already taken up for scrutiny by the AO. The Hon’ble Gujarat High Court in case of Gujarat Poli-Aux Electronics Ltd. v. DCIT (supra) has held in para 15 & 16 as under:
“15. Mr. Shah, learned Counsel has placed reliance on the decision of Calcutta High Court in the case of Modern Fibotex India Limited v. Dy. C.I.T. , 212 ITR 496. In view of the Calcutta High Court when once notice under Section 143(2) has been issued there is no scope for Assessing Officer either to make prima facie adjustment on the basis of the return as filed or issue intimation under Section 143(1)(a) of the Act. Emphasis is given to the omission by the legislature with regard to savings of powers as is found in sub-section (1) of Section 143. If issuance of notice under Section 143(2) would have been without prejudice to “intimation under Section 143(1) it could be said that parallel proceedings are permitted. The legislature specifically provided that issuance of intimation under Section 143(1)(a) would be without prejudice to provisions of Section 143(2). The provision is made so as to indicate the difference in the nature of two subsections. In view of Calcutta High Court the jurisdiction exercised under Section 143(1)(a) of the Act is a summary one. Looking to the language of Section 143(2) of the Act, it is clear that the Assessing Officer has to follow the procedure under Section 143(3) of the Act for making assessment. Mr. Shah, learned Counsel, submitted that in the instant case by issuing notice under Section 143(2) of the Act proceedings commenced under Section 143(3) of the Act. According to him, once the proceedings under Section 143(3) of the Act have commenced the Assessing Officer has no power to pass order under Section 143(1) of the Act. He submitted that order passed by Assessing Officer is without jurisdiction and, therefore, it must be quashed and set aside and the party should not be relegated to alternative forum. He pointed out the procedure and drew our attention to the decision of the Apex Court in the case of Calcutta Discount Company Limited v. ITO (4) ITR 191). The Court has held as under:
. though the writ or prohibition or certiorari would not issue against an order prohibiting an executive authority, the High Courts had power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjected, or was likely to subject, a person to lengthy proceedings and unnecessary harassment, the High Courts would issue appropriate orders or directions to prevent such consequences. The existence of such alternative remedies as appeals and reference to the High Court was not, however, always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action. When the Constitution conferred on the High Courts the power to give relief it became the duty of the courts to give such relief in fit cases and the courts would be failing to perform their duty if relief were refused without adequate reasons.” 16. In this view of the matter, we are of the opinion that after issuance of notice under Section 143(2) ofthe Act, it is not open for the Assessing Officer to make adjustment or to pass order under Section 143(1) of the Act but has to make assessment in accordance with law, i.e., under Section 143(3) ofthe Act.”
6. Thus, the Hon’ble High Court has held that after issuing notice u/s 143(2) of the Act it is not open for the AO to make adjustment or to pass the order u/s 143(1) of the Act but has to make the assessment in accordance with provisions of section 143(3) of the Act. Therefore, once the proceedings u/s 143(3) are initiated by the AO by issuing notice u/s 143(2) then the AO has no jurisdictional to initiate parallel proceedings of processing the return u/s 143(1) of the Act. The Hon’ble Supreme Court in case of
Vodafone Idea Limited v.
ACIT 424 ITR 664 has also observed in para 18 as under:
“18. The exercise of power under sub-sections (2) and (3) of Section 143 of the Act is thus premised on non-acceptance of what is evident from the return itself and to ensure that there is no avoidance of tax in any manner. The dimension of such power is far greater and deeper than mere adjustments to be made in respect of what is available from the return. Once such scrutiny is undertaken and proceedings are initiated by issuance of a notice under sub-section (2) of Section 143, it would be anomalous and incongruent that while such proceedings so initiated are pending, the return be processed under sub-section (1) of Section 143, which may in a given case, entail payment of refund. Logically, the outcome of the exercise initiated through notice under sub-section (2) of Section 143, must determine whether any refund is due and payable. If the return itself is under probe and scrutiny, such return cannot be the foundation to sustain a claim for refund till such scrutiny is not complete. Considering the nature of power exercisable under these two limbs of Section 143, the inescapable conclusion is that the processing of return under sub-section (1) of Section 143 must await the further exercise of power of scrutiny assessment under sub-sections (2) and (3) of Section 143. If the power under subsection (2) of Section 143 of the Act is initiated in a manner known to law, there cannot be any insistence that the processing under subsection (1) of Section 143 be completed and refund be made before the scrutiny pursuant to notice under sub-section (2) of Section 143 is over.”
7. Thus, the Hon’ble Supreme Court has held that once the scrutiny is undertaken and proceedings are initiated by issuance of notice u/s 143(2) it would be anomalous and incongruent that while such proceedings so initiated are pending, the return be processed u/s 143(1). The Hon’ble Calcutta High Court in case of CESC Ltd. v. DCIT (supra) has also considered this issue in para 11 & 12 as under:
“11. The Division Bench judgment of this Court, quoted hereinabove, answers the controversy raised before me squarely. The decision of the Apex Court noticed above, in my view, takes the matter a step further inasmuch as resorting to summary procedure under section 143(1)(a) after issuance of a notice under section 143(2) for regular assessment has been forbidden. If the Department cannot, after issuing a notice under section 143(2) for regular assessment, resort to the summary procedure under section 143(1)(a) can it not be said that the rectification of an intimation issued under the aforesaid section is also not permissible because in either case it would amount to activating section 143(1) of the Act which according to the judgment of the Apex Court is not permissible after issuance of a notice under section 143(2).
12. Regular assessment for the assessment years 1990-91 and 199293 under section 143(3) has been completed disallowing appropriates contingency reserve as a business expenditure and appeals therefrom are pending. A further question therefore arises whether assessment or the provisional assessment or to be more precise, the assessment made on the basis of the return itself under section 143(1)(a) the Act accepting appropriation to contingency reserve as an allowable expenditure merged in the order passed under section 143(3) of the wherein the aforesaid appropriation to contingency reserve was disallowed ? What was accepted in the intimation has been revered in regular assessment and the assessee has preferred an appeal which is pending. I am firmly of the view that this is a case where the theory merger is bound to apply because the intimation issued under section 143(1)(a) is no longer operative in respect of the assessment years 1991 and 1992-93. The only order which is effective and operative is the one passed under section 143(3) ofthe Act The order passed under section 143(1)(a) ceased to be operative and merged in the final order. I am supported in my view by the following judgments.”
8. The Hon’ble High Court has held that once the assessment u/s 143(3) has been completed then the order passed u/s 143(1)(a) merges with the order passed u/s 143(3) of the Act. Therefore, the order passed u/s 143(1) of the Act ceased to be operative. Accordingly in the facts and circumstances of the case as well as various binding precedents on the point we hold that the order passed u/s 143(1) by CPC after the scrutiny assessment proceedings were initiated by the AO for A.Ys.2016-17 & 2016-18 are not valid and liable to be set aside. We order accordingly.
9. In the result, appeals of assessee for A.Y.2016-17 & 2017-18 are allowed.”
5.1 Therefore, respectfully following the above cited judgment of the Hon’ble Calcutta High Court, I hold that the intimation under section 143(1) in the present appeal is devoid of legality and is hereby quashed. Once, the intimation under section 143(1) is quashed, the subsequent assessment under section 143(3), which has proceeded to assess income on the basis of intimation under section 143(1), also becomes bad-in-law and is accordingly set-aside.
6. In the result, the appeal of the assessee stands allowed.
