Karnataka High Court holds that a Section 143(1) intimation issued without adjustment cannot be revised under Section 263, clarifying the limits of revisionary jurisdiction.
The Karnataka High Court has clarified an important issue concerning the scope of revisionary powers under Section 263 of the Income Tax Act. The Court has held that an intimation issued under Section 143(1), where no adjustment has been made to the returned income, cannot be treated as an “order” for invoking revisionary jurisdiction under Section 263.
The judgment assumes significance for taxpayers whose income tax returns are processed under Section 143(1), particularly where the processing results in a substantial refund. The Court also distinguished between the limited nature of automated processing under Section 143(1) and the wider examination possible during scrutiny assessment under Section 143(3).
Background of the Case
The matter arose in the case of Shri Mukesh Bansal v. Principal Commissioner of Income Tax, Bengaluru, Writ Petition No. 5330 of 2026 (T-IT), decided by Justice S. Sunil Dutt Yadav of the Karnataka High Court.
The taxpayer had originally filed his income tax return for Assessment Year 2019-20, declaring total income of approximately ₹231.73 crore and claiming a refund of about ₹6.08 lakh.
Subsequently, the taxpayer approached the Central Board of Direct Taxes (CBDT) seeking condonation of delay and permission to furnish a revised return. After the request was considered, he filed a revised return in which the amount received from his former employer pursuant to the repurchase of unexercised Employee Stock Options (ESOPs) was treated as capital gains rather than salary income.
The revised return was processed under Section 143(1), resulting in a substantial refund of approximately ₹27.13 crore, together with interest.
Following this processing, the Principal Commissioner of Income Tax, Bengaluru-2, initiated proceedings under Section 263. The Revenue questioned, among other things, the taxpayer’s treatment of the ESOP-related receipt as capital gains and the interest granted on the refund.
Issue Before the Karnataka High Court
The principal question before the High Court was not whether the ESOP receipt was actually taxable under the head “Salary” or “Capital Gains”.
Instead, the Court considered whether a Section 143(1) intimation issued without making any adjustment could itself be regarded as an “order” capable of being revised under Section 263.
This distinction was crucial because Section 263 permits the Principal Commissioner or Commissioner to revise certain orders that are considered erroneous and prejudicial to the interests of the Revenue.
The taxpayer argued that the statutory requirements for exercising Section 263 jurisdiction were not satisfied because the Section 143(1) intimation did not involve any adjustment or adjudication of the disputed issue.
Court’s Analysis of Section 143(1)
The Karnataka High Court examined the statutory scheme governing processing of income tax returns.
Section 143(1) provides for a limited form of processing of a return and permits only specified adjustments contemplated by the provision. It is fundamentally different from scrutiny proceedings, where the Assessing Officer can conduct a detailed examination of the taxpayer’s claims and supporting material.
The Court referred to the Supreme Court’s decision in Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Private Limited, particularly the distinction between processing under Section 143(1) and a regular assessment.
According to the High Court, an intimation under Section 143(1) cannot ordinarily be equated with an assessment order. In the present case, this distinction became even more significant because the intimation had been issued without making any adjustment to the revised return.
Section 263 Cannot Be Used to Undertake a Fresh Inquiry
The Court further observed that deciding whether the amount received from the former employer on repurchase of ESOPs constituted salary income or capital gains would require an examination beyond the limited scope of Section 143(1).
Such an issue involves consideration of the underlying facts and the legal character of the receipt. According to the Court, this kind of inquiry would take the matter outside the limited processing contemplated under Section 143(1).
If the Income Tax Department considered the taxpayer’s treatment of the ESOP receipt to be incorrect, the appropriate course would have been to examine the revised return through the statutory scrutiny mechanism under Section 143(2).
The Court therefore observed that the Revenue could not subsequently treat a Section 143(1) intimation as an assessment order merely for the purpose of exercising revisionary jurisdiction under Section 263.
Court’s Important Observation on Adjustments
An important aspect of the judgment concerns the distinction between an intimation with an adjustment and one without an adjustment.
The Court indicated that where an adjustment is actually made while processing a return under Section 143(1), the assessee has the statutory mechanism to challenge such adjustment through the applicable appellate provisions.
However, where the return is processed under Section 143(1) without any adjustment, the resulting intimation does not acquire the character of an “order” merely because it has been issued by the tax department.
This distinction preserves the taxpayer’s statutory rights while preventing the revisionary provisions from being expanded beyond their intended scope.
High Court’s Decision
The Karnataka High Court ultimately held that the Section 143(1) intimation in the taxpayer’s case, having been issued without any adjustment, could not be treated as an order for the purposes of Section 263.
Consequently, the revision proceedings initiated by the Principal Commissioner were held to be without jurisdiction.
The Court set aside the impugned notice and allowed the taxpayer’s writ petition.
Importantly, the Court clarified that it was not deciding the substantive taxability of the ESOP receipt. The judgment was confined to the jurisdictional question concerning whether Section 263 could be invoked against the particular Section 143(1) intimation.
Key Takeaway for Taxpayers
The judgment provides an important clarification regarding the interaction between Sections 143(1), 143(2) and 263 of the Income Tax Act.
A Section 143(1) intimation is primarily a limited processing mechanism and does not automatically amount to a detailed assessment. Where no adjustment has been made, the intimation cannot, according to the Karnataka High Court’s ruling in this case, be treated as an assessment order for invoking Section 263.
The decision also highlights the importance of maintaining a clear distinction between return processing, scrutiny assessment and revision proceedings. The Revenue must exercise each statutory power within the boundaries prescribed by the Income Tax Act.
For taxpayers receiving large refunds or dealing with complex claims involving ESOPs, capital gains, salary income or other disputed classifications, the judgment demonstrates the importance of examining the precise nature of the proceedings initiated by the tax authorities before responding to a revision notice.
Case: Shri Mukesh Bansal v. Principal Commissioner of Income Tax, Bengaluru
Court: Karnataka High Court
Case No.: W.P. No. 5330 of 2026 (T-IT)
Decision: 18 September 2026
Key provisions: Sections 143(1), 143(2) and 263 of the Income Tax Act.