The Karnataka High Court has set aside an Income Tax Department notice seeking to revise an intimation that granted a refund of ₹27.13 crore to the assessee.
The bench of Justice S. Sunil Dutt Yadav has observed that an intimation issued under Section 143(1) of the Income Tax Act without any adjustment to the return is not an “order” that the Department can revise under Section 263.
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The dispute arose after the assessee revised his return for assessment year 2019–20 and changed the tax treatment of compensation received on the repurchase of employee stock options (ESOPs).
The assessee’s original return declared income of ₹231.73 crore and a tax liability of ₹82.55 crore. He subsequently sought condonation of delay under Section 119(2)(b) to file a revised return. After his application was considered, he filed a revised return treating the ESOP repurchase amount as capital gains instead of salary income.
The revised return was processed under Section 143(1) on February 12, 2025, resulting in a refund of ₹27,13,38,330. The Department later issued a Section 263 hearing notice dated January 13, 2026, proposing to revise that processing.
According to the notice, the assessee had claimed ₹230.36 crore received for the repurchase of unexercised stock options as capital gains, although tax had been deducted at source under the salary provision. The Department maintained that the payment arose from the employment relationship and should be taxed as salary. It also objected to ₹9.63 crore in interest granted under Section 244A, citing CBDT circulars concerning belated refund claims.
Section 263 permits revision of an order considered erroneous and prejudicial to the interests of the Revenue. The assessee argued that the Department could not invoke that power because processing a return under Section 143(1), without making any adjustment, produces an intimation, not an assessment order.
The High Court agreed. It explained that Section 143(1) allows only limited processing of a return, whereas scrutiny can examine matters beyond the return and lead to an assessment order. Relying on the Supreme Court’s decision in Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Private Limited, the Court held that routine processing does not itself amount to an assessment.
The Court drew an important distinction: an intimation after adjustments may be treated as an order for the purposes discussed in its judgment, and could potentially be subject to revision. In the assessee’s case, however, it was undisputed that the Section 143(1) intimation made no adjustment. It therefore could not provide the order required for Section 263 proceedings.
The Department’s argument that an intimation can operate as a notice of demand did not change the result. The Court said that this limited legal treatment cannot be extended to presume that an assessment order was passed.
The High Court noted that deciding whether the ESOP compensation belonged under “capital gains” or “salary” would require a substantive examination beyond the limited processing allowed by Section 143(1). It observed that the Department could have subjected the revised return to scrutiny under Section 143(2). The judgment did not decide which tax treatment of the ESOP payment was correct, or rule on the merits of the disputed refund interest.
Because the intimation in this case was not an order capable of revision under Section 263, the Court held that the January 13, 2026 notice was issued without jurisdiction. It allowed assessee’s writ petition and set aside the notice.
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