This article explains the function of the MP3 Smart Encoding Adjustments option in iTunes.

If you choose to customize the MP3 encoding configuration, you can enable the Smart Encoding Adjustments option to allow iTunes to automatically adjust some of the internal parameters to improve the sound quality of converted files based on the original bit rate selection. This can include reducing the number of channels, encoded frequencies, or the sample rates.

Depending on the bit rate settings you select, you will hear different levels of quality in the music playback. Lower bit rate settings produce smaller file sizes but lower quality music playback. Higher bit rate settings create larger files but sound quality nearly as good as the source material.

iTunes does not override your choices if you've selected a specific sample rate or number of channels, even if the Smart Encoding Adjustments option is enabled. To allow iTunes to adjust your configuration, choose Auto from the Sample Rate pop-up menu, and click Auto in the Channels area.

Figure 1 MP3 Encoder