Duplicate Taxation of Bad Debt Recovery Requires Reconciliation: ITAT Mumbai

HDFC Bank Limited Vs DCIT (ITAT Mumbai)

Summary: The Mumbai Bench “E” of the Income Tax Appellate Tribunal, in HDFC Bank Limited Vs DCIT, considered the bank’s appeal for Assessment Year 2022-23 against the CIT(A)’s order dated 31 March 2026. CPC Bengaluru had processed the return under Section 143(1) on 23 December 2023 and made an adjustment of ₹27,65,13,48,285 relating to recovery of bad debts, treating it as deemed income under Section 41 of the Income-tax Act, 1961. The bank also challenged non-grant of foreign tax credit of ₹24,01,22,892 and short credit of TDS and TCS. It contended that notices issued by the CIT(A) under Section 250 had not been served on its registered email address, resulting in inadequate opportunity of hearing. The CIT(A) had dismissed the appeal principally for want of supporting documentary evidence.

The bank submitted that the recovery of bad debts was disclosed in Clause 25 of its Tax Audit Report and recorded as “Other Income – Miscellaneous Income” in its financial statements, and had already been included in taxable income. According to the bank, the separate Section 143(1) adjustment consequently taxed the same receipt twice. It also pointed to its reply through the e-Proceedings facility and to a subsequent scrutiny assessment dated 18 March 2025 under Sections 143(3) and 144B, in which the disputed issues were examined without a further addition for the recovered bad debts. The bank relied on Form 67 and its acknowledgement for FTC and Form 26AS for TDS and TCS credits. The departmental representative supported the CIT(A)’s order but did not produce specific material contradicting the submissions regarding the subsequent scrutiny assessment.

The Tribunal observed that the CIT(A) had disposed of the appeal ex parte without complete supporting material and that the later scrutiny assessment needed to be considered. It restored the natural justice ground to the Assessing Officer with directions to provide a reasonable opportunity of hearing. On the Section 41 adjustment, it directed a limited verification and reconciliation of the original processing adjustment with the scrutiny assessment. If the recovery had already been included in assessed income, the Assessing Officer was to make the consequential adjustment to prevent double taxation, without reopening the merits already examined during scrutiny.

For FTC, the Tribunal directed the Assessing Officer to examine the scrutiny assessment order, Form 67 and supporting documents and allow eligible credit under Section 90 or 91, as applicable, read with Rule 128, after checking for any credit already allowed. Similarly, it directed reconciliation of TDS and TCS credits against Form 26AS, the return and the scrutiny assessment, allowing the balance eligible credit without duplication. All four grounds were restored to the Assessing Officer, and the bank’s appeal was allowed for statistical purposes; the Tribunal did not grant unconditional final relief on the disputed amounts.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The instant appeal of the assessee filed against the order of the Ld. Commissioner of Income Tax (Appeals), ADDL/JCIT-(A), Udaipur [for brevity “Ld. CIT(A)”], order passed under Section 250 of the Income Tax Act, 1961 (for brevity ‘the Act’), for Assessment Year 2022-23, date of order 31.03.2026. The impugned order emanated from the order of CPC, Bengaluru (for brevity ‘Ld. AO’), order passed under Section 143(1) of the Act, date of order 23.12.2023.

2. The assessee has taken the following grounds:

“1. GROUND No. 1: VIOLATION OF PRINCIPLE OF NATURAL JUSTICE:

1.1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in not granting adequate opportunity of being heard as the notices u/s 250 were not served to the registered email-id of the Appellant.

1.2. The impugned order has thus been passed without granting a proper and reasonable opportunity of being heard.

1.3′ ln view of the above, the Appellant humbly prays that the impugned order passed by the ld. CIT(A) is in violation of the principles of natural justice and thus, be quashed.

WITHOUT PREJUDICE TO GROUND NO. 1

2. GROUND NO. 2: INCORRECT ADJUSTMENT TO PROFITS AND GAINS OF BUSINESS OR PROFESSION AMOUNTING TO RS. 27,65,13,48,285/-:

2.1 On thefacts and in the circumstances of the case and in law, the ld. CIT(A) has erred in confirming the adjustment of Rs. 27,65,13,49,29st- to the profits and gains of business or profession by treating the same as deemed income u/s. 41of the Act.

2.2. The Appellant prays that the impugned addition/adjustment of Rs. 27,65,13,48,285tbe deleted.

WITHOUT PREJUDICE TO GROUND NO. 1

3. GROUND NO. 3: NOT GRANTING CREDIT FOR FOREIGN TAX (“FTC”) PAID AMOUNTING TO RS. 24,01,22,892/-:

3.1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not granting credit for foreign taxes claimed by the Appellant in the return of income (“ROl”) amounting to Rs. 24,01,22,892t-. 3.2. The Appellant prays that the ld. AO be directed to grant the FTC as claimed by the Appellant in the ROI.

WITHOUT PREJUDICE TO GROUND NO. 1

4. GROUND NO. 4: SHORT GRANT OF TAX DEDUCTED AT SOURCE (“TDS”) AND TAX COLLECTED AT SOURCE (“TCS”):

4.1 On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not directing the ld. AO to grant credit of TDS and TCS as per Form 26AS and claimed by the Appellant in the ROI.

4.2. The Appellant prays that the ld. AO be directed to grant credit of TDS and TCS as per 26AS. The Appellant craves leave to add to, alter, amend and / or delete the above grounds of appeal.”

3. The brief facts of the case are that the assessee, a banking company, filed its return of income under section 139(1) of the Act, declaring a total income of Rs. 5,10,27,01,78,840/-. The return was processed under section 143(1) of the Act by CPC, Bengaluru, wherein an adjustment amounting to Rs. 27,65,13,48,285/- was made to the profits and gains of business or profession by treating the recovery of bad debts as deemed income chargeable to tax under section 41 of the Act. Further, while processing the return, the Ld. AO did not grant foreign tax credit (FTC) amounting to Rs. 24,01,22,892/- and granted short credit in respect of tax deducted at source (TDS) and tax collected at source (TCS), as compared to the amounts claimed by the assessee in its return of income. Aggrieved by the aforesaid adjustments and denial of tax credits, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), by the impugned order dated 31.03.2026, dismissed the appeal, principally on the ground that the assessee had failed to furnish the requisite documentary evidence in support of its claims during the appellate proceedings. Being aggrieved by the said order, the assessee has preferred the present appeal before the Tribunal.

4. The Ld. AR submitted that the assessee had filed two sets of paper books comprising pages 1 to 95, which have been placed on record. The Ld. AR contended that the dispute arising from the intimation issued under section 143(1) of the Act relates to three substantive issues, namely, the incorrect adjustment of Rs. 27,65,13,48,285/- under section 41 of the Act, non-granting of FTC amounting to Rs. 24,01,22,892/-, and short granting of TDS and TCS credits as reflected in Form No. 26AS and claimed in the return of income.

5. The Ld. AR further submitted that, subsequent to the processing of the return under section 143(1) of the Act, the assessee’s case was selected for scrutiny assessment. Accordingly, the Ld. AO passed an assessment order dated

18.03.2025 under section 143(3) read with section 144B of the Act. It was specifically contended that the issues forming the subject matter of the present appeal were also examined during the scrutiny assessment proceedings. With regard to the adjustment made under section 41 of the Act, the Ld. AR submitted that the assessee had duly disclosed the recovery of bad debts amounting to Rs. 27,65,13,48,285/- in Clause 25 of the Tax Audit Report, relating to profits chargeable to tax under section 41 of the Act. The said amount was also disclosed under the head “Other Income – Miscellaneous Income” in Note No. 21 of Schedule 18 to the financial statements, placed at APB page 10. The amount had already been credited to the profit and loss account and duly offered to tax in the return of income. The Ld. AR accordingly contended that the separate adjustment of the same amount while processing the return under section 143(1) of the Act had resulted in double taxation of the identical income.

6. The Ld. AR further submitted that, during the processing of the return under section 143(1)(a) of the Act, the assessee had furnished its response through the e-Proceedings facility, specifically explaining that the recovery of bad debts reported in Clause 25 of the Tax Audit Report (TAR) had already been credited to the profit and loss account and included in the taxable income declared in the return.

7. It was further argued that, during the subsequent scrutiny assessment proceedings, the Ld. AO had examined the explanation furnished by the assessee and had not proposed any further variation in respect of the aforesaid recovery of bad debts. However, the adjustment earlier made under section 143(1) of the Act was not specifically rectified while finalising the scrutiny assessment. The Ld. AR invited our attention to the assessment order dated

18.03.2025, placed at APB pages 31 to 76, in support of the aforesaid contention.

8. With regard to the claim of FTC, the Ld. AR submitted that the assessee had duly furnished Form No. 67, being the statement of income from a country or specified territory outside India and the corresponding foreign tax credit, along with the e-filing acknowledgement. Copies of the relevant documents are placed at APB pages 77 to 79.

The Ld. AR contended that the assessee had claimed FTC amounting to Rs. 24,01,22,892/- in its return of income. However, the said credit was not granted while processing the return under section 143(1) of the Act. It was further submitted that the issue had been examined during the subsequent scrutiny assessment proceedings and no adverse finding was recorded by the Ld. AO regarding the claim of FTC. Nevertheless, the corresponding credit was not given effect to while computing the final tax liability. The Ld. AR accordingly prayed that the Ld. AO be directed to grant the eligible FTC after considering the scrutiny assessment order and the relevant documentary evidence.

9. With regard to the short granting of TDS and TCS credits, the Ld. AR submitted that the entire amount of tax deducted and collected at source was duly reflected in Form No. 26AS and had been claimed by the assessee in its return of income. However, while processing the return under section 143(1) of the Act, CPC granted credit for amounts lower than those claimed.

The Ld. AR further contended that the issue had also been examined during the scrutiny assessment proceedings and that the Ld. AO had not recorded any adverse finding regarding the availability of the corresponding TDS and TCS credits. The Ld. AR submitted that the Ld. CIT(A) had dismissed the grounds primarily on account of non-availability of the requisite documentary evidence during the appellate proceedings, without considering the subsequent scrutiny assessment order and the relevant records. Accordingly, the Ld. AR prayed that the Ld. AO be directed to grant the balance eligible TDS and TCS credits after necessary verification.

10. Per contra, the Ld. DR relied upon the orders passed by the Revenue authorities and supported the findings recorded by the Ld. CIT(A). However, the Ld. DR did not bring any specific material on record to controvert the submissions advanced by the Ld. AR regarding the subsequent scrutiny assessment completed under section 143(3) r.w.s. 144B of the Act.

11. We have heard the rival submissions and perused the material available on record, including the paper book filed by the assessee, the impugned appellate order, the intimation issued under section 143(1) of the Act and the subsequent assessment order dated 18.03.2025 passed under section 143(3) r.w.s. 144B of the Act. We find that the dispute primarily arises from the adjustments made while processing the return under section 143(1) of the Act and the non-granting or short granting of the corresponding tax credits. It is an undisputed fact that the Ld. CIT(A) disposed of the appeal ex parte without the benefit of the complete documentary evidence now relied upon by the assessee. We further find that, subsequent to the issuance of the intimation under section 143(1), a regular scrutiny assessment was completed under section 143(3) r.w.s. 144B of the Act for the same assessment year. Therefore, the issues raised in the present appeal require consideration in the light of the subsequent scrutiny assessment order and the relevant material available on record. Accordingly, we proceed to consider the grounds of appeal separately.

Ground No. 1 — Violation of the principles of natural justice

12. Ground No. 1 relates to the alleged violation of the principles of natural justice by the Ld. CIT(A). The Ld. AR contended that the notices issued under section 250 of the Act were not served upon the registered email address of the assessee and, consequently, the assessee was deprived of an effective opportunity to substantiate its claims during the appellate proceedings. We find that the Ld. CIT(A) dismissed the appeal without the benefit of the complete supporting documentary evidence. Considering the facts and circumstances of the case, particularly the subsequent scrutiny assessment completed under section 143(3) of the Act, the grievance of the assessee regarding the absence of an effective opportunity deserves consideration. Accordingly, Ground No. 1 is restored to the file of the Ld. AO for appropriate consideration of the underlying issues in accordance with the directions contained hereinbelow. Needless to say, the assessee shall be afforded a reasonable opportunity of being heard and of furnishing the relevant documentary evidence.

Ground No. 2 — Adjustment under section 41 of the Act

13. Ground No. 2 relates to the adjustment of Rs. 27,65,13,48,285/- made under section 41 of the Act in respect of recovery of bad debts. We find that the assessee had disclosed the aforesaid amount in Clause 25 of the Tax Audit Report and had also credited the same to the profit and loss account under the head “Other Income – Miscellaneous Income”. The Ld. AR specifically contended that the said amount had already been included in the taxable income declared in the return of income and, therefore, making a separate adjustment of the identical amount while processing the return under section 143(1) of the Act had resulted in double taxation.

13.1. We further find that the Ld. AO, during the subsequent scrutiny assessment proceedings under section 143(3) r.w.s. 144B of the Act, had examined the issue and had not made any further addition in respect of the recovery of bad debts. However, the earlier adjustment made under section 143(1) of the Act requires reconciliation with the income assessed under section 143(3) of the Act. Considering that the impugned appellate order was passed ex parte and that the original dispute arose from an intimation issued under section 143(1) of the Act, we restore Ground No. 2 to the file of the Ld. AO for the limited purpose of verification and reconciliation of the adjustment made under section 143(1) with the subsequent assessment order passed under section 143(3) of the Act. The Ld. AO shall verify whether the amount of Rs. 27,65,13,48,285/- has already been included in the taxable income of the assessee and shall ensure that the identical income is not subjected to taxation twice. If the amount has already been offered to tax and included in the assessed income, the consequential adjustment shall be made so as to eliminate any duplication. The scope of the proceedings shall remain confined to the aforesaid verification and reconciliation, without reopening the merits of the issue already examined during the scrutiny assessment proceedings. Accordingly, Ground No. 2 is restored to the file of the Ld. AO for the limited purpose indicated above.

Ground No. 3 — Non-granting of Foreign Tax Credit

14. Ground No. 3 relates to the non-granting of FTC amounting to Rs. 24,01,22,892/-. We find that the assessee had claimed the aforesaid credit in its return of income and had furnished Form No. 67 along with the relevant acknowledgement, copies of which are placed at APB pages 77 to 79. The Ld. AR submitted that the claim of FTC was duly examined during the subsequent scrutiny assessment proceedings under section 143(3) r.w.s. 144B of the Act and that no adverse finding was recorded by the Ld. AO. However, the corresponding credit was not granted while computing the tax liability.

14.1. Considering the facts and circumstances of the case, we find that the claim of FTC requires to be given appropriate effect in the computation of tax liability, subject to verification of the credit already granted, if any. Accordingly, the Ld. AO is directed to consider the assessment order passed under section 143(3) of the Act, Form No. 67 and the relevant supporting documents, and grant the eligible FTC in accordance with section 90 or section 91 of the Act, as applicable, read with Rule 128 of the Income-tax Rules, 1962. The Ld. AO shall ensure that credit is not denied merely on account of the omission to give consequential effect to the claim already examined during the scrutiny assessment proceedings. Needless to say, no duplicate credit shall be granted. Accordingly, Ground No. 3 is restored to the file of the Ld. AO with the aforesaid directions.

Ground No. 4 — Short granting of TDS and TCS credits

15. Ground No. 4 relates to the short granting of TDS and TCS credits claimed by the assessee in its return of income. We find that the Ld. AR specifically contended that the corresponding credits were duly reflected in Form No. 26AS and had been claimed in the return of income. However, while processing the return under section 143(1) of the Act, CPC granted credit for amounts lower than those claimed by the assessee. It was further contended that the Ld. AO, during the subsequent scrutiny assessment proceedings, had examined the issue and had not recorded any adverse finding regarding the entitlement of the assessee to the said credits.

15.1. Considering the facts and circumstances of the case, we find that the eligible TDS and TCS credits are required to be reconciled with Form No. 26AS, the return of income and the subsequent assessment order passed under section 143(3) of the Act. Accordingly, the Ld. AO is directed to verify the credits already granted and allow the balance eligible TDS and TCS credits in accordance with law. The Ld. AO shall give due effect to the credits reflected in the relevant records and ensure that the assessee is neither denied the eligible credits nor granted any duplicate credit. Accordingly, Ground No. 4 is restored to the file of the Ld. AO with the aforesaid directions.

16. Consolidated treatment of grounds

17. In the result, the appeal of the assessee bearing ITA No. 5927/Mum/2026 is allowed for statistical purposes.

Order pronounced in the open court on 12th day of October 2026.