Provision for bad debts is allowable, and income enhancement without serving Section 143 intimation is illegal.

ORDER

Arun Khodpia, Accountant Member.- The captioned appeal is filed by the assessee, against the order u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 [in short,”the Act”] dated 23.07.2024 for the Assessment Year (AY) 2020-21,passed in pursuance to directions issued by Ld. Dispute Resolution Panel [in short,”the DRP”] u/s 144C(5) of the Act date 24^th June, 2024.The grounds of appeal raised by the assessee are as under:

“General:

1. The Learned AO/DRP erred in law and in facts in assessing the total income of the Appellant at INR 1,53,87,33,909 as against INR 1,18,81,42,290 reported in the return of income filed by the Appellant

Transfer pricing adjustment in respect of manufacturing segment:

2. Based on the facts and in the circumstances of the case, the Learned AO/DRP has erred in law and in facts in making an adjustment of INR 24,90,00,000 with respect to the arm’s length price (‘ALP’) of the international transactions under the manufacturing segment entered with its Associated Enterprises (AEs).

3. On the facts and circumstances of the case and in law, the Learned AO/DRP erred in not considering the benchmarking / economic analysis undertaken by the Appellant to justify the ALP in its transfer pricing documentation without recording any reasons to show that the conditions mentioned in clause (a) to (d) of Section 92C(3) of the Act were satisfied.

4. The Learned AO/DRP erred in rejecting the following companies as comparables which were selected by the Appellant as comparables in its transfer pricing documentation for the FY 2019-20, on the ground that the companies are not functionally comparable to the business of the Appellant –

Kirloskar Corrocoat Private Limited

Shalimar Paints Limited

5. The Learned AO / DRP erred in considering the following non-comparable companies as comparables for the international transactions of the Appellant under the manufacturing segment-Esdee Paints Limited

Hempel Paints (India) Private Limited

Cipy Polyurethanes Private Limited [Merged]

6. The Learned AO/DRP erred in not providing the search process followed by the TPO before selecting further companies as comparable to the business of the Appellant for determining the ALP of international transactions in the manufacturing segment.

7. The Learned AO/DRP erred in not providing the detailed computation of operating profit margin analysis carried out by the learned TPO for the final set of comparables selected by him in the transfer pricing order.

8. The Learned AO/DRP erred in disregarding the detailed computation of operating profit margins submitted by the Appellant using audited financial statements as per the annual reports of the comparable and incorrectly computing the operating profit margin for the purpose of determination of the ALP in the case of the following companies:

9. The Learned AO/DRP ought to restrict the value of transfer pricing adjustment by undertaking a proportionate adjustment to the value of international transactions entered into by the Appellant with its AEs under its manufacturing segment as against an adjustment based on segment level margin of the Appellant.

10. The Learned AO/DRP ought to reject Grauer & Weil (India) Ltd as functionally not comparable on the basis that the said company earns less than 50% revenue from sale of paints and related products.

Assessment proceedings are time-barred:

11. The Learned AO/DRP erred in not passing the final assessment order within the time limit prescribed under section 153 of the Act accordingly the final assessment order dated 23 July 2024 is invalid and ought to be quashed.

10% Adhoc disallowance on Travel and Conveyance

12. The learned AO/DRP –

12.1. Erred on facts by stating that the evidence is incomplete as the invoices does not tie-up on a one-to-one basis with the Bank statement. erred in law in making an ad hoc 10% disallowance of Travel and Conveyance expenses, amounting to adisallowance of Rs. 1,05,17,886.

12.2. Erred in law and on facts stating that the expenses are not incurred fully and exclusively for the purpose of business.

10% Ad hoc disallowance on Advertisement and Sales promotion expenses

13. The learned AO/DRP-

13.1. Erred on facts by stating that the evidence is incomplete as the invoices does not tie-up on a one-to-one basis with the Bank statement.

13.2. Erred in law making an ad hoc 10% disallowance of Advertisement and Sales promotion expenses, amounting to a disallowance of Rs. 3,08,51,942.

13.3. Erred in law and on facts stating that the expenses are not incurred fully and exclusively for the purpose of business.

10% Ad hoc disallowance on Miscellaneous promotion expenses

14. The learned AO/DRP-

14.1. Erred on facts by stating that the evidence is incomplete as the invoices does not tie-up on a one-to-one basis with the Bank statement.

14.2. Erred in law making an ad hoc 10% disallowance of Miscellaneous promotion expenses, amounting to a disallowance of Rs. 1,71,19,731.

14.3. Erred in law and on facts stating that the expenses are not incurred fully and exclusively for the purpose of business.

Disallowance on Provision for Bad and Doubtful debts

15. The learned AO / DRP –

15.1. Erred in law in not allowing the amount of Rs. 22,30,000 as deduction under section 36(1)(vii) of the Act on the ground that it was a provision for bad and doubtful debts and not an actual write off of bad debt.

15.2. Erred on facts in not considering the submission of the Appellant.

Unknown Addition without serving any intimation u/s 143(1).

16. The Learned AO/DRP –

16.1. Erred on facts by considering the income as per intimation under section 143(1) at Rs. 122,89,65,030 instead of Rs. 1,18,81,42,290 as per returned income in the final assessment order.

16.2. Erred in not appreciating that no intimation under section 143(1) of the Act has been served on the Appellant and that the Income Tax Portal reflects the status of the return as still under processing.

16.3. Erred in law by not giving an opportunity of being heard to the Appellant in this matter.

Levy of interest under section 234A/234B/234C of the Act:

17. The Learned AO / DRP erred in levying interest under section 234A / 234B / 234C of the Act

Penalty under Section 270A:

18. The Learned AO / DRP erred in initiating penalty proceedings under Section 270A of the Act.”

2. At the outset, Ld. Counsel of the assessee requested to not press Ground Nos.1 to 10 of the present appeal. Regarding Ground No.11 of the appeal, challenging the limitation in passing of order u/s 153 of the Act, it is requested to not press the same, however to keep it open at this stage. Ld. DR did not object to such contentions of the Ld. Counsel of the assessee. Accordingly, Ground Nos.1 to 10 are treated as dismissed as not pressed whereas Ground No.11 is left open.

3. Ground No.12 to 14, regarding Disallowance of Travelling and Conveyance Expenses to the tune of Rs.1,05,17,886/-, the Ld. AR drew our attention to the findings of Assessing Officer (AO) in para 4.2.1.

A notice was issued to the assessee to furnish details of travelling and conveyance expenses along with documentary evidences. The assessee had furnished its reply on 27.06.2023 and 10.07.2023, which was not found complete by the AO, since the list of vendors has been provided by the assessee but was not accompanied with further documentary evidence like receipts/vouchers, bank statements etc. Therefore, the AO has made a disallowance of 10% of Rs.10,51,78,860/-. During the course of assessment, the assessee had provided a party-wise break-up of expenditure and sample invoices for parties having higher amounts, also the bank statements are provided on sample basis. It is submitted that there was no cash expenditure incurred by the company and all payments are made via banking channels.

4. On this aspect, the issue was raised before Ld. DRP – 2, Mumbai who had dismissed the contentions of the assessee, as the assessee before the DRP also had produced part details along with bank statements. The details furnished before the Panel was for Rs.76,25,658/- only which in the opinion of DRP was only a fraction of the expenses claimed, therefore, the disallowance made by the AO was found in order.

5. The assessee before us through the Ld. AR had submitted that the assessee has furnished sample invoices and bank entries to establish the genuineness of expenditure, however, the AO as well as DRP are not convinced with the submission of assessee. Under such circumstances, the assessee undertakes to furnish all the necessary information required by the Revenue Authorities and would request to restore this issue back to the file of Ld. AO for verification and examination of such expenses claimed by the assessee, to revisit the disallowance and to decide in accordance with the evidences which the assessee shall produce before him.

6. Regarding Ground No.13 for Ad-hoc Disallowance on Advertisement and Sales Promotion Expenses and Ground No.14 for Ad-hoc Disallowance on Miscellaneous Promotion Expenses, Ld. Counsel of the assessee come up with similar contention and accordingly requests to set aside the issues to the file of AO for fresh adjudication, with an opportunity to allow the assessee to furnish complete evidence and explanations, which the assessee undertakes to furnish in the set aside proceedings.

7. Per contra, Ld. CIT – DR strongly supported the order of AO and Ld. DRP, however had not objected to the request on the issues to be set aside to the files of AO for fresh adjudication.

8. We have considered the rival submissions, perused the material available on record. Admittedly, in the present case, since Ld. AR had requested to restore these issues of ad hoc disallowances back to the file of AO for fresh adjudication with an opportunity to assessee to furnish all the necessary evidence, which were sought by the Assessing Officer and DRP, but are produced on sample basis by the assessee. We, thus, in the interest of justice, find it appropriate to set aside Ground No.12, 13 and 14 of the present appeal to the file of AO for fresh adjudication after hearing the assessee. The assessee shall be provided with reasonable opportunity of being heard and the opportunity to furnish necessary evidences which would be required to substantiate the genuineness of expenditure doubted by the AO. In result, Ground No. 12, 13 and 14 of the present appeal are allowed for statistical purposes.

9. Ground No.15 pertains to Disallowance on Provision for Bad and Doubtful Debts:

It was the submission by Ld. AR that an amount of Rs.22,30,000/- was claimed by the assessee as deduction u/s 36(1)(vii) of the Act. However, such claim of assessee was not allowed by the DRP by following the decision of ITAT in the case of Dy. CIT v. Asian Paints Ltd. [IT Appeal No. 1673 (Mum.) of 2019, dated 8-3-2024] for AY 2015-16,wherein it is held by the Tribunal that claim of assessee is contrary to the provisions of section 36(1)(vii) of the Act, as the case of assessee is not covered by the decision of Vijaya Bank v. CIT  323 ITR 166 (SC) which is a banking company. Therefore, the claim of assessee has been disallowed by the lower authorities.

10. Ld. AR on the aforesaid issue had referred to the subsequent order of ITAT in the case of Asian Paints Ltd. v. Dy. CIT [IT Appeal No. 2700 (Mum.) of 2023, dated 27-7-2024] for AY 2016-17, wherein the tribunal has discussed the aforesaid issue at length including the decision for AY 2015-16 also and held that the decision of Vijay Bank (supra),itself had observes that section 36(1)(vii) applies both for banking and non-banking business. It is further noted by the Tribunal that as per the principle laid down by Hon’ble Bombay High Court, which is followed by Hon’ble Karnataka High Court and Hon’ble Gujarat High Court, wherein post-amendment to section 115JB also provision for doubtful debts has been allowed as deduction from book profits. Therefore, the provision for doubtful debt is deductible not only under normal provisions of law but also u/s 115JB of the Act. Accordingly the Grounds of assessee were allowed.

11. In view of aforesaid findings by the Tribunal in Asian Paints Limited (supra) for Ay 2016-17, we find substance in the submissions of Ld. AR which though are strongly opposed by the Ld. CIT – DR, but following the judicial principles, we direct the AO to allow the claim of assessee for provision for bad and doubtful debts in accordance with the decision of Tribunal in the case of Asian Paints Ltd. (supra) for AY 2016-17. In result, Ground No.15 of the assessee stands allowed.

12. Ground No.16 relates to Unknown Addition made Out of Intimation u/s 143(1):

It was the submission by Ld. AR that the returned income of the assessee was 118,81,42,290/- which was recomputed by the AO vide impugned order dated 23^rd July, 2024 and has assessed the income of assessee starting with 122,89,65,033/- being income computed in case of assessee as per intimation u/s 143(1) of the Act. Ld. Counsel submits that no intimation has been issued u/s 143(1) of the Act and neither is it served to the assessee. Ld. AR referred to the snapshot of the assessee’s accounts on the portal of Income Tax Department captured on 25^th October, 2023, which reveals that the statement of return of income of assessee for AY 2021 is reflected as “under process”, thus confirms that no intimation u/s 143(1) has been issued to the assessee. Copy of such screenshot is furnished before us at page no.196 of assessee’s paper book. Assessee again took a screenshot of its account on the portal of Department on 16^th April, 2026 placed at page no.124 of assessee’s submissions dated 17^th April, 2026, still the intimation u/s 143(1) is not reflecting in the assessee’s account on the ITBA portal therefore, it was requested that the assessee cannot be saddled with an enhancement in the income,without any intimation in hand to rebut against such unknown variations / adjustments. Such enhancement which is unknown to assessee is not justified and needs an opportunity to defend for any disallowance or additions which were made referring to a purported intimation u/s 143(1) of the Act, which was never issued or served on the assessee. Ld. CIT did not make any comment on the issue.

13. We have considered the rival submissions, perused the material on record. Admittedly, in the present case there is an enhancement of income of assessee referred to an intimation u/s 143(1) by the AO, while recomputing the assessed income of assessee. The AO has not mentioned any date of intimation u/s 143(1) in the table of variation, wherein he had adopted the income as per return of income at Rs.118,81,42,290/- and income as per intimation u/s 143(1) at Rs.1,22,89,65,030/-. Further, as per submission of Ld. AR and facts on record no intimation u/s 143(1) is reflecting in assessee’s account on the Income Tax Portal, which the assessee has the lawful right to be intimated with, as it has to defend or explain,before the Revenue makes any disallowance or addition to its income. We are, therefore setting aside this issue also to the file of AO to provide the assessee with the copy of intimation and to take on record the submission of assessee regarding such disallowance of additions made by the CPC for which the assessee has no information as of today. The matter, therefore, is set aside to the file of AO for verification and adjudication afresh.

14. Needless to say, the assessee shall be provided with reasonable opportunities of being heard in the setaside proceedings. The assessee is also directed to co-operate and pro-actively assist in the set aside proceedings, failing which the revenue authority would be at liberty to pass a speaking order in accordance with the mandate of law.

15. In result, Ground No.16 of the present appeal stands allowed for statistical purposes.

16. Ground Nos. 17 and 18 – These grounds pertain to Levy of Interest u/s 234A/234B/234C of the Act and penalty u/s 270A of the Act:

It is submitted by the Ld. AR that the return of assessee was filed in time, therefore, levy of interest u/s 234A is out of question, as the same can be charged only in case where the return of income is filed belatedly. Regarding interest u/s 234B and 234C, both are consequential in nature, which can be decided at this at stage, as the issuesare set aside in present case, the AO is directed to reconsider the same. The penalty is also consequential in nature therefore, set aside to the file of AO. In result, Ground Nos. 17 and 18 are allowed for statistical purposes.

17. In result, the ground of present appeal of assessee are allowed / allowed for statistical purposes, as indicated above.