Unreconciled Section 143(1) Adjustments and Denied Tax Credits Remanded for Fresh Verification Following Scrutiny Order

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Unreconciled Section 143(1) Adjustments and Denied Tax Credits Remanded for Fresh Verification Following Scrutiny Order

Issue

Whether statutory adjustments made under section 143(1)—including double taxation of recovered bad debts and short-granting of Foreign Tax Credit (FTC) and TDS/TCS credits—must be remanded to the Assessing Officer for reconciliation when subsequent scrutiny proceedings under section 143(3) accept the assessee’s claims.

Facts

  • The assessee, a nationalized banking company, filed its return of income for Assessment Year 2022-23, which was initially processed under section 143(1).
  • In the section 143(1) processing output, the Assessing Officer (AO) added bad debt recoveries as deemed income under section 41 (causing double taxation as it was already offered in profit & loss), disallowed/short-granted Foreign Tax Credit (FTC) of ₹24.01 crores, and allowed lower TDS/TCS credits than reflected in Form 26AS.
  • Subsequently, a regular scrutiny assessment under section 143(3) read with section 144B was completed, wherein the AO examined these specific issues and recorded no adverse findings, yet failed to update or grant the corresponding credit rectifications in the final tax computation.
  • The Commissioner (Appeals) dismissed the assessee’s appeal ex parte on the grounds of non-furnishing of documentary evidence, failing to consider the subsequent section 143(3) scrutiny assessment order and Form 26AS.

Decision

  • Ex Parte Appellate Order Set Aside: The ex parte dismissal by the Commissioner (Appeals) without considering the scrutiny order violated principles of natural justice and denied effective opportunity to the assessee.
  • Reconciliation of Bad Debt Recovery: The matter regarding bad debt recovery addition under section 41 is remanded to the AO for verification to eliminate double counting between section 143(1) adjustments and section 143(3) assessment.
  • Allowance of Foreign Tax Credit (FTC): Remanded to the AO to grant the claimed FTC of ₹24.01 crores in accordance with Sections 90/91 read with Rule 128, following verification of Form 67.
  • Correction of TDS/TCS Credits: Remanded to the AO to reconcile TDS/TCS credits with Form 26AS and grant the balance eligible credits as per law.

KeyTakeaways

  • Scrutiny Supercedes Summary Adjustments: When regular scrutiny under section 143(3) resolves issues in favour of the assessee without adverse findings, tax computations must incorporate those findings to rectify summary adjustments under section 143(1).
  • Prevention of Double Taxation: Recoveries of bad debts already offered to tax in the Profit and Loss Account cannot be separately added again under section 41 during section 143(1) processing.
  • Duty of Credit Reconciliation: Procedural omissions in tax computation sheets regarding FTC (Rule 128) and TDS/TCS (Form 26AS) must be rectified upon verification of underlying records.
IN THE ITAT MUMBAI BENCH ‘E’
HDFC Bank Ltd.
v.
Deputy Commissioner of Income-tax
ANIKESH BANERJEE, Judicial Member
and Vikram Singh Yadav, Accountant Member
IT Appeal No. 5927 (MUM) of 2026
[Assessment Year 2022-23]
OCTOBER  12, 2026
Yogesh Thar and Ms. Vidhi Salot for the Appellant. Smt. Amrita Singh, CIT DR for the Respondent.
ORDER
Anikesh Banerjee, Judicial Member. -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 the facts 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. 24,01,22,892/-.
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
Ground Issue Proposed treatment
1 Violation of principles of natural justice Restored to Ld. AO
2 Adjustment under section 41 — Rs. 27,65,13,48,285/- Limited verification and reconciliation; no double taxation
3 FTC — Rs. 24,01,22,892/- Direction to grant eligible FTC after verification
4 Short granting of TDS and TCS Direction to grant balance eligible credits after reconciliation

 

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