MERCEDES-BENZ FINANCIAL SERVICES INDIA PRIVATE LIMITED,CHENNAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX, CHENNAI 4, CHENNAI

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ITA 550/CHNY/2025Status: DisposedITAT Chennai16 April 2026AY 2021-229 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the PCIT's identified errors were based on an incorrect understanding of facts. The assessee's write-off was in line with its accounting policy and not a mere provision.

What were the facts?

The assessee claimed expenses on account of impairment of financial instruments. The PCIT initiated revisionary proceedings under Section 263, believing the AO's order allowing the claim was erroneous and prejudicial to revenue.

What were the issues?

Whether the PCIT correctly exercised revisionary powers under Section 263 when the identified errors were based on a misinterpretation of the assessee's facts and accounting policies?

Which sections of the Income-tax Act were involved?

Section 263,Section 143(3),Section 36(1)(vii)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S

Hearing: 08.04.2026Pronounced: 16.04.2026

आदेश / O R D E R

PER PADMAVATHY.S, A.M: This appeal by the assessee is against the order of the Principal Commissioner of Income Tax, Chennai-4 (in short "PCIT") passed u/s. 263 of the Income Tax Act, 1961 (in short "the Act") dated 13.12.2024 for Assessment Year (AY) 2021-22. The grounds raised by the assessee are as under:

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 2 -: “Based on the facts and circumstances of the case, the Appellant respectfully craves to prefer an appeal against the order dated 13 December 2024 passed by the Principal Commissioner of Income-tax ('PCIT'), Chennai-4 under section 263 of the Income-tax Act, 1961 ('the Act'), on the following grounds which are independent and without prejudice to each other: On the facts and in the circumstances of the case and in law, the Hon'ble PCIT has: 1. Erred in exercising revisionary powers under Section 263 without satisfying the twin conditions that the order is erroneous insofar as it is prejudicial to the interests of the revenue 2. Erred in not appreciating facts of the case to disregard legal contentions and supporting evidences provided during revisionary proceedings and erred in holding that the actual write off was in the nature of provision 3. Erred in directing the learned AO to compute the allowable loss based on a method contrary to the method of accounting regularly followed by the Assessee. Any consequential relief to which the Appellant may be entitled under the law in pursuance of the aforesaid grounds of appeal or otherwise, thus may be granted.”

2.

The assessee is a private limited company and engaged in the business of leasing and finance including operating lease and finance lease to end customers and dealership related to financial services. The assessee is categorized as asset finance by the Reserve Bank of India. The assessee filed a return of income for AY 2021-22 on 15.03.2022 declaring total income of Rs.145.66 Crores. The return was processed u/s. 143(1)(a) of the Act determining income at Rs. 147.54 Crores. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The A.O completed the assessment u/s. 143(3) of the Act assessing the same income as was computed u/s. 143(1)(a) of the Act. The PCIT from the records noticed that the assessee has claimed expenses on account of impairment of financial instruments to the tune of Rs.509.25 Crores. The PCIT further noticed that

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 3 -:

the assessee in the computation has disallowed the loss to the tune of Rs.365.49 Crores, whereby the assessee has actually claimed Rs.143.76 Crores towards impairment as deduction. The PCIT was of the view that the A.O has not made proper enquiries before allowing the claim of deduction towards impairment and accordingly issued a notice u/s. 263 of the Act calling on the assessee to furnish the details pertaining to the claim. The PCIT after considering the submissions of the assessee held that: “5.1 The assessee contends that for claiming deduction on account of bad debt, it is only required to write off this amount as irrecoverable in the books of accounts and since this has been done, it is entitled to claim deduction u/s 36(1)(vii). On this contention of the assessee, it is noted that the repossessed vehicle is not recognised as a separate asset in the books of accounts of the assessee company, however, the same is treated as collective receivable against the outstanding balances. The assessee while claiming this deduction of bad debts, has not written off the collective receivable in respect of the corresponding vehicle in the books of accounts. Since, the outstanding loan balances and the vehicle for which the corresponding loan was availed are in inextricably linked, the corresponding collective receivable is also required to be written off in the books of accounts, however this has not been done. The assessee cannot be selective and write off the outstanding loan while not writing off of the corresponding collective receivable. This amounts to cherry picking which surely is not allowable as per law. Therefore, the reliance placed by the assessee on the decision of the Hon'ble Supreme Court in the case of M/s TRF Ltd. (supra), is incorrect and misplaced. 5.2 Further, it is noted that the said bad debt claimed of Rs. 143.75 crores, is in respect of outstanding loans in respect of 807 vehicles. These 807 vehicles comprise of 411 repossessed vehicles and balance 396 vehicles are yet to be repossessed. Out of the repossessed 411 vehicles, 388 vehicles have been sold for 53.1 crores and balance 23 vehicles are still unsold. Interestingly, it is noted that in respect of the 388 vehicles sold which have fetched Rs. 53.1 crores, the corresponding outstanding loan liability is of Rs. 57.57 crores (Exact details are as per Annexure 1). In respect of the balance outstanding loan liability of Rs. 86.18 crores (Rs. 143.75 crores (-) Rs.57.57 crores), the vehicles are either yet to be repossessed or repossessed but not sold. Thus, the assessee has incurred only a marginal loss of Rs. 4.46 crores (Rs. 57.57 crores (-) Rs. 53.1 crores) in respect of the said outstanding loan liability of Rs. 57.57 crores after considering the sale of the corresponding vehicles. In percentage terms the loss to the

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 4 -:

assessee in respect of the said outstanding loan liability of Rs. 57.57 crores wherein the vehicles have been repossessed and sold is of only 7.75%. Moreover, this loss doesn't factor the fact that 6 passenger cars and 117 commercial vehicles of substantial value which is lying in stock of the assessee have NIL outstanding balance of loan amount as on 31-03-2021. 5.3 Moreover, it is relevant to note that as such the actual loss with the assessee will incur in respect of the vehicle loan granted will be determined only once the vehicle is sold after being repossessed. Till then the said deduction claimed by the assessee is nothing but a provision made for probable loss. The Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. (314 ITR 62) has held that any provision made which is reasonable and scientific on the basis of past experience etc. is to be allowed as a deduction. In the instant case, it is observed that the assessee has incurred a marginal loss of Rs. 4.46 crores in respect of the said outstanding loan liability of Rs. 57.57 crores after factoring the sale amount of the corresponding vehicles. In percentage terms, the loss to the assessee in respect of the said outstanding loan liability of Rs. 57.57 crores wherein the vehicles have been repossessed and sold is of only 7.75%. Further, this loss doesn't factor the fact that 6 passenger cars and 117 commercial vehicles of substantial value which is lying in stock of the assessee have NIL outstanding balance of loan amount as on 31-03-2021. Moreover, the fact that during the year there is a substantial write back on account of reversal of amounts written off in earlier years of Rs. 81.43 crores, clearly shows that the claim of bad debts is of a much higher amount.”

3.

Accordingly, the PCIT held the order of assessment to be erroneous and prejudicial to the interest of Revenue and partly set aside the assessment order with a direction to the A.O to make necessary enquiries with regard to the impairment claimed by the assessee as deduction. The assessee is in appeal before the Tribunal against the order of the PCIT.

4.

The Ld. Authorized Representative (AR) of the assessee submitted that the PCIT has held that the order of the A.O as erroneous and prejudicial to the interest of the Revenue based on incorrect understanding of facts. In this regard, the Ld. AR drew our attention to the finding of the PCIT in para 5.2 (as extracted hereinabove) to submit that the finding of the PCIT with respect

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 5 -: to the loss suffered by the assessee is not correct and that the impairment claimed to the tune of Rs.143.75 Crores is after considering the amount realized on sale of repossessed assets. The Ld. AR further drew our attention to the write off policy followed by the assessee whereby the loans outstanding beyond 360 days are evaluated for write off. The Ld. AR submitted that when no vehicle against the loan is repossessed the gross outstanding loan is written off and if the vehicle repossessed and sold then the net outstanding after setting off the sale consideration is written off. The Ld. AR further submitted that where the vehicles are repossessed after write off when the sale process is offered to tax in the year of sale. The Ld. AR also drew our attention to the submissions made in this regard before the PCIT (page 98 to 137 of paper book). The Ld. AR further drew our attention to the following table containing the details of impairment to submit that the amount actually written of i.e.Rs.143.75 crores already considers the assets repossessed and sold –

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 6 -:

5.

The Ld. AR further submitted that the wherever the gross amount is written off the assessee has not repossessed the assets and that the impairment claimed is in accordance with the regular accounting policy followed by the assessee. The Ld. AR also submitted that the amount claimed by the assessee is the actual write off and not the provision for impairment which is substantiated by the fact that the assessee itself has disallowed Rs.365.49 crores in the computation of income. The Ld. AR accordingly submitted that the error identified by the PCIT is based on incorrect understanding of facts and therefore, the PCIT is not correct in exercising jurisdiction u/s. 263 of the Act.

6.

The Ld. Departmental Representative (DR), on the other hand, relied on the order of the PCIT.

7.

We have heard the parties, and perused the material available on record. The PCIT held the assessment order as erroneous and prejudicial to the interest of the revenue, for the reason that the quantum of impairment deduction claimed by the assessee is not correct and that the AO has not carried out proper verification of the same. The error identified by the PCIT can be summarised as under – (i) Where the assets are repossessed the assessee has written of only the loan and not the assets repossessed that are yet to be sold against the said loans;

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 7 -: (ii) The assessee has not considered the sale value of the repossessed assets for the purpose of write off and therefore the loss claimed is much more than the actual loss; (iii) The deduction claimed is a claim against provision and not actual write off and therefore the reliance placed by the assessee on the decision of the Hon'ble Supreme Court in the case of TRF Ltd [(2010) 323 ITR 397 (SC)] is misplaced.

8.

In this regard, we notice that as per the impairment policy, the assessee considers any loan which has no repayment for more than 1 year for impairment. We further notice that when no vehicle against the loan is repossessed the gross outstanding loan is written off and if the vehicle repossessed and sold then the net outstanding after setting off the sale consideration is written off. In the light of the above policy when we look at the break up of write-off submitted by the assessee before the PCIT we notice that the same contains two categories of write off where asset is yet to be repossessed (396 vehicles) and where the asset is repossessed and sold (388 vehicles). We further notice that the amount written off does not include loans outstanding where the assets are repossessed and not yet sold i.e. the loan outstanding against 396 vehicles is where the assessee is yet to repossess the vehicle. Therefore we see merit in the submission that the write off towards impairment is as per the accounting policy followed by the assessee and cannot be treated as a provision. In other words the amount of Rs.94,51,36,225/- written off is towards those loans where assets are not repossessed and does not include loans where assets are repossessed and yet to be sold (refer table above). Accordingly it is noticed that the gross amount written off where the assets are not repossessed is as per its regular

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 8 -: accounting policy and is an actual write off claimed u/s.36(1)(vii) of the Act. Considering the decision of the Hon'ble Supreme Court in the case of M/s TRF Ltd. (supra), in our view the error identified [in point (i) & (iii)] by the PCIT in this regard is not tenable.

9.

Now coming to the other error identified by the PCIT [Point (ii)] with regard to written off wherever the assessee has repossessed and sold the assets. The contention of the PCIT is that the assessee has suffered a nominal loss of Rs.4.46 crores whereas the amount claimed as deduction is Rs.57.57 crores. However, we notice that the above finding of PCIT is factually incorrect, since the gross amount of loan outstanding where assets are repossessed and sold is Rs. 1,07,50,73,051/- and that the assessee has recovered a sum of Rs.49,93,69,015/- and the net amount of write off is Rs.57,57,04,036/- (refer table above). From the perusal of the above it is clear that the assessee has already reduced the amount recovered from the sale of repossessed assets and has only written off the net amount as per the accounting policy. Therefore the error identified by the PCIT once again reducing the amount recovered from the amount written off would amount to double adjustment and accordingly the error envisaged is based on incorrect understanding of facts.

10.

The condition precedent to the exercise of jurisdiction under section 263 is that the order sought to be revised must be erroneous insofar as it is prejudicial to the interests of the revenue and that the error is an error of law or facts. In the present case, though the PCIT has invoked Explanation-2 to Section 263 of the Act towards inadequate enquiry by the AO, the PCIT has

ITA No.550/Chny/2025 Mercedes Benz Financial Services India Pvt. Ltd. :- 9 -: proceeded to identify an error of fact. We have in the above paragraphs have held that the error of facts identified by the PCIT is not correct and is based on incorrect understanding of facts. Therefore, we hold that the PCIT is not correct in exercising jurisdiction u/s.263 identifying the error of fact based on incorrect understanding and accordingly the impugned order is liable to be quashed.

11.

In the result, the appeal of the assessee is allowed.

Order pronounced on 16th day of April, 2026 at Chennai.

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) लेखा लेखा सद�य लेखा लेखा सद�य सद�य /Accountant Member सद�य �याियक �याियक सद�य �याियक �याियक सद�य सद�य / Judicial Member सद�य चे�नई/Chennai, �दनांक/Dated: 16th April, 2026. EDN, Sr. P.S आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF EJTADA Digitally signed by EJTADA DURGA NARESH DURGA Date: 2026.04.20 NARESH 10:13:45 +05'30'

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