Order under Section 148A(3) was quashed as the Assessing Officer failed to consider the assessee’s explanation that the marked-to-market loss had already been taxed in the preceding assessment year.

By | August 31, 2026
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Order under Section 148A(3) was quashed as the Assessing Officer failed to consider the assessee’s explanation that the marked-to-market loss had already been taxed in the preceding assessment year.
Issue
  1. Whether Section 148A requires the Assessing Officer to disclose the exact source of information (such as an audit objection) to the assessee, or whether conveying the substance and details of the information is sufficient.
  2. Whether an order passed under Section 148A(3) is legally sustainable when the Assessing Officer acknowledges the assessee’s explanation—that the marked-to-market hedge reserve loss had already been taxed in the preceding assessment year—but fails to consider or address it before initiating reassessment.
Facts
  • Reassessment Initiation: For AY 2020-21, the Assessing Officer (AO) issued a show-cause notice under Section 148A proposing reassessment to disallow a claim of ~Rs. 8.06 crores regarding Marked to Market (MTM) valuation of a hedge reserve under Section 40A(13) read with ICDS-6.
  • Non-Disclosure of Information Source: The show-cause notice detailed the nature of the claim but did not explicitly state that the information originated from an audit objection, which was only mentioned later in the Section 148A(3) order.
  • Assessee’s Defense & Proof: The assessee responded to the notice demonstrating that it did not dispute the taxability of the amount, but proved via computation statements and tax returns for AY 2019-20 and AY 2020-21 that the subject amount had already been offered to tax in AY 2019-20.
  • Summary Order Passed: The AO passed an order under Section 148A(3) acknowledging the submission of tax computation statements, but proceeded to issue a Section 148 notice without adjudicating or addressing the double-taxation defense raised by the assessee.
Decision
  • Disclosure of Source Not Mandatory: Held, yes. Section 148A mandates that the details and substance of the information suggesting income escaping assessment must be conveyed to the assessee; revealing the specific source of the information is not a statutory prerequisite. The show-cause notice was valid on this ground.
  • Section 148A(3) Order Quashed: Held, yes. Since the assessee provided uncontradicted proof that the marked-to-market amount was already taxed in AY 2019-20, the AO’s failure to address this core explanation resulted in arbitrary double taxation. The Section 148A(3) order was accordingly quashed.
Key Takeaways
  • Substance Over Source in Reassessment: Under Section 148A, failure to disclose the origin/source of audit information does not invalidate a show-cause notice as long as the material details of the alleged leakage of income are clearly communicated.
  • Mandatory Application of Mind: Section 148A(3) requires the AO to meaningfully evaluate the assessee’s reply and evidence. Passing a routine order without deciding on explicit defenses (such as prior-year taxation) renders the reassessment order illegal.
  • Protection Against Double Taxation: Reassessment proceedings cannot be used to tax an amount for a second time when the assessee conclusively proves it was already included and taxed in a prior assessment year.
HIGH COURT OF KERALA
IBS Software (P.) Ltd.
v.
Union of India
ZIYAD RAHMAN A.A., J.
WP(C) NO. 45997 OF 2024
JULY  23, 2026
Raja Kannan, K. John Mathai, Paulose C. Abraham, M. Gopikrishnan Nambiar and Joson Manavalan, Advs. for the Petitioner. Navaneeth N. Nath, CGC, P.G. Jayashankar and G. Keerthivas, Advs. for the Respondent.
JUDGMENT
1. The petitioner is a Private Limited Company, registered under the Companies Act and an assessee under the provisions of the Income Tax Act, 1961.
2. The facts that led to the filing of this writ petition are as follows:
Pertaining to the assessment year 2020-2021, the petitioner submitted returns. The same was subjected to scrutiny and as per Ext.P12 order of assessment, it was finalized. Subsequently, the petitioner was served with Ext.P1 notice under Section 148A of the Income Tax Act, where it was proposed to re-assess the petitioner, as according to the assessing authority, as per the information received by them, certain income has escaped from the assessment. Annexure to Ext.P1 notice indicates the specific reasons, based on which, such a re-assessment was proposed. It was to the effect that, the petitioner claimed an amount of Rs.8,05,92,988/- as deduction towards “Marked to Market valuation of hedge reserve”. However, as per Section 40A(13) of the Income Tax Act, no deduction of allowance shall be allowed in respect of “Marked to Market valuation of hedge reserve” as computed in accordance with ICDS (ICDS 6-Effects of changes in foreign exchange rates).
3. The petitioner responded to Ext.P1, by submitting Ext.P3 Email, where, the petitioner sought for adjournment. Accordingly, as per Ext.P5, the matter was adjourned to 08.11.2024 and the petitioner was offered for an opportunity of hearing on that date. Later, on 07.11.2024, the petitioner issued Ext.P6 Email, where it is pointed out that, a sum of Rs.8,05,92,988/- which has been reduced in the Assessment Year 2020-2021 was included in the tax computation of Assessment Year 2019-2020. To substantiate the said fact, the petitioner produced the returns submitted for the years 2019-2020 and 2020-2021, which are produced in this writ petition as Exts.P7 and P8 respectively. According to the petitioner, a perusal of the said documents would clearly indicate that, the amount referred to above has been included in the taxable income of the petitioner for the assessment year 2019-2020. It was in these circumstances, the said amount was deducted, as part of accounting practice, while preparing the returns for the year 2020-2021. In Ext.P6, the petitioner also requested to the assessing authority that, in case explanation offered by the petitioner finds no favour with the said authority, the petitioner may be allowed an opportunity to file another reply and also an opportunity be extended to be heard.
4. However, the assessing authority proceeded to pass the order as per Ext.P10 under Section 148A (3) of the Income Tax Act, 1961. According to the petitioner, in Ext.P10, even though Ext.P6 Email and the documents produced along with the same were referred to, without considering the explanation offered by the petitioner, the assessing authority proceeded to determine the taxability of the amount deducted by the petitioner as “Marked to Market valuation of hedge reserve”. This writ petition is submitted by the petitioner in such circumstances, challenging Ext.P10 order, as according to the petitioner, the said order was not in fulfillment of the statutory requirement contemplated under Section 148A of the Act, as the explanation offered by the petitioner was not considered.
5. A detailed statement has been submitted on behalf of the 2nd and 3rd respondents, in response to the averments contained in the writ petition, where, the procedure adopted by the respondents while completing the procedure that culminated in Ext.P10 order, were explained. The statutory provisions invoked by the respondents while completing the said assessment were discussed and contended that, no interference is warranted in the orders passed by the authority, as the same is in compliance of the legal provisions contemplated under the Act. Thus, they sought dismissal of the writ petition.
6. I have heard Sri. Raja Kannan, the learned counsel for the petitioner and Sri. P.G. Jaya Shankar, learned Senior Standing Counsel for the respondents.
7. The learned counsel for the petitioner mainly raised two grounds while challenging Ext.P10 order. Firstly, it is contended that, as per the statutory stipulations contained in Section 148A(1), there is an obligation upon the authority concerned, while issuing a show-cause notice, to furnish the information which suggest that the income chargeable to tax has escaped assessment. According to the learned counsel for the petitioner, in this case, in Ext.P10 order, the information has been specified as the audit objection received by the assessing officer, whereas in Ext.P1 show-cause notice, there is no reference of any audit objection. Therefore, the same is not in compliance of the statutory requirement contemplated under Section 148A of the Income Tax Act.
8. Secondly, it was contended that, despite the fact that the petitioner had offered a clear explanation with regard to the deduction of amount of Rs.8,05,92,988/- towards “Marked to Market valuation of hedge reserve”, by submitting Ext.P6 along with Exts.P7 and P8, to substantiate such explanation, the same has not been referred to in Ext.P10 order. It is pointed out that, instead of answering the said explanation, the assessing authority proceeded to determine the taxability of the amount, which according to the petitioner was never in dispute, as the petitioner has already included it in the taxable income, in the computation which formed part of the return for the assessment year 2019-2020.
9. On the other hand, the learned Standing Counsel for the respondents submitted that, insofar as the first contention raised by the learned counsel for the petitioner is concerned, namely, the alleged non-disclosure of the information contemplated under Section 148A(1), it is the specific case of the respondents that, the said provision does not mandate the furnishing of the entire set of information. According to the respondents, furnishing the particulars of the information that formed the basis for initiating the reassessment proceedings would itself constitute sufficient compliance with the requirement under the said provision. The learned standing counsel brought to the attention of this Court to Ext.P1 notice, which contain specific details of the information and the grounds on which re-assessment is proposed.
10. With regard to the 2nd contention, it is pointed out by the learned standing counsel for the respondents that, the assessing authority was not provided with the copies of the returns or other documents, along with the reply submitted and only an Email along with computation statement which according to the petitioner formed the basis of the returns for the assessment year 2019-2020 and 2020-2021 alone were produced. According to the learned standing counsel, the computation statements are not statutory documents and therefore, it was not obligatory for the assessing authority to consider the same, in the absence of any other documents referred to in the statute. Therefore, actions of the respondents are justified.
11. I have carefully gone through the records, perused the relevant statutory provisions and considered the contentions of both sides. When it comes to the first question, namely, the obligation regarding the disclosure of the information, on carefully going through the statutory stipulations contained in Section 148A, I find merit in the submission of the learned standing counsel. This is because, there is nothing in the said provision that provides that, the source of information should be furnished, but what is contemplated therein is that, while issuing show-cause notice, it should be accompanied with information which suggests that income chargeable to tax has escaped assessment for the relevant assessment year. Therefore, what is contemplated in that provision is that, details of the information should be conveyed to the assessee and it is not mandatory that source of information has to be furnished to the assessee. In this case, as rightly pointed out by the learned standing counsel, in Annexure to Ext.P1, the reason for suggesting re-assessment was clearly mentioned, with sufficient details, so as to enable the petitioner/assessee to submit a reply to the same. Therefore, I find that Ext.P1 show-cause notice issued, is in conformity with the requirements contemplated under Section 148A(1) of the Income Tax Act and therefore, contentions raised by the learned counsel for the petitioner in this regard cannot be accepted.
12. However, when it comes to the 2nd contention raised by the petitioner, I find merits therein. In response to the show-cause notice issued, the petitioner submitted Ext.P6 along with Exts.P7 and P8. The relevance of Exts.P7 and P8 are clearly specified in Ext.P6 Email, as it is clearly stated therein that, the amount of Rs.8,05,92,988/-, which has been deducted for the assessment year 2010-2021 was included in the tax computation for the assessment year 2019-2020. On perusal of Exts.P7 and P8 computation statements, the said contention is substantiated. On going through Ext.P1 show-cause notice, it can be seen that the assessing authority was proceeding on the assumption that the amount referred to above was deducted by the petitioner while submitting the returns for the assessment year 2020-2021, in view of the fact that, the amount is not assesseble to tax. In Ext.P10 order also, what was considered by the assessing authority was the taxability of the amounts specified therein.
13. In fact, going by the explanation offered by the petitioner as evidenced by Ext.P6, coupled with the contents of Exts.P7 and P8, it can be seen that, it was not the case of the petitioner that, the amount specified above was not taxable, but on the other hand, the contention was that, the said amount was already subjected to tax in the year 2019-2020. Therefore, the proper question that ought to have been considered while passing the order under Section 148A was whether, the said amount is already subjected to tax, as claimed by the petitioner in Ext.P6 and consequences thereof. Although the materials highlighting this aspect were produced before the assessing authority, which are seen acknowledged by the assessing authority in paragraph No.3 to Ext.P10 order, the same has not been considered and instead, the authority proceeded to determine the question of assessebility of the said amount for the purpose of tax. As mentioned above, the petitioner never disputed the taxability of the said amount. The precise contention of the petitioner is that the said amount had already been included in the return of income for the assessment year 2019-2020 and, therefore, could not have been brought to tax once again, for the assessment year in question.
14. Therefore, the relevant question which ought to have been considered by the assessing authority while passing an order under Section 148 A(3), was not considered in Ext.P10 order. Of course, the learned standing counsel for the respondent submitted that, the relevant returns were not submitted by the petitioner and therefore, the assessing authority could not examine the same. The said contention cannot be accepted for more than one reason. Firstly, that is not the reason mentioned in Ext.P10 for not considering the explanation offered by the petitioner. Secondly, as far as the returns are concerned, those are available with the assessing authority and it could be verified by the assessing authority to determine the correctness of the explanation offered by the petitioner as per Ext.P6. Another aspect highlighted by the learned standing counsel for the respondents is that, the computation statements are not statutory documents and therefore, in the case of computation statements produced by the petitioner in Exts.P7 and P8, there is no obligation on the part of the assessing authority to consider the same. However, the said statements submitted by the petitioner to show that, that amount which is the subject matter of the dispute is included in the assessment year 2019-2020 and tax is suffered. Those documents are relied on, only to establish the said inclusion. Therefore, it was the obligation of the assessing authority to verify whether, the said statement made by the petitioner was correct or not. Thus, an enquiry with respect to the same was absolutely necessary for finalizing the issue, which is not seen considered. Therefore, I find that the matter requires reconsideration.
15. In such circumstances, this writ petition is disposed of quashing Ext.P10, with a direction to the assessing authority to re-consider the matter, after giving the petitioner an opportunity for being heard and also adverting to the contention raised by the petitioner with regard to the inclusion of the said amount in the assessment for the assessment year 2019-2020 as taxable income. As this writ petition is pending since 19.12.2024, it is clarified that the period from the date of filing of this writ petition till the date of receipt of certified copy of this judgment shall be excluded for the purpose of computing the period of limitation for completing the assessment. It is also clarified that, the petitioner shall be at liberty to furnish additional documents if desired by it.