Reassessment based on financial notes previously scrutinized

Reassessment based on financial notes previously scrutinized during the original assessment constitutes an impermissible change of opinion.

Issue

Whether the Assessing Officer can legally initiate reassessment proceedings under Section 148 to disallow foreign currency transaction losses and warranty provisions when both items were fully disclosed in the original financial notes, explicitly scrutinized via Section 142(1) notices, and accepted in the original assessment.

Facts

Original Filing: The assessee filed its return of income for Assessment Year 2015-16, enclosing complete audited financial statements.
The Disclosures: Note 29 to the profit and loss account explicitly disclosed a net loss on foreign currency transactions and translation. The financial notes also detailed a provision for warranty.
Original Scrutiny: During the initial assessment, the Assessing Officer (AO) issued a statutory notice under Section 142(1) seeking details of large expenses. The assessee furnished a comprehensive reply providing all requested particulars, including the breakdown of Note 29.
Original Order Passed: The AO completed the original assessment without making any disallowances for the foreign currency loss, while explicitly recording considerations regarding the provision for warranty in the final assessment order.
The Reopening Notice: The AO subsequently issued a reassessment notice under Section 148, claiming that the foreign currency loss was “notional” and should be disallowed, and that the warranty provision should be added back to the book profits under Section 115JB.
The Material Used: The recorded reasons for reopening relied entirely on the exact same Note 29 and financial balance sheet documents submitted during the original filing.

Decision

Review is Impermissible: Reopening an assessment based solely on the identical material provided with the original return—especially on items directly questioned and answered prior to the original order—amounts to an illegal review of a settled issue.
Change of Opinion Barred: A mere change of opinion by the Assessing Officer on a previously examined transaction does not grant jurisdiction to initiate reassessment proceedings.
Reassessment Quashed: The reassessment order, along with the underlying Section 148 notices and preliminary orders, was completely set aside. (In favour of assessee)

Key Takeaways

No Second Guessing Finalized Scrutiny: Once an issue is raised, explained, and accepted during original regular assessment proceedings, the tax department cannot use reassessment as a tool to give the same documents a second look.
Disclosure in Notes Protects the Taxpayer: Clear, transparent disclosures in the notes to accounts (such as detailing foreign exchange fluctuations or provisions) prevent the revenue department from arguing that the taxpayer “failed to disclose fully and truly” all material facts.
Section 115JB Book Profits Limitations: The department cannot arbitrarily re-adjust book profits under Section 115JB during a reassessment by targeting provisions that were already openly debated and accepted in the initial assessment round.

HIGH COURT OF MADRAS

Schwing Stetter (India) (P.) Ltd.

Additional /Joint/ Deputy/ Assistant Commissioner of Income-tax/ Income-tax officer, National Faceless Assessment Centre^*

Senthilkumar Ramamoorthy, J.

WP No. 6230 of 2022
WMP Nos. 6293 & 6295 of 2022

JUNE 11, 2026

R.Venkatanarayanan for the Petitioner. Mrs. S. Premalatha, SPC for the Respondent.

ORDER

1. In relation to assessment year 2015-16, the petitioner filed the return of income on 30.11.2015. Along with said return of income, the petitioner enclosed the financial statement for financial year 2014-15. The assessing officer issued notice under Section 142(1) of the Income-Tax Act, 1961 (the I-T Act) calling upon the petitioner to provide the information requested for in the annexure thereto. Such information included details of large expenses claimed in the profit and loss account. The petitioner replied to said notice on 14.09.2018 providing the information requested for. In particular, the assessing officer was informed about the expenses debited in the profit and loss account towards net loss on foreign currency transactions and translation. Thereafter, original assessment order dated 28.01.2019 was issued. No disallowance was made in respect of the claim of net loss on foreign currency transactions. Said order expressly dealt with disallowance of the provision for warranty.

2. Later, notice under Section 148 of the I-T Act was issued on 30.03.2021. The petitioner requested for reasons for reopening of the assessment and, in response thereto, reasons were furnished on 22.09.2021. In said document, it is recorded as under:

“The assessee company is engaged in the manufacturing and sale of concrete mixers concrete pumps, components and related spares and services. The assessee filed a return of income on 31.11.2015 by declaring an income of Rs.14,94,50,150 under normal provisions and a book profit of Rs. 46,77,45,000. An order u/s 143(3) r.w.s. 144C of the I.T.Act, 1961 was completed on 28.01.2019 determining the assessed income at Rs.25,41,01,314.

1. Upon perusal of the Note 29 appended to the P&L Account for the year ended 31.03.2015 it was noted that the assessee has debited an amount of Rs.6,56,98,000 towards Net loss on foreign currency transactions and translation. In the Notes (No.2.10 Foreign currency transactions) to financial statements for the year ended 31.03.2015, it is stated that the derivatives are marked to market and loss arising from such derivatives are recognised in the statement of Profit and loss. This being notional in nature and not actually expended needs disallowance. Further the provision of warranty amounting to Rs.1,95,94,545 needs to be disallowed while computing book profit u/s 115JB.”

The reassessment order was issued pursuant thereto. The petitioner had approached this Court prior thereto by challenging the notice under Section 148 and the order rejecting the objections raised by the petitioner with regard to reopening of the assessment. After the assessment order was issued upon reassessment, the prayer was amended to challenge such order.

3. Learned counsel for the petitioner referred to the notice under Section 142(1), the reply thereto and the financial statement of the petitioner. In particular, he invited my attention to Note 29 to the profit and loss account and to paragraph 2.10 of the Notes to financial statements for the year ended 31.03.2015. By drawing a comparison between the information disclosed in the said financial statement and the reasons for reopening the assessment, learned counsel contended that the assessment was reopened on the basis of information furnished in the financial statement and enclosed with the original return of income. Learned counsel contends that this amounts to reopening of an assessment on the basis of a change of opinion, which is not permissible. In support of this contention, he relies upon the judgment of this Court in Pon Pure Chemical India (P.) Ltd. v. Asstt. CIT 481 ITR 799 (Madras) (Pon Pure Chemical). He points out that the fact situation in the said judgment is nearly identical to the fact situation in the present case.

4. These contentions are countered by learned standing counsel for the Income-tax Department. Referring to the order dated 24.01.2022 rejecting the objections of the petitioner, learned counsel submits that the assessment may be reopened if the assessing officer has reason to believe that income has escaped assessment as long as the original assessment order does not consciously consider and record findings on the material placed on record by the assessee. She relies on the judgment of the Gujarat High Court in Gruh Finance Ltd. v. Jt. CIT [2000] 243 ITR 482 (Gujarat) in support of this proposition.

5. The record shows that the petitioner had enclosed the financial statement for financial year 2014-15, which corresponds to assessment year 2015-16, along with the return of income. Note 29 to the profit and loss account records the net loss of foreign currency transactions and translation in a sum of Rs.65,698,000. Paragraph 2.10 of the notes to financial statement reads as under:

“2.10 Foreign currency transactions

Foreign currency transactions are accounted at the exchange rates prevailing on the date of the relevant transactions. Exchange differences arising on foreign currency transactions settled during the year are recognized in the statement of profit and loss of the year. Monetary assets and liabilities denominated in foreign currencies as at the balance sheet date are translated at the closing exchange rates on that date. The resultant exchange differences are recognized in the statement of profit and loss.

In relation to the forward contracts entered into to hedge the foreign currency risk of the underlying outstanding at the balance sheet date, the exchange difference is calculated as the difference between the foreign currency amount of the contract translated at the exchange rate at the reporting date, or the settlement date where the transaction is settled during the reporting period, and the corresponding foreign currency amount translated at the later of the date of inception of the forward exchange contract and the last reporting date. Such exchange differences are recognized in the statement of profit and loss in the reporting period in which the exchange rates change. Premium or discount arising at the inception of forward exchange contracts is amortized as expense or income over the life of the contract. Any profit or loss arising on the cancellation or renewal of forward contracts is recognised as income or as expense for the period.

In accordance with the announcement of “Accounting for Derivatives made by the Institute of Chartered Accountants of India” (‘ICAI) on March 29, 2008, derivatives are marked to market, and loss arising out of such derivatives are recognised in the Statement of profit and loss.”

6. In the notice under Section 142(1) of the I-T Act, the assessing officer had requested for information relating to about 11 items, including details of large expenses claimed in the profit and loss account. By reply dated 14.09.2018, the assessee had provided such details. With specific reference to net loss on foreign currency transactions, the assessee had provided the details contained in Note-29 to the financial statement.

7. Thus, the documents on record disclose in no uncertain terms that the assessing officer had called for information pertaining to large expenses claimed in the profit and loss account and such information was provided by the assessee. The original assessment order was issued thereafter on 28.01.2019 without making any disallowance in relation thereto. As regards the second reason mentioned for reopening the assessment, namely, provision for warranty, said issue has been expressly considered in the original assessment order.

8. The order providing reasons for reopening the assessment was extracted supra at paragraph 2. On comparing the above reasons for reopening with the reply of the petitioner to the notice under Section 142(1), note 29 and para 2.10 to the notes to accounts, it is clear that the assessment was reopened based on material provided with the original return of income and, in fact, in relation to an issue raised prior to the original assessment. I concur with the opinion expressed in Pon Pure Chemical in this regard.

9. This is akin to reviewing and revising the earlier assessment on a change of opinion, which is impermissible.

10. For reasons aforesaid, the impugned order issued on reassessment and the notices and orders prior thereto, which are the subject matter of challenge in this writ petition, are set aside.

11. The writ petition is disposed of on the above terms. Consequently, connected miscellaneous petitions are closed. No costs.