Case Law Details
Schwing Stetter (India) Private Limited Vs Additional/Joint/Deputy/ACIT/ITO (Madras High Court)
For Assessment Year 2015-16, the petitioner filed its return of income on 30.11.2015 along with the financial statements for Financial Year 2014-15. During the original assessment proceedings, the Assessing Officer issued a notice under Section 142(1) of the Income-tax Act, 1961 calling for, among other things, details of large expenses claimed in the profit and loss account. The petitioner replied on 14.09.2018 and specifically furnished details relating to the net loss on foreign currency transactions and translation debited to the profit and loss account. Thereafter, the original assessment order dated 28.01.2019 was passed without making any disallowance in respect of the claim for net loss on foreign currency transactions. The original assessment order, however, expressly dealt with the disallowance relating to the provision for warranty.
Subsequently, a notice under Section 148 of the Income-tax Act was issued on 30.03.2021. Upon the petitioner’s request, reasons for reopening were furnished on 22.09.2021. The recorded reasons stated that Note 29 to the profit and loss account disclosed a debit of ₹6,56,98,000 towards net loss on foreign currency transactions and translation, while Note 2.10 to the financial statements stated that derivatives were marked to market and the resulting losses were recognised in the profit and loss account. According to the reasons recorded, such loss was notional in nature and required disallowance. It was also stated that the provision for warranty amounting to ₹1,95,94,545 required disallowance while computing book profit under Section 115JB. A reassessment order was thereafter passed. The petitioner had initially challenged the Section 148 notice and the order rejecting its objections, and after the reassessment order was passed, amended the writ petition to challenge that order as well.
The petitioner contended that the assessment had been reopened solely on the basis of information already disclosed in the financial statements filed along with the original return of income. Reference was made to Note 29 and paragraph 2.10 of the notes to the financial statements, and it was argued that the reopening was founded entirely on material that had already been examined during the original assessment proceedings. It was therefore submitted that the reassessment amounted to a change of opinion and was impermissible. Reliance was placed on the judgment in Pon Pure Chemical India (P) Ltd. v. Assistant Commissioner of Income-tax, which was stated to involve a nearly identical factual situation.
The Income-tax Department argued that reassessment could be initiated if the Assessing Officer had reason to believe that income had escaped assessment, provided the original assessment order had not consciously considered and recorded findings on the material placed on record by the assessee. Reliance was placed on the Gujarat High Court decision in Green Finance Ltd. v. Joint CIT.
The High Court examined the record and found that the petitioner had enclosed the financial statements with the original return of income. Note 29 recorded the net loss on foreign currency transactions, while paragraph 2.10 explained the accounting treatment of foreign currency transactions, forward contracts and derivatives, including that derivatives were marked to market and losses arising therefrom were recognised in the statement of profit and loss.
The Court further found that the notice under Section 142(1) had specifically sought details of large expenses claimed in the profit and loss account and that the petitioner had supplied those details, including particulars relating to the net loss on foreign currency transactions, in its reply dated 14.09.2018. The original assessment order was thereafter passed without making any disallowance on that issue. As regards the second reason for reopening, namely the provision for warranty, the Court noted that this issue had been expressly considered in the original assessment order.
Comparing the reasons recorded for reopening with the petitioner’s reply to the Section 142(1) notice, Note 29 and paragraph 2.10 of the financial statements, the Court concluded that the reassessment had been initiated on the basis of material furnished with the original return of income and in relation to issues already raised before completion of the original assessment. The Court concurred with the view expressed in Pon Pure Chemical and held that the reassessment was akin to reviewing and revising the earlier assessment on a change of opinion, which was impermissible.
Accordingly, the Court set aside the reassessment order as well as the notices and orders preceding it that had been challenged in the writ petition. The writ petition was disposed of, the connected miscellaneous petitions were closed, and no costs were awarded.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
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. Assistant Commissioner of Income-tax, [2025] 172 taxmann.com 93 (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 Green Finance Ltd. v. Joint CIT, (2000) 243 ITR 482 (Guj) 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 dfferences 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 dfferences 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” (‘CAI) 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.
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