Madras High Court Quashes Reassessment Based On Material Already Examined During Original Assessment

The Madras High Court has recently set aside reassessment proceedings initiated against an engineering equipment manufacturer after finding that the Income Tax Department reopened the assessment based on material that had already been disclosed and examined during the original assessment.

Justice Senthilkumar Ramamoorthy observed that the reassessment amounted to an impermissible change of opinion.

"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.", the court observed.

Schwing Stetter (India) Private Limited challenged the notice reopening its assessment for the assessment year 2015-16, the order rejecting its objections and the consequential reassessment order.

The company had filed its income tax return along with its financial statements for the 2014-15 financial year. During the original assessment, the assessing officer sought details of large expenses reflected in the profit and loss account. The company furnished the requested information, including particulars of the net loss on foreign currency transactions and translation. The original assessment was completed without making any disallowance on that issue. It did, however, expressly deal with the provision for warranty.

About two years later, the Income Tax Department reopened the assessment. The reasons recorded stated that the company had claimed a net loss on foreign currency transactions and translation of about ₹6.57 crore, which the Department considered notional in nature and liable to be disallowed. It also proposed to disallow the provision for warranty while computing book profit under Section 115JB.

The company argued that the documents relied on for reopening had accompanied the original return and had also been furnished in response to the assessing officer's queries during the original assessment.

The Income Tax Department contended that reopening was justified because the original assessment order did not expressly record findings on the foreign exchange loss and that the assessing officer had reason to believe income had escaped assessment.

Rejecting that contention, the court found that the financial statements accompanied the original return and that the assessing officer had specifically sought details regarding large expenses before completing the assessment. The company had furnished the information called for.

"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 court observed.

The court also noted that the issue relating to the provision for warranty had already been expressly considered in the original assessment order.

The court held that the reassessment was akin to reviewing and revising the earlier assessment on a change of opinion.

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

The court, consequently, set aside the reassessment order, the notice reopening the assessment, and the earlier orders connected with the reassessment proceedings.

For Petitioner: Advocate R.Venkatanarayanan, 

For Respondent: S.Premalatha, SPC