|DATE:||(Date of pronouncement)|
|DATE:||September 20, 2011 (Date of publication)|
|Click here to download the judgement (dredging_DRP_enhance_future_loss.pdf)|
DRP’s power to “enhance” confined to issues raised in draft assessment order. “Future losses” allowable as deduction
The assessee, a foreign company, declared a loss of Rs. 31.22 crores in its first year of operations after claiming deduction for “Provision for future losses” of Rs. 32.86 crores. The AO passed a draft assessment order u/s 144C in which he disallowed the claim for future losses. The DRP confirmed the disallowance of future losses and also directed the AO to take 20% of the contract as having been completed during the period and to assess 8% thereof as the profit. The assessee filed an appeal claiming that the DRP had no jurisdiction to go beyond the draft assessment order and that the future losses were allowable. HELD upholding the plea:
(i) U/s 144C (5), the DRP can issue directions only in respect of the objections raised by the assessee and the objections are to be in terms of the variation proposed in the draft order. S. 144C (8) restricts the powers of the DRP to “confirm, reduce or enhance the variations proposed in the draft assessment order“. Hence, the DRP’s directions have to be with reference to the objections to the variations proposed in the draft order. In the context of the erstwhile s. 144B, it was held by Courts that the IAC’s review powers were limited to the additions proposed by the AO and that he had no jurisdiction to give instructions which were beyond the purview of the draft order and objections. This principle applies to s. 144C as well. (GE India Technology Centre vs. DRP (Kar) followed);
(ii) As regards the deduction for “future losses“, Accounting Standard AS-7 requires “expected loss” (difference between probable contract costs and contract revenues) to be “recognised as an expense immediately” irrespective of whether work has commenced and the stage of completion of activity. Accordingly, estimated or foreseeable losses are allowable as a deduction. (Jacobs Engineering Private Ltd (ITAT Mumbai) & Mazagaon Dock 29 SOT 356 followed).