DREDGING INTERNATIONAL N.V., MUMBAI v. ADIT (IT) 1(2), MUMBAI

ITA 8035/MUM/2010 | 2006-2007
Pronouncement Date: 16-09-2011 | Result: Allowed

Appeal Details

RSA Number 803519914 RSA 2010
Assessee PAN AABCD1445N
Bench Mumbai
Appeal Number ITA 8035/MUM/2010
Duration Of Justice 9 month(s) 24 day(s)
Appellant DREDGING INTERNATIONAL N.V., MUMBAI
Respondent ADIT (IT) 1(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 16-09-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 16-09-2011
Date Of Final Hearing 24-08-2011
Next Hearing Date 24-08-2011
Assessment Year 2006-2007
Appeal Filed On 22-11-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 8035/MUM/2010 (ASSESSMENT YEAR: 2006-07) M/S. DREDGING INTERNATIONAL N.V. ASST. DIRECTOR OF INCOME TAX PWC-HOUSE - PLOT 18/A (INTERNATIONAL TAXATION) 1(2) GURU NANAK ROAD (STATION ROAD) VS. 1ST FLOOR SCINDIA HOUSE N.M. RD. BANDRA (W) MUMBAI 400050 BALLARD PIER MUMBAI 400 038 PAN - AABCD 1445 N APPELLANT RESPONDENT APPELLANT BY: S/SHRI KANCHAN KAUSHAL/NIRANJAN GOVINDEKAR/DHANESH BAFNA & ALIASAGAR RAMPURAWALA RESPONDENT BY: DR. S. SENTHIL KUMAR DATE OF HEARING: 24.08.2011 DATE OF PRONOUNCEMENT: 16.09.2011 O R D E R PER B. RAMAKOTAIAH A.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAX ATION 1(2)) PASSED UNDER SECTION 143(3) R.W.S 144C(13) OF THE I.T. ACT . ASSESSEE IN THE GROUNDS IS QUESTIONING THE ORDER OF THE DRP-1 MUMBAI IN IS SUING VARIOUS DIRECTIONS AND THE ACTION OF THE A.O. IMPLEMENTING THEM. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT ASSESSEE IS A FOREIGN CO MPANY AND IS COVERED BY THE DEFINITION OF ELIGIBLE ASSESSEE UNDER SUB- SE CTION 15(B) OF SEC.144C. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE HON'BLE DISPUTE RESOLUTION PANEL (DRP) ERRED IN D IRECTING THE LEARNED ASSISTANT DIRECTOR OF INCOME-TAX (INTERNATI ONAL TAXATION) 1(2) (ADIT) HAS ERRED IN ENHANCING THE ASSESSME NT PURSUANT ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 2 TO SUCH DIRECTIONS OF HON'BLE DRP TO IMPUTE PROFIT FOR THE YEAR OF RS.1 05 03 587 ON ESTIMATED BASIS WHICH WAS NOT A V ARIATION PROPOSED IN THE DRAFT ORDER PASSED BY THE LEARNED A DIT UNDER SECTION 144C(1) OF THE INCOME-TAX ACT 1961 (THE A CT). IT IS THEREFORE PRAYED THAT THE DIRECTION ISSUED BY THE HON'BLE DRP UNDER SECTION 144C OF THE ACT AND CONSEQUENT EN HANCEMENT BY THE LEARNED ADIT ON THE VARIATION NOT PROPOSED I N THE DRAFT ASSESSMENT ORDER SHOULD BE TREATED AS INVALID BAD IN LAW AND TO THAT EXTENT THE ENHANCEMENT SO MADE BE ORDERED T O BE DELETED. WITHOUT PREJUDICE TO GROUND NO. 1 ABOVE 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED ADIT HAS ERRED IN ESTIMATING 20% OF THE TOT AL CONTRACT PRICE AS REVENUE OF THE YEAR ON AN ARBITRARY BASIS AND HAS ALSO ERRED IN APPLYING AN ADHOC RATE OF 8% AS PROFIT MAR GIN THEREON THEREBY CHARGING TO TAX NET PROFIT OF RS.1 05 03 58 7 FOR THE ASSESSMENT YEAR 2006-07. IT IS PRAYED THAT THE AFORESAID ESTIMATION OF PROF ITS AT RS.1 05 03 587 BE DELETED. WITHOUT PREJUDICE TO GROUND 1 AND 2 ABOVE 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED ADIT ERRED IN ESTIMATING REVENUES (I.E. VAL UE OF WORK IN PROGRESS) AT RS.13 12 94 847 BEING 20 PERCENT OF CO NTRACT VALUE WITHOUT APPRECIATING THE FACT THAT APPELLANT ITSELF HAD CREDITED TO THE PROFIT AND LOSS ACCOUNT REVENUE (I.E. WORK IN P ROGRESS) AT RS.19 83 63 908 AND FURTHER ERRED IN ESTIMATING A P ROFIT AT THE RATE OF 8% WITHOUT GRANTING DEDUCTION FOR ACTUAL PR OJECT COSTS AS DEBITED TO THE PROFIT AND LOSS ACCOUNT BY THE APPEL LANT. IT IS PRAYED THAT THE LEARNED ADIT BE DIRECTED TO COMPUTE PROFIT/LOSS AFTER GRANTING DEDUCTION FOR ACTUAL PRO JECT COSTS FROM THE VALUE OF PROJECT REVENUES. WITHOUT PREJUDICE TO GROUND NO. 1 AND 2 ABOVE AND STRICTLY IN THE ALTERNATIVE 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED ADIT ERRED IN NOT COMPUTING THE WORK-IN-PRO GRESS AS DIRECTED BY THE HON'BLE DRP. IT IS PRAYED THAT THE LEARNED ADIT BE DIRECTED TO COMPUTE REVISED WORK-IN-PROGRESS AS DIRECTED BY THE HON'BLE DRP. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED ADIT ERRED IN DISALLOWING CLAIM OF THE APPE LLANT IN RESPECT OF PROVISION FOR FORESEEABLE LOSSES AMOUNTI NG TO RS.32 86 17 293. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 3 IT IS PRAYED THAT THE CLAIM OF PROVISION FOR FUTUR E LOSS OF RS.32 86 17 293/- BE ALLOWED WHILE COMPUTING INCOME OF THE APPELLANT. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED ADIT ERRED IN NOT QUANTIFYING ADDITIONAL DE PRECIATION OF RS.5 14 015 ON FIXED ASSETS ARISING ON ACCOUNT OF DIRECTIONS ISSUED BY HON'BLE DRP TO CAPITALIZE THE AMOUNT OF T HE FOREIGN EXCHANGE FLUCTUATION TO THE COST OF THE ASSET. IT IS PRAYED THAT LEARNED ADIT BE DIRECTED TO QUAN TIFY AND ALLOW ADDITIONAL DEPRECIATION OF RS.5 14 015 TO THE APPEL LANT. 3. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNED D .R. IN DETAIL AND THEIR ARGUMENTS ARE BEING CONSIDERED IN THE COURSE OF THIS ORDER AT THE RELEVANT PLACES. 4. BRIEFLY STATED THE A.O. [DDIT INTERNATIONAL TAXAT ION 1(2)] HAS PROPOSED A DRAFT ASSESSMENT ORDER DATED 24.12.2009 AS PROVIDED UNDER SECTION 144C(1) OF THE ACT. ASSESSEE BEING A FOREI GN COMPANY INCORPORATED IN BELGIUM IS COVERED BY THE PROVISIONS AND IS PRI MARILY ENGAGED IN DREDGING AND LAND RECLAMATION ACTIVITIES. DURING A. Y. 2006-07 IT WAS AWARDED A CONTRACT BY RELIANCE INDUSTRIES LTD. (RIL ) FOR UNDERTAKING DREDGING AND SITE FILLING RELATED WORKED NEAR GADIM OGA VILLAGE IN ANDHRA PRADESH. A.Y. 2006-07 IS THE FIRST YEAR OF ASSESSEE S OPERATION IN INDIA. FOR THE PURPOSE OF EXECUTION OF THE PROJECT THE COMPANY SET UP A PROJECT OFFICE IN INDIA AND SINCE THE DURATION OF THE PROJECT UNDERTA KEN HAS EXCEEDED SIX MONTHS THERE WAS A PERMANENT ESTABLISHMENT IN TERM S OF ARTICLE 7 OF INDO- BELGIUM TAX TREATY. DURING THE RELEVANT YEAR ASSESS EE FILED ITS RETURN OF INCOME DECLARING A TOTAL LOSS OF ` 31 22 11 230/-. IN THE DRAFT ORDER THE DDIT HAS PROPOSED THE FOLLOWING ADJUSTMENTS: - A) DEPRECIATION ON TEMPORARY STRUCTURE ` 43.29 LAKHS B) PROVISION FOR FUTURE LOSSES ` 32.86 CRORES C) DISALLOWANCE OF EXPENSES ` 22.10 LAKHS D) UNEXPLAINED CASH CREDIT ` 12.21 CRORES E) FOREIGN EXCHANGE LOSS ` 52 48 LAKHS 5. ASSESSEE MADE OBJECTIONS TO THE PROPOSED VARIATIONS AND THE DISPUTE RESOLUTION PANEL (DRP) I VIDE DIRECTIONS DATED 16 .09.2010 ACCEPTED THE ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 4 OBJECTION-1 RELATING TO DEPRECIATION ON TEMPORARY S TRUCTURE OBJECTION NO. 3 DISALLOWANCE OF EXPENSES AND OBJECTION NO. 4 UNEX PLAINED CASH CREDIT. WITH REFERENCE TO OBJECTION NO. 2 THE DRP DID NOT A LLOW THE CLAIM OF FUTURE LOSSES BUT DIRECTED THE A.O. TO CONSIDER 20% OF THE CONTRACT AS COMPLETED DURING THE PERIOD AND ESTIMATE A REASONABLE PERCENT AGE AT 8% THEREBY TAXING NET PROFIT AT ` 1 05 03 587/-. WITH REFERENCE TO OBJECTION NO. 5 TH E DRP DIRECTED TO EXAMINE WHETHER THE LOSSES CLAIMED ARE CAPITAL LOSS OR REVENUE LOSS. ITS DIRECTION WAS THAT CAPITAL LOSS S HALL BE INCLUDED IN THE COST OF THE ASSETS AND REVENUE LOSS SHALL BE CAPITALISED TO THE WORK-IN-PROGRESS. THE A.O. PASSED ORDER IN COMPLIANCE TO THE DIRECTIO NS ISSUED AND ASSESSEE IS CONTESTING THE ISSUES ARISING OUT OF SUCH DIRECTION S AGAINST THE ASSESSEE. 6. GROUND NO. 1 TO 4 PERTAINS TO THE ISSUE OF DIRECTIO N GIVEN FOR BRINGING TO TAX AN AMOUNT OF ` 1 05 03 587/- AT 8% OF THE PERCENTAGE COMPLETION OF 20% CONTRACT PRICE WHICH WAS DETERMINED BY THE DRP AT ` 13 12 94 847/-. THESE GROUNDS ARE INTER-RELATED TO THE ISSUE OF DIR ECTIONS AND THE POWERS OF THE DRP TO PROPOSE VARIATION IN THE DRAFT ASSESSMEN T ORDER SUO MOTO WHICH WAS NOT PROPOSED BY THE A.O. 7. THE ARGUMENTS ARE THAT THE ASSESSEE HAS ALREADY SHO WN THE REVENUE RECEIPT I.E. WORK-IN-PROGRESS AT ` 19 83 63 908/- WHICH WAS MORE THAN THE CONTRACT RECEIPTS DETERMINED BY THE DRP AT ` 13 12 94 847/- AND SO THE QUESTION OF ESTIMATING REVENUE ON THE AMOUNT AS DIR ECTED BY THE DRP DOES NOT ARISE AS CONTESTED IN GROUND NO. 3. FURTHER SI NCE ASSESSEE CLAIMED THE FUTURE LOSS OF ` 32 86 17 293/- AND THIS FUTURE LOSS WAS PROPOSED TO BE DISALLOWED BY THE A.O. IN THE DRAFT ASSESSMENT ORDE R THE DRP CANNOT DIRECT THE A.O. TO ESTIMATE THE PROFIT ON 20% OF THE CONTR ACT AT 8% WHICH IS AT VARIANCE WITH THE PROPOSED DRAFT ORDER. IT WAS ALSO THE CONTENTION THAT THE DRP DOES NOT HAVE ANY POWERS TO GIVE SUCH DIRECTION S WHICH ARE AT VARIANCE WITH THE PROPOSED DRAFT ORDER AND VARIOUS ARGUMENTS HAVE BEEN RAISED IN THIS REGARD. 8. THE LEARNED COUNSEL REFERRED TO THE PROVISIONS OF T HE I.T. ACT WITH REFERENCE TO THE POWERS OF THE DRP THEN COMPARED T HEM WITH REFERENCE TO THE EARLIER POSITIONS OF SECTION 144B TO SUBMIT THA T THE DIRECTIONS OF THE DRP ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 5 ARE AT VARIANCE WITH THE ORIGINAL PROPOSED DRAFT OR DER AND THEREFORE THE DIRECTION IS INVALID. THE LEARNED COUNSEL FURTHER R ELIED ON THE RECENT DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. IN WRIT APPEAL NO. 1010 OF 2011 DA TED 5 TH JULY 2011. 9. THE LEARNED D.R. HOWEVER SUPPORTED THE ORDER OF T HE DRP TO SUBMIT THAT THE A.O. PROPOSED RESTRICTION OF THE LOSS AND THE DRP DIRECTED PART OF THE CLAIM TO BE TREATED AS PROFIT AND TO BE CONSIDE RED FOR WORK-IN-PROGRESS. IT WAS HIS SUBMISSION THAT THE DIRECTIONS ARE NOT AT V ARIANCE. 10. AFTER CONSIDERING THE ARGUMENTS OF THE LEARNED COUN SEL AND THE LEARNED D.R. WE ARE OF THE OPINION THAT THE DRPS D IRECTION IN TAXING 20% OF THE GROSS CONTRACT RECEIPT AT 8% IS AT VARIANCE WIT H THE PROPOSED DRAFT ORDER BY THE A.O. DISALLOWING THE FUTURE LOSS CLAIMED. TH E DISALLOWANCE OF FUTURE LOSS CLAIMED IS CONTESTED BY THE ASSESSEE IN GROUND NO. 5 WHICH WE INTEND TO DEAL LATER SEPARATELY. FOR THE PURPOSE OF THESE GROUNDS THE ISSUE OF ESTIMATION OF PROFIT AT 8% WAS NOT BEFORE THE A.O. WHEN HE PROPOSED THE DRAFT ORDER. AS SEEN FROM THE DRAFT ORDER THE A.O. HAS MADE A REFERENCE TO SECTION 92CA(1) OF THE I.T. ACT TO THE ADDITIONAL C OMMISSIONER OF INCOME TAX TRANSFER PRICING-1(2) WHO DID NOT PROPOSE ANY ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTION. AFTER THIS THE A.O. H AS PROPOSED DISALLOWANCE OF DEPRECIATION ON TEMPORARY STRUCTURE DISALLOWANCE O F FUTURE LOSS DISALLOWANCE OF EXPENSES ON ADHOC BASIS AND ADDITIO N OF UNEXPLAINED CASH CREDIT AND FOREIGN EXCHANGE LOSSES IN THE COMPUTATI ON. AS AGAINST LOSSES CLAIMED AT ` 31 22 11 230/- THE PROPOSED ADDITIONS OR DISALLOWAN CES RESULTED IN TOTAL INCOME OF ` 15 03 78 290/-. THEREFORE ESTIMATION OF 8% OF INCOME ON CONTRACT RECEIPT IS AT VARIANCE WITH THE ORIGINALLY PROPOSED DRAFT ORDER. NOT ONLY THAT AS SEEN FROM THE FINAL ORDER PASSED BY THE A.O. IN CONSONANCE WITH THE DIRECTIONS OF THE DRP VIDE ORDE R DATED 25.10.2010 THE A.O. HIMSELF HAS RECORDED THE FOLLOWING: - FURTHER THE DRP HAS DIRECTED TO DETERMINE PROFIT O F THE ASSESSEE AT A SPECIFIED PERCENTAGE OF PART CONTRACT VALUE ON ESTIMATED BASIS AND OBSERVED AS UNDER: - SINCE THE DRP HAS APPLIED THE NET RATE OF PROFIT ON THE PROPORTIONATE RECEIPTS PERTAINING TO THE ACCOUNTING YEAR NO FURT HER ALLOWANCE ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 6 EITHER ON ACCOUNT OF OBJECTION NO. 1 I.E. DEPRECIAT ION ON ACCOUNT OF TEMPORARY STRUCTURE AND ON ACCOUNT OF LOSSES ON FLU CTUATION OF FOREIGN EXCHANGE SHALL ACTUALLY BE ALLOWED TO THE A SSESSEE FOR THE SET OFF FROM THE NET PROFIT AND THESE TWO AMOUNTS A LONG WITH THE NET PROFIT TO BE ASSESSED AT RS.1 05 03 587/- SHALL BE INCLUDED IN THE WORK-IN-PROGRESS FOR CONSIDERING THE SAME FOR COMPU TATION OF FINAL PROFITS WHEN THE PROJECT IS COMPLETE. HENCE THE A. O. IS DIRECTED TO ASSESS THE INCOME AT RS.1 05 03 587/- AND WORK OUT THE CLOSING WORK-IN-PROGRESS. IN VIEW OF THE ABOVE DIRECTION OF THE DRP 20% OF T HE CONTRACT IS CONSIDERED TO HAVE BEEN COMPLETED IN THE FINANCIAL YEAR 2005-06 AND PROFIT AT 8% OF THE COMPLETED CONTRACT REVENUE IS C ONSIDERED AS REASONABLE PROFIT OF THE PERIOD. ACCORDINGLY AMOUN T OF ` 1 05 03 587/- [65 64 74 235 X 20%) X 8%] IS CONSIDE RED AS NET PROFIT OF THE FINANCIAL YEAR 2005-06. 11. EVEN THE A.O. IS ADMITTING THAT THE DRP HAS DIRECTE D TO DETERMINE THE PROFIT AT SPECIFIC PERCENTAGE ON ESTIMATION BASIS A ND IN VIEW OF THE DIRECTION 20% OF THE CONTRACT IS CONSIDERED TO HAVE BEEN COMP LETED AND PROFIT AT 8% WAS ESTIMATED. THIS DIRECTION OF THE DRP IS NOT ONL Y AGAINST THE PRINCIPLES OF LAW BUT ALSO AGAINST THE FACTS. ASSESSEE HAS ACCOU NTED FOR ` 19.83 CRORES IN THE P & L ACCOUNT AND SHOWN IN THE WORK-IN-PROGRESS WHEREAS THE DRP WITHOUT ANY BASIS DETERMINED THE RECEIPTS AT ` 13.13 CRORES. MOREOVER ESTIMATION OF PROFIT ON PERCENTAGE COMPLETION METHO D WAS NOT AN ISSUE BEFORE THE A.O. SO IN OUR VIEW THE DRP HAS ERRED I N DIRECTING THE A.O. TO ESTIMATE THE PROFIT AND DETERMINING PROFIT AT ` 1 03 03 587/-. 12. COMING TO THE PROVISIONS OF LAW SECTION 144C IS AS UNDER: - 144C. (1) THE ASSESSING OFFICER SHALL NOTWITHSTANDING AN YTHING TO THE CONTRARY CONTAINED IN THIS ACT IN THE FIRST IN STANCE FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREAFTE R IN THIS SECTION REFERRED TO AS THE DRAFT ORDER) TO THE ELIGIBLE ASS ESSEE IF HE PROPOSES TO MAKE ON OR AFTER THE 1ST DAY OF OCTOBER 2009 ANY VARIATION IN THE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF SUCH ASSESSEE. (2) ON RECEIPT OF THE DRAFT ORDER THE ELIGIBLE ASS ESSEE SHALL WITHIN THIRTY DAYS OF THE RECEIPT BY HIM OF THE DRAFT ORDE R (A) FILE HIS ACCEPTANCE OF THE VARIATIONS TO THE AS SESSING OFFICER; OR (B) FILE HIS OBJECTIONS IF ANY TO SUCH VARIATION WITH (I) THE DISPUTE RESOLUTION PANEL; AND (II) THE ASSESSING OFFICER. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 7 (3) THE ASSESSING OFFICER SHALL COMPLETE THE ASSESS MENT ON THE BASIS OF THE DRAFT ORDER IF (A) THE ASSESSEE INTIMATES TO THE ASSESSING OFFICER THE ACCEPTANCE OF THE VARIATION; OR (B) NO OBJECTIONS ARE RECEIVED WITHIN THE PERIOD SP ECIFIED IN SUB- SECTION (2). (4) THE ASSESSING OFFICER SHALL NOTWITHSTANDING AN YTHING CONTAINED IN SECTION 153 PASS THE ASSESSMENT ORDER UNDER SUB -SECTION (3) WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH (A) THE ACCEPTANCE IS RECEIVED; OR (B) THE PERIOD OF FILING OF OBJECTIONS UNDER SUB-SE CTION (2) EXPIRES. (5) THE DISPUTE RESOLUTION PANEL SHALL IN A CASE W HERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2) ISSUE SUCH DIREC TIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO E NABLE HIM TO COMPLETE THE ASSESSMENT. (6) THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DI RECTIONS REFERRED TO IN SUB-SECTION (5) AFTER CONSIDERING THE FOLLOWING NAMELY: (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT IF ANY OF THE ASSESSING OFFICER VALUA TION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; (F) EVIDENCE COLLECTED BY OR CAUSED TO BE COLLECTE D BY IT; AND (G) RESULT OF ANY ENQUIRY MADE BY OR CAUSED TO BE MADE BY IT. (7) THE DISPUTE RESOLUTION PANEL MAY BEFORE ISSUIN G ANY DIRECTIONS REFERRED TO IN SUB-SECTION (5) (A) MAKE SUCH FURTHER ENQUIRY AS IT THINKS FIT; OR (B) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INC OME-TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM REDUC E OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO HOWEVER THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIREC TION UNDER SUB- SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. (9) IF THE MEMBERS OF THE DISPUTE RESOLUTION PANEL DIFFER IN OPINION ON ANY POINT THE POINT SHALL BE DECIDED ACCORDING TO THE OPINION OF THE MAJORITY OF THE MEMBERS. (10) EVERY DIRECTION ISSUED BY THE DISPUTE RESOLUTI ON PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. (11) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE IS SUED UNLESS AN OPPORTUNITY OF BEING HEARD IS GIVEN TO THE ASSESSEE AND THE ASSESSING OFFICER ON SUCH DIRECTIONS WHICH ARE PREJUDICIAL TO THE INTEREST OF THE ASSESSEE OR THE INTEREST OF THE REVENUE RESPECTIVE LY. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 8 (12) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE IS SUED AFTER NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FORWARDED TO THE ELIGIBLE ASSESSEE. (13) UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER SU B-SECTION (5) THE ASSESSING OFFICER SHALL IN CONFORMITY WITH THE DIR ECTIONS COMPLETE NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 153 THE ASSESSMENT WITHOUT PROVIDING ANY FURTHER OPPORT UNITY OF BEING HEARD TO THE ASSESSEE WITHIN ONE MONTH FROM THE EN D OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. (14) THE BOARD MAY MAKE RULES FOR THE PURPOSES OF T HE EFFICIENT FUNCTIONING OF THE DISPUTE RESOLUTION PANEL AND EXP EDITIOUS DISPOSAL OF THE OBJECTIONS FILED UNDER SUB-SECTION (2) BY TH E ELIGIBLE ASSESSEE. (15) FOR THE PURPOSES OF THIS SECTION (A) DISPUTE RESOLUTION PANEL MEANS A COLLEGIUM CO MPRISING OF THREE COMMISSIONERS OF INCOME-TAX CONSTITUTED BY TH E BOARD FOR THIS PURPOSE; (B) ELIGIBLE ASSESSEE MEANS (I) ANY PERSON IN WHOSE CASE THE VARIATION REFERRE D TO IN SUB- SECTION (1) ARISES AS A CONSEQUENCE OF THE ORDER OF THE TRANSFER PRICING OFFICER PASSED UNDER SUB-SECTION (3) OF SEC TION 92CA; AND (II) ANY FOREIGN COMPANY. 13. SECTION 144C OF THE INCOME-TAX ACT 1961 WAS INTROD UCED BY FINANCE (NO. 2) ACT 2009 TO PROVIDE FOR AN ALTERNATE DISPU TE RESOLUTION MECHANISM TO FACILITATE EXPEDITIOUS RESOLUTION OF DISPUTES ON A FAST TRACK BASIS IN THE CASES OF FOREIGN COMPANIES AND TRANSFER PRICING DIS PUTES. ON RECEIPT OF THE DRAFT ORDER THE TAXPAYER UNDER SECTION 144C(2) H AS A RIGHT TO FILE HIS OBJECTIONS TO THE VARIATIONS PROPOSED IN THE DRAFT ORDER WITH THE DRP. SUB- SECTIONS (5) AND (8) WHICH DEAL WITH DISPOSAL OF TH E OBJECTIONS BY THE DRP ARE REPRODUCED BELOW: - (5) THE DISPUTE RESOLUTION PANEL SHALL IN A CASE WHERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2) ISSUE SUCH DIRECTIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO E NABLE HIM TO COMPLETE THE ASSESSMENT. .. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM REDUC E OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO HOWEVER THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIREC TION UNDER SUB- SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. A PLAIN READING OF SUB-SECTION (5) SUGGEST THAT DRP CAN ISSUE DIRECTIONS ONLY IN RESPECT OF THE OBJECTIONS RAISED BY THE TAXPAYER AND THE OBJECTIONS ARE TO ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 9 BE IN TERMS OF VARIATION PROPOSED IN THE DRAFT ORDE R. SECTION 144C(8) SPECIFICALLY PROVIDES THAT POWERS OF THE DRP ARE RE STRICTED TO CONFIRM REDUCE OR ENHANCE THE VARIATION AS PROPOSED IN THE DRAFT A SSESSMENT ORDER. HENCE DRP DIRECTIONS ARE TO BE WITH REFERENCE TO THE OBJE CTIONS TO THE VARIATIONS PROPOSED IN THE DRAFT ORDER. 14. PROVISION UNDER SECTION 144B (WHICH HAS BEEN DELETE D W.E.F. APRIL 1 1989) ON SIMILAR LINES WAS PREVALENT IN THE INCOME- TAX LAW. A COMPARISON OF PROVISIONS OF SECTION 144C AND SECTION 144B( SINCE DELETED) IS GIVEN BELOW: - SECTION 144B- REFERENCE TO INSPECTING ASSISTANT COMMISSIONER IN CERTAIN CASES PARALLEL PROVISIONS OF SECTION 144C REFERENCE TO DISPUTE RESOLUTION PANEL 1 NOTWITHSTANDING ANYTHING CONTAINED IN THIS ACT WHERE IN AN ASSESSMENT TO BE MADE UNDER SUB-SECTION (3) OF SECTION 143 THE INCOME-TAX OFFICER PROPOSES TO MAKE ANY VARIATION IN THE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE ASSESSEE AND THE AMOUNT OF SUCH VARIATION EXCEEDS THE AMOUNT FIXED BY THE BOARD UNDER SUB-SECTION (6) THE INCOME- TAX OFFICER SHALL IN THE FIRST INSTANCE FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREINAFTER IN THIS SECTION REFERRED TO AS THE DRAFT ORDER) TO THE ASSESSEE 1 THE ASSESSING OFFICER SHALL NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS ACT IN THE FIRST INSTANCE FORWARD A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREINAFTER IN THIS SECTION REFERRED TO AS THE DRAFT ORDER) TO THE ELIGIBLE ASSESSEE IF HE PROPOSES TO MAKE ON OR AFTER THE 1 ST DAY OF OCTOBER 2009 ANY VARIATION IN THE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF SUCH ASSESSEE 2 ON RECEIPT OF THE DRAFT ORDER THE ASSESSEE MAY FORWARD HIS OBJECTIONS IF ANY TO SUCH VARIATION TO THE INCOME-TAX OFFICER WITHIN SEVEN DAYS OF THE RECEIPT BY HIM OF THE DRAFT ORDER OR WITHIN SUCH FURTHER PERIOD NOT EXCEEDING FIFTEEN DAYS AS THE INCOME-TAX OFFICER MAY ALLOW ON AN APPLICATION MADE TO HIM IN THIS BEHALF 2 ON RECEIPT OF THE DRAFT ORDER THE ELIGIBLE ASSESSEE SHALL WITHIN THIRTY DAYS OF THE RECEIPT BY HIM OF THE DRAFT ORDER: - (A) FILE HIS ACCEPTANCE OF THE VARIATIONS TO THE ASSESSING OFFICER; OR (B) FILE HIS OBJECTIONS IF ANY TO SUCH VARIATION WITH (I) THE DISPUTE RESOLUTION PANEL; AND (II) THE ASSESSING OFFICER. 3 IF NO OBJECTIONS ARE RECEIVED WITHIN THE PERIOD OR THE EXTENDED PERIOD AFORESAID OR THE ASSESSEE INTIMATES TO THE INCOME-TAX OFFICER THE ACCEPTANCE OF THE VARIATION THE INCOME-TAX OFFICER SHALL COMPLETE 3 THE ASSESSING OFFICER SHALL COMPLETE THE ASSESSMENT ON THE BASIS OF THE DRAFT ORDER IF (A) THE ASSESSEE INTIMATES TO THE ASSESSING OFFICER THE ACCEPTANCE ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 10 THE ASSESSMENT ON THE BASIS OF THE DRAFT ORDER. OF THE VARIATION; OR (B) NO OBJECTIONS ARE RECEIVED WITHIN THE PERIOD SPECIFIED IN SUB- SECTION (2). 4 IF ANY OBJECTIONS ARE RECEIVED THE INCOME-TAX OFFICER SHALL FORWARD THE DRAFT ORDER TOGETHER WITH THE OBJECTIONS TO THE INSPECTING ASSISTANT COMMISSIONER AND THE INSPECTING ASSISTANT COMMISSIONER SHALL AFTER CONSIDERING THE DRAFT ORDER AND THE OBJECTIONS AND AFTER GOING THROUGH (WHEREVER NECESSARY) THE RECORDS RELATING TO THE DRAFT ORDER ISSUE IN RESPECT OF THE MATTER COVERED BY THE OBJECTIONS SUCH DIRECTIONS AS HE THINKS FIT FOR THE GUIDANCE OF THE INCOME-TAX OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. 5 6 7 8 THE DISPUTE RESOLUTION PANEL SHALL IN A CASE WHERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2) ISSUE SUCH DIRECTIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DIRECTIONS REFERRED TO IN SUB-SECTION (5) AFTER CONSIDERING THE FOLLOWING NAMELY: - (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT IF ANY OF THE ASSESSING OFFICER VALUATION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; (F) EVIDENCE COLLECTED BY OR CAUSED TO BE COLLECTED BY IT; AND (G) RESULT OF ANY ENQUIRY MADE BY OR CAUSED TO BE MADE BY IT. THE DISPUTE RESOLUTION PANEL MAY BEFORE ISSUING ANY DIRECTIONS REFERRED TO IN SUB-SECTION (5) - (A) MAKE SUCH FURTHER ENQUIRY AS IT THINKS FIT; OR (B) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INCOME-TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. THE DISPUTE RESOLUTION PANEL MAY CONFIRM REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO HOWEVER THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB- SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 11 PROVIDED THAT NO DIRECTIONS WHICH ARE PREJUDICIAL TO THE ASSESSEE SHALL BE ISSUED UNDER THIS SUB-SECTION BEFORE AN OPPORTUNITY IS GIVEN TO THE AS TO BE HEARD. 11 NO DIRECTION UNDER SUB-SECTION (5) SHALL BE ISSUED UNLESS AN OPPORTUNITY OF BEING HEARD IS GIVEN TO THE ASSESSEE AND THE ASSESSING OFFICER ON SUCH DIRECTIONS WHICH ARE PREJUDICIAL TO THE INTEREST OF THE AS OR THE INTEREST OF THE REVENUE RESPECTIVELY. 5 EVERY DIRECTION ISSUED BY THE INSPECTING ASSISTANT COMMISSIONER UNDER SUB-SECTION (4) SHALL BE BINDING ON THE INCOME-TAX OFFICER 10 13 EVERY DIRECTION ISSUED BY THE DISPUTE RESOLUTION PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER SUB-SECTION (5) THE ASSESSING OFFICER SHALL IN CONFORMITY WITH THE DIRECTIONS COMPLETE NOTWITH- STANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 153 THE ASSESSMENT WITHOUT PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. 6 FOR THE PURPOSES OF SUB-SECTION (1) THE BOARD MAY HAVING REGARD TO THE PROPER AND EFFICIENT MANAGEMENT OF THE WORK OF ASSESSMENT BY ORDER FIX FROM TIME TO TIME SUCH AMOUNT AS IT DEEMS FIT: PROVIDED THAT DIFFERENT AMOUNTS MAY BE FIXED FOR DIFFERENT AREAS: PROVIDED FURTHER THAT THE AMOUNT FIXED UNDER THIS SUB-SECTION SHALL IN NO CASE BE LESS THAN TWENTY-FIVE THOUSAND RUPEES. 4 9 12 14 THE ASSESSING OFFICER SHALL NOTWITH- STANDING ANYTHING CONTAINED IN SECTION 153 PASS THE ASSESSMENT ORDER UNDER SUB-SECTION (3) WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH - (A) THE ACCEPTANCE IS RECEIVED; OR (B) THE PERIOD OF FILING OF OBJECTIONS UNDER SUB-SECTION (2) EXPIRES. IF THE MEMBERS OF THE DISPUTE RESOLUTION PANEL DIFFER IN OPINION ON ANY POINT THE POINT SHALL BE DECIDED ACCORDING TO THE OPINION OF THE MAJORITY OF THE MEMBERS. NO DIRECTION UNDER SUB-SECTION (5) SHALL BE ISSUED AFTER NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FORWARDED TO THE ELIGIBLE ASSESSEE. THE BOARD MAY MAKE RULES FOR THE PURPOSES OF THE EFFICIENT FUNCTIONING OF THE DISPUTE RESOLUTION PANEL AND EXPEDITIOUS DISPOSAL OF THE OBJECTIONS FILED UNDER SUB-SECTION (2) BY THE ELIGIBLE ASSESSEE. 7 NOTHING IN THIS SECTION SHALL APPLY TO THE CASE WHERE AN INSPECTING ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 12 ASSISTANT COMMISSIONER EXERCISES THE POWERS OR PERFORMS THE FUNCTIONS OF AN INCOME-TAX OFFICER IN PURSUANCE OF AN ORDER MADE UNDER SECTION 125 OR SECTION 125A. 15 FOR THE PURPOSE OF THIS SECTION - (A) DISPUTE RESOLUTION PANEL MEANS A COLLEGIUM COMPRISING OF THREE COMMISSIONERS OF INCOME- TAX CONSTITUTED BY THE BOARD FOR THIS PURPOSE; (B) ELIGIBLE ASSESSEE MEANS - (I) ANY PERSON IN WHOSE CASE THE VARIATION REFERRED TO IN SUB- SECTION (1) ARISES AS A CONSEQUENCE OF THE ORDER OF THE TRANSFER PRICING OFFICER PASSED UNDER SUB-SECTION (3) OF SECTION 92CA; AND (II) ANY FOREIGN COMPANY. SECTION 144B PROVIDED FOR A REFERENCE TO BE MADE TO THE INSPECTING ASSISTANT COMMISSIONER (IAC) BY THE A.O. ALONG WITH THE DRA FT ORDER AND THE OBJECTIONS OF THE TAXPAYER (WHERE VARIATIONS EXCEED ED A PARTICULAR LIMIT). SECTION 144B(4) WHICH DISCUSSED THE POWER OF THE IN SPECTING ASSISTANT COMMISSIONER( LATER DESIGNATED AS DEPUTY COMMISSION ER NOW AS JOINT COMMISSIONER) ON THE REFERENCE OF A CASE IS REPRODU CED BELOW: (4) IF ANY OBJECTIONS ARE RECEIVED THE ASSESSING OFFICER SHALL FORWARD THE DRAFT ORDER TOGETHER WITH THE OBJECTIONS TO THE DEPUTY COMMISSIONER AND THE DEPUTY COMMISSIONER SHALL AFT ER CONSIDERING THE DRAFT ORDER AND THE OBJECTIONS AND AFTER GOING THROUGH (WHEREVER NECESSARY) THE RECORD RELATING TO THE DRAFT ORDER ISSUE IN RESPECT OF THE MATTERS COVERED BY THE OBJECTIONS SUCH DIRECTIONS AS HE THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT THE JUDICIAL PRECEDENCE LAID BY DECIDED CASES BY TH E COURTS IN CONNECTION WITH INTERPRETATION OF JURISDICTION AND POWERS OF I AC UNDER SECTION 144B SHOULD APPLY WITH EQUAL FORCE TO THE INTERPRETATION OF SECTION 144C OWING TO SIMILARITY BETWEEN THE TWO PROVISIONS. IN THE CONTE XT OF SECTION 144B VARIOUS JUDICIAL PRECEDENTS HAVE HELD THAT THE REVI EW MECHANISM WHICH SECTION 144B PROVIDES FOR IS LIMITED ONLY TO THE AD DITIONS PROPOSED BY THE ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 13 A.O. AND OBJECTED BY THE ASSESSEE. FURTHER ENHANCE MENT OF THE ASSESSMENT AS A RESULT OF THE DIRECTIONS ISSUED BY THE INSPECT ING ASSISTANT COMMISSIONER UNDER SECTION 144B(4) ON THE ITEMS NOT COVERED BY THE DRAFT ORDER WOULD BE INVALID TO THE EXTENT IT WAS NOT CO VERED BY THE DRAFT. IT WAS OBSERVED BY JUDICIAL PRECEDENTS THAT THE INSPECTING ASSISTANT COMMISSIONER HAS NO JURISDICTION TO GIVE ANY INSTRUCTIONS WHICH IS BEYOND THE PURVIEW OF THE DRAFT ORDER AND THE OBJECTIONS FILED BY THE TAX PAYER. THE FOLLOWING JUDICIAL PRECEDENTS AMONGST VARIOUS OTHERS SUPPOR T THE ABOVE PROPOSITION: A) IN THE CASE OF ASIATIC OXYGEN LTD. VS. CIT 190 ITR 328 THE INSPECTING ASSISTANT COMMISSIONER DISALLOWED A PARTICULAR EXPE NDITURE WHICH WAS ALLOWED BY THE A.O. (ACCORDINGLY NO OBJECTION BY T HE TAXPAYER ON SUCH AMOUNT) AND THEREBY RESULTING IN ENHANCEMENT OF INC OME TO THE EXTENT OF DISALLOWANCE. WHILE HOLDING THAT ACTION OF THE I NSPECTING ASSISTANT COMMISSIONER WAS NOT LAWFUL THE CALCUTTA HIGH COUR T OBSERVED AS FOLLOWS: - IN SUCH A CASE THE INSPECTING ASSISTANT COMMISSIO NER DOES NOT HAVE THE POWER TO DIRECT THE INCOME-TAX OFFICER TO MAKE THE DISALLOWANCE AND THEREBY ENHANCE THE ASSESSMENT OR REDUCE THE LO SS SUFFERED BY THE ASSESSEE. ... WE ARE OF THE VIEW THAT IN THE INSTANT CASE THE D IRECTION WAS NOT LAWFUL. ANY ACT DONE BEYOND THE SCOPE OF POWERS DEFINED BY THE STATUES WILL BE ULTRA VIRES. THIS TERM HAS A BROAD APPLICATION A ND INCLUDES ACTS PROHIBITED BY THE STATUE OR WHICH ARE IN EXCESS OF THE POWERS GRANTED. EXERCISE OF POWER IN A MANNER NOT ALLOWED BY LAW IS ULTRA VIRES AND NOT LAWFUL AS WELL. ACCORDINGLY THE DIRECTION OF THE INSPECTING ASSIST ANT COMMISSIONER UNDER SECTION 144B OF THE ACT TO DISALLOW THE SAID EXPENDITURE IS NOT SUSTAINABLE. B) IN THE CASE OF BENGAL & ASSAM INVESTORS LTD. VS. CI T 142 ITR 156 THE ASSESSEE FILED A RETURN DISCLOSING INCOME OF ` 4 70 830/-. THE ITO FORWARDED A DRAFT ORDER UNDER SECTION 144B(1) PROPO SING ASSESSMENT ON A TOTAL INCOME OF ` 5 75 656/-. ON RECEIPT OF DIRECTIONS THE ASSESSMEN T WAS COMPLETED ON AN INCOME OF ` 6 61 561/- BECAUSE WHILE THE ITO PROPOSED TO ALLOW A DEDUCTION OF ` 3 51 105/- UNDER SECTION 80M THE SAME WAS REDUCED TO ` 2 65 300/- UNDER THE DIRECTIONS OF THE IAC THOUGH THIS MATTER WAS NOT THE SUBJECT MATTER OF RE FERENCE TO HIM. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 14 WHILE HOLDING THAT ACTION OF THE INSPECTING ASSISTA NT COMMISSIONER WAS NOT LAWFUL THE CALCUTTA HIGH COURT OBSERVED AS FOL LOWS: - HAVING REGARD TO THE PROVISIONS OF SECTION 144B(4) IT APPEARS THAT THE CORRECT VIEW WOULD BE THAT THE ENHANCEMENT OF T HE ASSESSMENT AS A RESULT OF THE DIRECTION ISSUED BY THE IAC UNDER S ECTION 144B(4) ON THE ITEMS NOT COVERED BY THE DRAFT ASSESSMENT ORDER WOULD BE INVALID TO THE EXTENT IT WAS NOT COVERED BY THE DRAFT. I N THE FACTS THE CIRCUMSTANCES OF THE CASE THE FACT THAT IT WAS DEL ETED ON APPEAL BY THE CIT IS QUITE IRRELEVANT. IN VIEW OF THE ABOVE JUDICIAL PRECEDENTS ON THE POW ERS OF SUPERVISORY AUTHORITY SINCE THE SIMILAR PROVISIONS WERE INCORP ORATED IN THE NEW SECTION 144C WITH REFERENCE TO DRAFT ORDERS THE PRINCIPLES ARE EQUALLY APPLICABLE. 15. THIS ISSUE WHETHER THE DRP HAS POWER TO ISSUE DIREC TIONS AT VARIANCE TO THE PROPOSED DRAFT ORDER WAS ALSO DECIDED IN THE CASE OF ANOTHER FOREIGN COMPANY M/S GE INDIA TECHNOLOGY CENTRE PVT. LTD. B Y WAY OF WRIT APPEAL BEFORE THE HON'BLE KARNATAKA HIGH COURT. IN WRIT AP PEAL NO. 1010 OF 2011 DATED 5 TH JULY 2011 THE HON'BLE HIGH COURT HAS ELABORATELY DISCUSSED THE ISSUE AND CAME TO THE CONCLUSION THAT THE DRP CANNO T GO BEYOND THE PROPOSED DRAFT ORDER. THE FACTS IN THE ABOVE REFERR ED CASE ARE THAT THE ASSESSEE DECLARED INCOME OF ` 2 12 18 961/- AND THIS CASE WAS SELECTED FOR SCRUTINY. UNDER SECTION 92CA OF THE ACT THE MATTER WAS REFERRED TO TPO FOR DETERMINING THE ARMS LENGTH PRICE AND THE ADDL. TPO PROPOSED ADJUSTMENT OF ARMS LENGTH PRICE TO AN EXTENT OF ` 1 04 96 20 245/-. THEREFORE THE PROPOSED DRAFT ORDER WAS MADE WHY THE EXCESS CLAIM OF ` 44 49 280/- SHOULD NOT BE DISALLOWED AND THE ARMS LENGTH PRICE AS DETE RMINED BY THE TPO SHOULD NOT BE ACCEPTED. SINCE THE ASSESSEE OBJECTED TO THE PROPOSED VARIATIONS THE DRP CAME TO THE CONCLUSION THAT ADJU STMENT OF ` 29 68 71 593/- WAS REQUIRED TO BE MADE UNDER SECTIO N 92CA R.W.S. 92C TO THE ARMS LENGTH PRICE DETERMINED. HOWEVER DRP FOUN D THAT HAVING REGARD TO THE MATERIAL ON THE RECORD AND THE DOCUMENTS SUB MITTED TO THE DRP FOR CONSIDERATION ASSESSEE WAS NOT ELIGIBLE TO ANY EXEM PTION UNDER SECTION 10A AND THEREFORE NOTICE WAS ISSUED AND THE DRP PASSE D FINAL ORDER HOLDING THAT ASSESSEE WAS NOT ENTITLED TO EXEMPTION UNDER S ECTION 10A. BEING AGGRIEVED ON THE DIRECTIONS ISSUED ASSESSEE THEREO N FIELD WRIT PETITION AND THE HON'BLE SINGLE JUDGE NEGATED THE CONTENTIONS RA ISED. HOWEVER THE ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 15 MATTER WAS TAKEN UP BY THE DIVISION BENCH EXAMINE D THE ISSUE AND HELD AS UNDER: - IT IS CLEAR ON A READING OF THE ABOVE SAID SUB-SEC TIONS OF 144C THAT THE PROVISIONS OF SECTION 144C(5) ( WRONGLY REPORTED AS (4 )) CANNOT BE READ DE HORS THE POWER OF THE DRP UNDER SUB-SECTION (8) AND WHILE CONSIDERING THE POWER OF DRP IT IS CLEAR THAT WHILE CONSIDERING SECTION 144C(1) REGARDING THE DRAFT PROPOSAL ORDER OR DRAFT ORDER IS ONLY APPLICABLE TO ELIGIBLE ASSESSEE AS DEFINED UNDER SU B-SECTION (15) THAT IS IN RESPECT OF THE VARIATIONS REFERRED TO ABOVE S UB-SECTION ARISING AS A CONSEQUENCE OF THE ORDER OF THE TRANSFER PRICING OFFICER UNDER SUB- SECTION (3) OF SECTION 92CA AND EVEN UNDER SECTION 144C(8). THE DRP MAY CONFIRM REDUCE OR ENHANCE THE VARIATIONS PROPO SED IN THE DRAFT ORDER AND WHEREFORE THE WORD ELIGIBLE ASSESSEE IN C LAUSE (1) AND (15) AND THE PROPOSED DRAFT ORDER REFERRED TO UNDER CLAU SE 144C(1) AND (8) WILL HAVE TO BE GIVEN FULL MEANING. IT CANNOT LEAD TO THE CONCLUSION THAT THE DISPUTE RESOLUTION PANEL CAN AFFIRM REDUC E OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER AND CANNOT G O BEYOND THE PROPOSED DRAFT ORDER FAILING WHICH IF IT IS HELD B Y ACCEPTING THE CONTENTION OF THE REVENUE WE WILL BE EXPANDING THE PROVISIONS OF THE POWERS OF DRP TO A REGULAR APPEAL TO THE COMMISSION ER OF INCOME-TAX AGAINST AN ORDER OF ASSESSMENT WHICH IS SOUGHT TO B E GIVEN UP IN VIEW OF THE PROVISIONS OF SECTION 92C AND SECTION 1 44C. THE DIRECTIONS ISSUED BY THE DRP UNDER SECTION 144C IS BINDING ON THE ASSESSING OFFICER AND AGAINST THE SAID ORDER OF THE ASSESSING OFFICER A DIRECT APPEAL TO THE INCOME-TAX APPELLATE TRIBUNAL. WHEREFORE WE HAVE TO LOOK INTO THE PROPOSED DRAFT ORDER IN THE P RESENT CASE TO FIND OUT AS TO WHETHER THE DIRECTIONS ISSUED BY THE DRP AS PER DIRECTION NO.(IV) CULLED OUT ABOVE IS VALID AND BINDING OR NO T. IT IS CLEAR FROM THE PROPOSED DRAFT ORDER THAT THE APPELLANT HAD CLAIMED EXEMPTION OF RS.32 58 26 375/-. THE PROPOSED DRAFT ORDER ANNEXED TO THE PROPOSED DRAFT REFERABLE TO EXCESS CLAIMED UNDER SE CTION 10A IN A SUM OF RS.44 49 280/- IS ARRIVED IN THE DRAFT PROPO SAL ORDER AS FOLLOWS: - ANNEXURE DEDUCTION U/S 10A PARTICULARS RS. TOTAL TURNOVER OF THE UNDERTAKING (A) 305 31 27 853 EXPORT TURNOVER OF THE UNDERTAKING 305 31 27 853 LESS: COMMUNICATION EXPENSES TRAVEL EXPENSES IN FOREIGN CURRENCY 3 25 98 610 90 92 976 ADJUSTED EXPORT TURNOVER (B) 304 14 36 267 PROFIT OF THE UNDERTAKING (C) 32 58 26 375 EXEMPTION U/SECTION 10A (D B/A X C 32 13 77 095 ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 16 LESS: ACTUALLY CLAIMED (E) 32 58 26 375 EXCESS CLAIMED (F-E-D) 44 49 280 THEREFORE IT IS CLEAR FROM THE PROPOSED DRAFT ORDER THAT AS PER THE PROPOSED DRAFT THE ARMS LENGTH PRICE FIXED BY THE T PO WAS ACCEPTED AND THE CLAIM MADE BY THE APPELLANT WAS REDUCED BY RS.44 49 280/- BUT IN THE PROPOSED DRAFT ORDER THERE MAY BE DEDUCT ION OF RS.32 13 77 095/-. HOWEVER AS PER THE DIRECTION IS SUED BY THE DRP IT IS CLEAR THAT THE DRP HAS ISSUED A DIRECTION TO THE ASSESSING OFFICER BY HOLDING THAT THE APPELLANT ASSESSEE IS NOT ENTIT LED TO ANY REDUCTION UNDER SECTION 10A IT WOULD BE BINDING ON THE ASSESS ING OFFICER IN VIEW OF THE PROVISIONS OF SECTION 144C(13) AND WHER EFORE HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THIS CASE THAT IN A PROPOSED DRAFT ORDER THERE WAS NO PROPOSAL TO HOLD THAT THE ASSESSEE IS NOT ENTITLED TO ANY BENEFIT UNDER SECTION 10A OF THE AC T AND WHAT WAS PROPOSED WAS ONLY REJECTION OF THE EXCESS CLAIM OF RS.44 49 280/- THE DIRECTION ISSUED BY THE DRP IN WHOLLY WITHOUT JURIS DICTION AND SUFFERS FROM INHERENT LACK OF JURISDICTION AND AMENABLE TO JUDICIAL REVIEW UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA. 16. APPLYING THE ABOVE PRINCIPLES IT IS CLEAR THAT IN THE PROPOSED DRAFT ORDER VIDE OBJECTION NO. 2 THE VARIATION PROPOSED WAS ONLY WITH REFERENCE TO DISALLOWANCE OF FUTURE LOSSES CLAIMED WHEREAS THE D RP SUO MOTO CONSIDERED 20% OF THE TOTAL CONTRACT AS COMPLETED DURING THE Y EAR (WHICH IS IN FACT WAS NOT CORRECT AS ASSESSEE HAS OFFERED MORE TURNOVER I N ITS BOOKS OF ACCOUNT) AND PROPOSED BRINGING TO TAX THE NET PROFIT AT 8% O F THE ABOVE DETERMINED TURNOVER. THIS DIRECTION OF THE DRP IS WHOLLY WITHO UT JURISDICTION AND SUFFERS FROM INHERENT LACK OF JURISDICTION AS IT IS NOT IN CONFORMITY WITH THE POWERS UNDER SECTION 144C(5) R.W.S. 144C(8). THEREF ORE ASSESSEES GROUND NO. 1 IS TO BE UPHELD AS THE DRP HAS VARIED FROM TH E PROPOSED DRAFT ORDER AND TOOK UP A NEW ISSUE AND ISSUED DIRECTIONS WHICH ARE AT VARIANCE WITH THE PROPOSED DRAFT ORDER. IN VIEW OF THIS GROUND N O. 1 RAISED BY ASSESSEE IS UPHELD. CONSEQUENTLY GROUND NO. 2 3 & 4 WHICH ARE RAISED AS ALTERNATE GROUNDS WITHOUT PREJUDICE ARE ALSO DEEMED TO HAVE BEEN ALLOWED. 17. THE NEXT ISSUE TO BE CONSIDERED IN GROUND NO. 5 IS WITH REFERENCE TO THE CLAIM OF PROVISION FOR FORESEEABLE LOSS AMOUNTI NG TO ` 32 86 17 293/-. ASSESSEE MADE A DEBIT TO THE P & L ACCOUNT OF THE A BOVE AMOUNT AND THE A.O. PROPOSED DISALLOWANCE OF THE ABOVE LOSS VIDE P ARA 5 OF THE DRAFT ORDER ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 17 ON THE REASON THAT THE EXPENSES WERE CONTINGENT UPO N OCCURRENCE OR NON- OCCURRENCE OF CERTAIN EVENTS AND ASSESSEE ITSELF HA S CLASSIFIED IT AS A PROVISION FOR FUTURE LOSSES. THE CONTINGENT LIABILI TY DID NOT CONSTITUTE EXPENDITURE AS THE SAME CANNOT BE SUBJECT MATTER OF DEDUCTION AND THE EXPENDITURE WHICH IS DEDUCTIBLE FOR THIS PURPOSE IS ONLY THOSE LIABILITIES WHICH ARE NOT CONTINGENT. BY HOLDING THIS ASSESSEE DISALLOWED THE PROVISIONS FOR FUTURE LOSSES AND IN DOING SO RELIED UPON THE CASE LAW REGARDING LIABILITY UNDER INCOME TAX ACT DETERMINED IN THE FOLLOWING CASES: - I) CIT VS. NAINITAL BANK LTD. 62 ITR 638 (SC) II) MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. C IT 225 ITR 802(SC) III) M.P. FINANCIAL CORPORATION VS. CIT 26 TAXMAN 92 (MP ) IV) MYSORE KIRLOSKER LTD. VS. CIT 166 ITR 836 (KAR) 18. IT WAS ASSESSEES CONTENTION BEFORE THE DRP (VIDE APPENDIX 3 OF THE OBJECTION RAISED BEFORE THE DRP) THAT PARAGRAPH 35 OF AS-7 MANDATES THAT WHEN IT IS PROBABLE THAT TOTAL CONTRACT COSTS WILL EXCEED TOTAL CONTRACT REVENUE THE EXPECTED LOSS SHOULD BE RECOGNISED AS AN EXPENSE IMMEDIATELY AND PARAGRAPH 36 OF AS-7 FURTHER PROVIDES THAT THE AMOUNT OF SUCH LOSS IS TO BE PROVIDED IRRESPECTIVE OF WHETHER OR NOT THE W ORK HAS COMMENCED AND THE STAGE OF COMPLETION OF CONTRACT ACTIVITY. 19. WITH REFERENCE TO THE FACTS OF ESTIMATION OF TOTAL COST OF THE CONTRACT AND WORKING OF THE LOSS IT WAS SUBMITTED IN PARA 2. 5 OF THE OBJECTION AS UNDER: - 2.5 THE ASSESSEE ESTIMATED THE TOTAL COST OF THE C ONTRACT AT THE TIME OF FINALIZATION OF BALANCE SHEET FOR YEAR ENDE D MARCH 31 2006 AND REALIZED THAT THE TOTAL CONTRACT COST (AS ESTIMATED) WOULD EXCEED THE CONTRACT REVENUE BY RS.32 86 17 29 3. THE PRIMARY REASON DUE TO WHICH THE COST INCREASED ARE AS UNDER: - WHEN THE DREDGER ARRIVED AT THE SITE IT WAS REALISE D THAT THE DRAUGHT OF THE DREDGER WAS 5.1 AND NOT 4.09 WHICH W OULD HAVE EASILY MOVED IN THE CHANNEL. HOWEVER EVEN THE N AN ATTEMPT WAS MADE TO PULL THE DREDGER INSIDE AFTER OFFLOADING MOST OF BUNKER LOT OF HEAVY ITEMS ETC B UT IN VEIN. FINALLY AN ACCESS CHANNEL WAS DREDGED FOR 2 WEEKS TO MAKE WAY FOR THE DREDGER. THE CHANNEL WAS 70M WIDE AND WAS DREDGED UPTO 6M. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 18 LOT OF SLIT WAS OBSERVED PASSING THROUGH WATER BOXE S IN SPITE OF LOW FINE CONTENTS SHOWN BY SIEVE ANALYSIS. ACCORDINGLY BUND WAS MADE BETWEEN AREA 2 AND 3 TO TRAP MOST OF THE SLIT INSIDER AREA 1 AND 2 AND THUS TO A VOID MAJOR PROBLEM AT THE END OF THE JOB. HOWEVER IN SP ITE OF SUCH EFFORT FURTHER 55 000M3 SLIT DEPOSITED IN TWO PONDS (STORM WATER PONDS FOR RIL) WHICH HAD TO BE TAKEN O UT. THE SHALLOW CONDITION ALSO PREVAILED WHILE THE DRED GER HAD TO EXIT FROM THE SITE AFTER COMPLETION OF THE JOB. THE PREVIOUSLY DREDGED ACCESS CHANNEL WAS FILLED UP TO SUCH EXTENT THAT THE DREDGER COULD NOT COME OUT. THIS WA S MAJORITY DUE TO THE ABNORMAL FLOOD DISCHARGE DURING AUGUST 06. THE DREDGER HAD TO THEREFORE DREDGED AN EXIT CHANNEL FOR ONE MONTH TO COME TO A LOCATION WHERE A LADDER CAN BE PUT ON THE FRAME TO GAIN SOME REDUCTION IN DRAUGHT. AFTER SO MUCH EFFORT AND COST FINALLY THE DREDGER CAME OUT O F THE CHANNEL DURING SPRING TIDE. AS MENTIONED EARLIER THE DREDGING WORK WAS BEING C ARRIED OUT IN RIVER GODAVARI. DURING THE MONSOON OF 2006 THERE WERE HEAVY RAINS IN ANDHRA PRADESH DUE TO WHICH FLO OD WATER DISCHARGE VOLUME IN GODAVARI RIVER ON 6 TH AND 7 TH AUGUST WERE 2.6 AND 2.8 MILLION CUSECS RESPECTIVELY (9 TO 10 TIMES OF NORMAL FLOOD DISCHARGE). AS A RESULT OF TH IS FLOW OF EXTRA ORDINARY FLOOD WATER DISCHARGE VERY HIGH CURR ENT WAS GENERATED IN GODAVARI RIVER (UP TO 15 KNOTS). DUE T O THIS SOME OF THE EQUIPMENT MOUNTED ON ASSURANCETOURIX CO ULD NOT HOLD GROUND THROUGH THE ANCHOR AND GOT DRIFTED INTO SEA. WHILE A FRAME WAS RETRIEVED THE FLOATING LINE WAS LOST AND BOOSTER WAS FOUND NEAR KOLKATTA AFTER 1 MONTH (I.E. APPROXIMATELY 800 NAUTICAL MILES AWAY FROM THEIR AC TUAL LOCATION). 20. IT WAS THE CONTENTION THAT ASSESSEE MADE PROVISION OF FUTURE LOSSES AMOUNTING TO ` 32 86 17 293/- AS ASSESSEE EXPECTS TO INCUR LOSS ON THE SAID PROJECT. IT WAS FURTHER SUBMITTED THAT ASSESSEE HAS SUFFERED LOSS ON COMPLETION OF WORK AND THE LOSS WAS ALSO RETURNED I N THE RETURN FILED FOR THE SUBSEQUENT YEAR WHICH WAS ALSO VERIFIABLE BY THE A. O. HOWEVER THE DRP IN ITS ORDER REJECTED THE CONTENTIONS AS UNDER: - OBJECTION NO 2 :- THIS OBJECTION RELATES TO DISALLOWANCE OF FUTURE LOSS OF RS. 32 86 17 293. IT IS CLAIMED BY THE ASSESSEE THAT IT IS FOLLOWING PERCENTAGE PROJECT COMPLETION METHOD FOR THE DREDGI NG CONTRACT AND IT HAS RECOGNISED THE EXPENDITURE INCURRED TILL 31 ST MARCH AS THE REASONABLE REVENUE TO BE REALISED AND IT HAS ENVISA GED HUGE LOSS AT THE END OF THE CONTRACT AND HAS FOLLOWED ACCOUNTING STANDARD AS 7 FOR CLAIMING PROPORTIONATE LOSS. THE DRP ASKED THE ASSESSEE ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 19 TO EXPLAIN THE CORRECT SYSTEM OF ACCOUNTING FOLLOWE D BY THE ASSESSEE AND THE ASSESSEE WAS ALSO ASKED TO EXPLAIN WHY REAS ONABLE PERCENTAGE OF PROFIT SHOULD NOT BE TREATED AS INCOM E ON THE PROPORTIONATE RECEIPTS FOR ACTUAL WORK COMPLETED TI LL THE LAST DATE OF THE ACCOUNTING PERIOD. THE ASSESSEE DID NOT FILE TH E PROPER REPLY AND AGAIN CLAIMED THAT INCOME HAS BEEN RETURNED AS PER ACCOUNTING STANDARD AS-7. THE DRP DOES NOT AGREE WITH THE VIEW S OF THE ASSESSEE AND DRP IS OF THE VIEW THAT ASSESSEE HAS C OMPLETED ABOUT 20% OF THE CONTRACT DURING THE ACCOUNTING PERIOD AN D THE ASSESSEE SHOULD HAVE RECOGNIZED 20% ON THE TOTAL AMOUNT RECE IVED WHICH WORKS OUT TO RS.13 12 94 847/-. THE REASONABLE PERC ENTAGE OF PROFIT IS TAKEN AT 8% AND ON THIS BASIS THE NET PROFIT SHO ULD BE RS.1 05 03 587/-. THIS PROFIT SHOULD HAVE BEEN INCL UDED BY THE ASSESSEE IN THE CLOSING STOCK OF WORK-IN-PROGRESS F OR COMPUTATION OF FINAL PROFIT OF THE COMPLETED PROJECT IN THE NEXT F INANCIAL YEAR. THUS THE CLAIM OF THE ASSESSEE FOR CLAIMING LOSS ON THE PROJECT ON ESTIMATE BASIS OF FUTURE PERIOD IS PREMATURE AND SAME CANNOT BE ALLOWED. 21. ASSESSEE IS OBJECTING TO THE ABOVE DIRECTIONS OF TH E DRP AND IT WAS SUBMITTED THAT ASSESSEE HAS GIVEN DETAILED EXPLANAT ION WITH REFERENCE TO WORKING OF LOSS AND VARIOUS CASE LAW RELIED ON BY I T. THE LEARNED COUNSEL DREW OUR ATTENTION TO THE DETAILED OBJECTION MADE B Y THE DRP TO CONTEST THE OBSERVATION OF THE DRP THAT ASSESSEE DID NOT FILE PROPER REPLY. THE LEARNED COUNSEL FURTHER DREW OUR ATTENTION TO ACCOUNTING ST ANDARD AS-7 THE ORDERS OF THE COORDINATE BENCH IN THE CASE OF JACOB ENGINE ERING PVT. LTD. VS. ACIT 2009 TIOL 533 THE DECISION OF IN THE CASE OF MAZAG ON DOCK LTD. VS. JCIT 29 SOT 356 (MUM) AND ALSO THE DECISION OF THE THERMAX BABCOCK & WILCOX LTD. 79 ITD 63 (PUNE). HE ALSO RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF UP INDUSTRIAL DEVELOPMENT CORP ORATION 225 ITR 703 FOR THE PROPOSITION THAT ORDINARY PRINCIPLE OF COMMERCI AL ACCOUNTING SHOULD BE APPLIED SO LONG AS THEY ARE NOT IN CONFLICT WITH AN Y EXPRESS PROVISIONS OF THE RELEVANT STATUTE. 22. THE LEARNED D.R. HOWEVER OBJECTED TO THE FACT OF APPLICATION OF AS-7 TO ASSESSEES CASE CONTESTING THAT ASSESSEE IS NOT INVOLVED IN CONSTRUCTION CONTRACT AND SO THE PRINCIPLES DO NOT APPLY AND ALS O REFERRED TO VARIOUS PROVISIONS OF ACCOUNTING STANDARD WHICH WAS PLACED ON RECORD IN THE PAPER BOOK. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 20 23. THE LEARNED COUNSEL OBJECTED TO THE DRAFT ACCOUNTIN G STANDARD RELIED ON BY THE LEARNED D.R. TO SUBMIT THAT IT WAS APPLIC ABLE FROM 1 ST APRIL 2011 AND PLACED AS-7 AS APPLICABLE TO ASSESSEE IN THE RE LEVANT YEAR ON RECORD AND REFERRED TO VARIOUS GUIDELINES THEREIN TO SUBMIT TH AT ASSESSEE IS COVERED BY THE GUIDELINES OF AS-7. THE TERM BUILDING SITE OR C ONSTRUCTION OR INSTALLATION PROJECT AS PER THE COMMENTARY TO ARTICLE 5 OF OECD ALSO INCLUDED LAYING OF PIPE LINES AND EXCAVATING AND DREDGING IN ITS DEFIN ITION. IT WAS FURTHER SUBMITTED THAT A.O. HAS NEVER OBJECTED TO THE FACT OF ASSESSEE BEING IN CONSTRUCTION CONTRACT AND OBJECTION TO APPLICATIO N OF AS-7 WAS NOT EITHER BEFORE THE A.O. OR BEFORE THE DRP SO AS TO RAISE TH E OBJECTION IN THE COURSE OF APPELLATE PROCEEDINGS. 24. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE VARIO US ARGUMENTS AND PAPERS PLACED ON RECORD. THE ASSESSEE JUSTIFIED ITS CLAIM OF FUTURE LOSSES NOT ONLY BEFORE THE A.O. BUT ALSO BEFORE THE DRP BY GIVING DETAILED FACTUAL POSITION AS WELL AS LEGAL ARGUMENTS. WE ARE SURPRIS ED TO NOTE THAT INSTEAD OF COUNTERING ALL THESE ARGUMENTS AND SUBMISSIONS THE DRP REJECTED THE ENTIRE EXPLANATION WITH A SINGLE SENTENCE THAT ASSESSEE DI D NOT FILE PROPER REPLY. HOWEVER THE DRP FAILED TO EXPLAIN WHAT IS PROPER REPLY AND HOW IT EXPECTS THE PROPER REPLY. SINCE NO REASONS WERE GIVEN IN REJECTING ASSESSEES EXPLANATION WE ARE UNABLE TO UNDERSTAND WHAT THE D RP MEANT BY STATING THAT ASSESSEE DID NOT FILE PROPER REPLY. AS FAR AS THE FACTUAL POSITION IS CONCERNED ASSESSEE HAS GIVEN DETAILED EXPLANATION F OR ESTIMATING THE FUTURE LOSSES WHICH IN FACT IT HAD SUFFERED AND THE FINAL LOSS WAS ALREADY DETERMINED BY THE A.O. IN THE NEXT ASSESSMENT YEAR THE ORDER OF WHICH DOES NOT CONTAIN ANY DISALLOWANCE. THERE IS EVIDENCE ON RECORD THAT ASSESSEE HAS SUFFERED LOSS AND LOSS CLAIMED IN THAT YEAR ON COMP LETION OF THE PROJECT STOOD ALLOWED. NO ADJUSTMENTS HAVE BEEN MADE TO THE LOSS CLAIMED IN LATER YEAR. IN VIEW OF THIS WE ARE OF THE OPINION THAT AS FAR AS Q UANTIFICATION OF LOSS IS CONCERNED ASSESSEE HAS MADE A JUSTIFIABLE CLAIM IN ARRIVING AT THE FUTURE LOSS FOR THIS YEAR. 25. NOW WITH REFERENCE TO THE GUIDELINES OF AS-7 PARA GRAPH 35 AND 36 ARE VERY CLEAR IN ITS GUIDELINES: - ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 21 35. WHEN IT IS PROBABLE THAT TOTAL CONTRACT COSTS WILL EXCEED TOTAL CONTRACT REVENUE THE EXPECTED LOSS SHOULD BE RECOG NISED AS AN EXPENSE IMMEDIATELY. 36. THE AMOUNT OF SUCH A LOSS IS DETERMINED IRRESPE CTIVE OF: (A) WHETHER OR NOT WORK HAS COMMENCED ON THE CONTR ACT; (B) THE STAGE OF COMPLETION OF CONTRACT ACTIVITY; OR (C) THE AMOUNT OF PROFITS EXPECTED TO ARISE ON OTH ER CONTRACTS WHICH ARE NOT TREATED AS A SINGLE CONSTRUCTION CONTRACT I N ACCORDANCE WITH PARAGRAPH 8. 26. THE ASSESSEE FOLLOWING THE ABOVE GUIDELINES PROVIDE D FOR THE ESTIMATED LOSS IN BOOKS OF ACCOUNT. THIS ISSUE ABOUT THE CLAI M OF FUTURE LOSS ON THE BASIS OF AS-7 WAS ALSO EXAMINED BY VARIOUS COORDINA TE BENCHES OF ITAT AND CLAIM OF FUTURE LOSSES ON THE BASIS OF AS-7 WAS CON SIDERED AS ALLOWABLE DEDUCTION WHILE COMPUTING PROFIT OF THE YEAR. 27. IN THE CASE OF JACOBS ENGINEERING PRIVATE LTD. VS. ACIT 2009 TIOL 533 THE MUMBAI TRIBUNAL HAS HELD THAT THE PROVISION FOR FORESEEABLE LOSSES UNDER AS-7 IS AN ALLOWABLE EXPENDITURE. IN THE FACT S OF THIS CASE THE ASSESSEE WHO ALSO PREPARED FINANCIAL STATEMENTS AS PER THE PROVISIONS OF AS -7 HAD CLAIMED PROVISION FOR FORESEEABLE LOSSES FOR A.Y. 2002-03 AND A.Y. 2003-04 OF ` 18 73 568/- AND ` 5 83 038/- RESPECTIVELY. AFTER ANALYZING THE LEGAL AND FACTUAL POSITION ON THE SUBJECT THE TRIB UNAL ALLOWED THE CLAIM OF THE APPELLANT HOLDING THAT SUCH A PROVISION IS AN A LLOWABLE EXPENSE. THE RELEVANT EXTRACT OF THE DECISION IS EXTRACTED BELOW : - HAVING REGARD TO THE ABOVE LEGAL AND FACTUAL DISCU SSIONS AND FOLLOWING THE DECISION OF THE ITAT IN THE CASE OF M AZAGAON DOCK LTD. (SUPRA) AND METAL BOX CO. OF INDIA LTD. (SUPRA) AND DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. WOO DWARD GOVERNOR INDIA PVT. LTD. (2007) 294 ITR 451 (DEL) THE CONTENTION OF THE ASSESSEE REGARDING ALLOWABILITY OF FORESEEABLE LOSS IS ACCEPTED IN PRINCIPLE. THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF MAZA GAON DOCK LTD. VS. JCIT 29 SOT 356 WAS ALSO IN FAVOUR OF ALLOWING FUTURE LO SSES. IN THIS CASE ASSESSEE AS PER METHOD OF ACCOUNTING IN CASE OF CO NTRACTS WHERE LOSS WAS ANTICIPATED RECKONED THE ENTIRE LOSS BASED ON ESTI MATED REALIZABLE VALUES AND ESTIMATED COST OF CONTRACTS IN THE FIRST YEAR I TSELF. THE A.O. DISALLOWED ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 22 ASSESSEES CLAIM OBSERVING THAT THIS BEING ONLY A P ROVISION MADE ON ESTIMATED BASIS CANNOT BE ALLOWED. THE TRIBUNAL HE LD AS BELOW: - HE SEEMS TO HAVE SWAYED MORE BY REVENUE LOSS THAN BY THE CORRECT PRINCIPLE TO BE APPLIED. THE MATCHING PRINCIPLE OF ACCOUNTING IS NOT OF MUCH SIGNIFICANCE IN THE PRESENT CONTEXT BECAUSE IF THE LOSS HAS BEEN PROPERTY ESTIMATED IN THE YEAR IN WHICH THE CONTRAC T HAS BEEN ENTERED INTO THEN IT HAS TO BE ALLOWED IN THAT VERY YEAR AN D CANNOT BE SPREAD OVER THE PERIOD OF CONTRACT. THE MATCHING PRINCIPLE IS OF RELEVANCE WHERE INCOME AND EXPENDITURE BOTH ARE TO BE CONSID ERED TOGETHER. HOWEVER IN THE PRESENT CASE THE EFFECT OF VALUATI ON OF WIP WILL AUTOMATICALLY AFFECT THE PROFITS OF SUBSEQUENT YEAR S ACCORDINGLY. WE ACCORDINGLY DO NOT FIND ANY REASON FOR NOT ACCEPTI NG IN PRINCIPLE ASSESSEES CLAIM AS BEING ALLOWABLE. ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF TH ERMAX BABCOCK & WILCOX LTD. 79 ITD 63 (PUNE) WHEREIN THE ITAT HAD UPHELD T HE PERCENTAGE COMPLETION METHOD OF ACCOUNTING FOLLOWED BY ASSESSE E AS PRESCRIBED BY AS- 7. THE TRIBUNAL HELD THAT WHERE ASSESSEE IS FOLLOWI NG CONSTANTLY THE SAME METHOD ADOPTED IN THE FIRST YEAR OF OPERATION ALSO IN SUBSEQUENT YEARS AND WHERE THE METHOD IS ONE OF THE ACCEPTED ACCOUNTING PRINCIPLES AND PRACTICES SANCTIFIED BY USAGE AND IS ALSO IN LINE WITH RECOMM ENDED STANDARD AS-7 PRESCRIBED BY ICAI THEN THE SAID METHOD DID NOT VI OLATE THE PROVISIONS OF CHARGING SECTION AND ADDITION ON ACCOUNT OF PROVISI ONING IS NOT JUSTIFIED. 28. ASSESSING OFFICER RELIED IN THE FOLLOWING CASE LAWS WHICH ARE NOT RELEVANT FOR THE ISSUE UNDER CONSIDERATION AND IS C OMPLETELY OUT OF CONTEXT: - I. IN CIT VS. NAINITAL BANK LTD. 62 ITR 638 (SC) ONE OF THE PATRONS OF THE ASSESSEE HAD PLEDGED CERTAIN JEWELLERY WITH THE BANK AGAINST WHICH LOAN WAS TAKEN BY THEM. CERTAIN DACOITS STOLE THE JEWELLERY OF THE PATRON ON JULY 11 1951. IN REGARD TO THE LOSS OF THE JEWELLERY THE BANK SETTLED THE CLAIM OF THE PATRON AND THE DIFFER ENCE WAS PAID BY THE BANK TO THE PATRON. IN VIEW OF THESE FACTS THE ISSUE WAS RAISED BEFORE THE HON'BLE SUPREME COURT WHETHER THE AMOUNT PAID BY THE BANK TO THE PATRON WAS ALLOWABLE BUSINESS EXPENDITU RE. THE APEX COURT HELD THAT THE AMOUNTS PAID BY THE BANK WERE E XPENDITURE LAID OUT FOR THE PURPOSE OF BUSINESS AND HENCE THE SAME WAS AN ALLOWABLE EXPENSE. II. IN MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS . CIT 225 ITR 802 (SC) THE HON'BLE SUPREME COURT WAS CONCERNED WITH ALLOWABILITY OF DISCOUNT ON DEBENTURES. THE APEX COURT HELD THAT PR OPORTIONATE DISCOUNT ON DEBENTURES WAS ALLOWABLE AS EXPENDITURE ON PRO-RATA BASIS OVER DIFFERENT ACCOUNTING PERIOD. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 23 III. IN M.P. FINANCIAL CORPORATION VS. CIT 165 ITR 765 ( MP) THE COURT WAS CONCERNED WITH THE SAME ISSUE RAISED BEFORE THE APE X COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LT D. I.E. ALLOWABILITY OF DISCOUNT ON DEBENTURES. THE COURT HELD THAT WHIL E THE ENTIRE AMOUNT OF DISCOUNT WAS NOT ALLOWABLE DEDUCTION THE DISCOUNT HAD TO BE SPARED OUT PROPORTIONATELY OVER THE NUMBER OF YE ARS FOR WHICH THE BONDS WERE ISSUED AND THE PROPORTIONATE AMOUNT OF D ISCOUNT WOULD BE ALLOWED EXPENDITURE. IV. IN MYSORE KIRLOSKER LTD. VS. CIT 166 ITR 836 (KAR) THE ISSUE WHICH WAS RAISED BEFORE THE COURT WAS WHETHER DONATION GI VEN BY THE ASSESSEE CAN BE CLAIMED UNDER SECTION 37(1). IN THI S CASE ASSESSEE COMPANY HAD PROMOTED A TRUST WHICH HAD CONSTRUCTED SCHOOL TO PROVIDE EDUCATION FOR THE CHILDREN OF THE EMPLOYEES AND EX-EMPLOYEES OF THE ASSESSEE COMPANY. DURING THE YEAR ASSESSEE COMPANY DONATED ` 62 000/- TO MEET THE EXPENDITURE OF THE SCHOOL. ASS ESSEE CLAIMED DEDUCTION OF THIS EXPENSE UNDER SECTION 37(1) OF TH E ACT. THE COURT OBSERVED THAT SECTIONS 37(1) AND 80G ARE NOT MUTUAL LY EXCLUSIVE. IN OTHER WORDS THE COURT OBSERVED DONATION IF LAID OU T WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS SHOULD BE A LLOWED UNDER SECTION 37(1) OF THE ACT. ACCORDINGLY THE COURT IN THE PRESENT CASE ALLOWED DEDUCTION OF ` 62 000/- TO ASSESSEE. 29. KEEPING THE PRINCIPLE LAID DOWN ON THIS ISSUE IN VA RIOUS COORDINATE BENCH DECISIONS WE ARE OF THE OPINION THAT ASSESSE ES CLAIM FOR PROVISION FOR LOSS WHICH WAS MADE IN ACCORDANCE WITH THE GUIDELI NES OF AS-7 AND DULY DEBITED IN THE AUDITED ACCOUNTS OF THE COMPANY IS A N ALLOWABLE EXPENDITURE. THEREFORE DRP WAS NOT CORRECT IN REJECTING THE SAM E WITHOUT ASSIGNING ANY REASON. THE AO IS DIRECTED TO ALLOW THE CLAIM OF FU TURE LOSS IN THIS YEAR. SINCE ASSESSEES CLAIM WAS REJECTED BY THE AO IN TH E ORDER AND ADJUSTED IN THE NEXT ASSESSMENT YEAR A.O. IS FREE TO PASS NECE SSARY MODIFICATION ORDER IF NECESSARY IN A.Y. 2007-08 WITHDRAWING THE CLAIM TO THAT EXTENT BEING ALLOWED IN THIS YEAR. GROUND NO. 5 IS ACCORDINGLY A LLOWED. 30. GROUND NO. 6 IS WITH REFERENCE TO QUANTIFYING ADDIT IONAL DEPRECIATION ON FIXED ASSETS ARISING ON ACCOUNT OF DIRECTIONS IS SUED BY THE DRP TO CAPITALIZE THE AMOUNT OF FOREIGN EXCHANGE FLUCTUATI ON TO THE COST OF THE ASSETS. 31. IT WAS THE CONTENTION THAT EVENTHOUGH THE DRP DIREC TED TO CAPITALISE THE AMOUNT OF FOREIGN EXCHANGE LOSS TO CERTAIN EXTE NT AND ASSESSEE HAS FURNISHED DETAILS THE CORRESPONDING DEPRECIATION W AS NOT ALLOWED ON THE COST OF THE ASSETS TO THE EXTENT OF CAPITALIZATION IN THE ORDER FINALLY PASSED. ITA NO. 8035/MUM/2010 M/S. DREDGING INTERNATIONAL N.V. 24 THE A.O. IS DIRECTED TO EXAMINE THIS AND ALLOW DEPR ECIATION AS PER LAW ON THE AMOUNT CAPITALIZED TO ASSETS AND REWORK OUT DEPRECI ATION ACCORDINGLY. WITH THIS DIRECTION THE GROUND IS CONSIDERED ALLOWED. 32. IN THE RESULT ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH SEPTEMBER 2011. SD/- SD/- (D.K. AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 16 TH SEPTEMBER 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. DIT MUMBAI MUMBAI 4. THE DR D BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.