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TMI Blog2011 (9) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in respect of the objections raised by the taxpayer and the objections are to be in terms of variation proposed in the draft order. In respect of provision for future losses it is held that there are evidence on record that assessee has suffered loss and loss claimed in that year on completion of the project stood allowed. Thereby, the assessee's claim for provision for loss, which was made in accordance with the guidelines of AS-7 and duly debited in the audited accounts of the company is an allowable expenditure. Further, in respect of additional depreciation A.O. is directed to examine this and allow depreciation as per law on the amount capitalized to assets and rework out depreciation accordingly.- Decided in favor of assessee. - IT APPEAL NO. 8035 (MUM.) OF 2010 - - - Dated:- 16-9-2011 - D.K. AGARWAL, B. RAMAKOTAIAH, JJ. Kanchan Kaushal, Niranjan Govindekar, Dhanesh Bafna and Aliasagar Rampurawala for the Appellant. Dr. S. Senthil Kumar for the Respondent. ORDER B. Ramakotaiah, Accountant Member. This appeal by the assessee is directed against the order of the Assistant Director of Income Tax (International Taxation - 1(2)) passed under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect 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 case and in law, the learned ADIT erred in not computing the work-in-progress 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 case and in law, the learned ADIT erred in disallowing claim of the appellant in respect of provision for foreseeable losses amounting to Rs.32,86,17,293. It is prayed that the claim of provision for future 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 case and in law, the learned ADIT erred in not quantifying additional depreciation of Rs.5,14,015 on fixed assets, arising on account of directions issued by Hon'ble DRP to capitalize the amount of the foreign exchange fluctuation to the cost of the asset. It is prayed that learned ADIT be directed to quantify and allow additional depreciation of Rs.5,14,015 to the appellant." 3. We have heard the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such directions against the assessee. 6. Ground No. 1 to 4 pertains to the issue of direction given for bringing to tax an amount of Rs. 1,05,03,587/- at 8% of the percentage completion of 20% contract price, which was determined by the DRP at Rs. 13,12,94,847/-. These grounds are inter-related to the issue of directions and the powers of the DRP to propose variation in the draft assessment order suo moto, which was not proposed by the A.O. 7. The arguments are that the assessee has already shown the revenue receipt, i.e. work-in-progress at Rs. 19,83,63,908/- which was more than the contract receipts determined by the DRP at Rs. 13,12,94,847/- and so the question of estimating revenue on the amount as directed by the DRP does not arise as contested in ground No. 3. Further, since assessee claimed the future loss of Rs. 32,86,17,293/- and this future loss was proposed to be disallowed by the A.O. in the draft assessment order, the DRP cannot direct the A.O. to estimate the profit on 20% of the contract 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 directions, which are at variance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 further allowance either on account of objection No. 1 i.e. depreciation on account of temporary structure and on account of losses on fluctuation of foreign exchange shall actually be allowed to the assessee for the set off from the net profit and these two amounts along 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 computation 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 the contract is considered to have been completed in the financial year 2005-06 and profit at 8% of the completed contract revenue is considered as reasonable profit of the period. Accordingly, amount of Rs. 1,05,03,587/- [65,64,74,235 X 20%) X 8%] is considered as net profit of the financial year 2005-06." 11. Even the A.O. is admitting that the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (7) 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. (8) 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. (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 directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nel 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." 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 be in terms of variation proposed in the draft order. Section 144C(8) specifically provides that powers of the DRP are restricted to confirm, reduce or enhance the variation as proposed in the draft assessment order. Hence, DRP directions are to be with reference to the objections to the variations proposed in the draft order. 14. Provision under section 144B (which has been deleted 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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. 6 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. 7 The Dispute Resolution Panel may, before issuing any directions referred to in sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to the opinion of the majority of the members. 12 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. 14 The Board may make rules for the 14 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 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; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant Commissioner was not lawful, the Calcutta high Court observed as follows: - "In such a case, the Inspecting Assistant Commissioner does not have the power to direct the Income-tax Officer to make the disallowance and thereby enhance the assessment or reduce the loss suffered by the assessee. ... We are of the view that, in the instant case, the direction 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 and 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 Assistant Commissioner under section 144B of the Act to disallow the said expenditure is not sustainable." (b) In the case of Bengal Assam Investors Ltd. v. CIT [1983] 142 ITR 156/12 Taxman 99 (Cal.), the assessee filed a return disclosing income of Rs. 4,70,830/-. The ITO forwarded a draft order under section 144B(1) proposing assessment on a total income of Rs. 5,75,656/-. On receipt of directions, the assessment was completed on an income of Rs. 6,61,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10A and, therefore, notice was issued and the DRP passed final order holding that assessee was not entitled to exemption under section 10A. Being aggrieved on the directions issued, assessee thereon field writ petition and the Hon'ble Single Judge negated the contentions raised. However, the matter was taken up by the Division Bench, examined the issue and held as under: - "It is clear on a reading of the above said sub-Sections 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 sub-Section (15) that is in respect of the variations referred to above sub-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 proposed in the draft order and wherefore the word eligible assessee in Clause (1) and (15) and the proposed draft order referred to under Clause 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... binding on the Assessing Officer in view of the provisions of section 144C(13) and wherefore 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 Act 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 jurisdiction 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 DRP suo moto considered 20% of the total contract as completed during the year (which is in fact was not correct as assessee has offered more turnover in its books of account) and proposed bringing to tax the net profit at 8% of the above determined turnover. This direction of the DRP is wholly without jurisdiction and suffers from inherent lack of jurisdiction as it is not in conformity with the powers under section 144C(5) r.w.s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted) would exceed the contract revenue by Rs.32,86,17,293. The primary reason due to which the cost increased are as under: - When the dredger arrived at the site it was realised that the draught of the dredger was 5.1 and not 4.09 which would have easily moved in the channel. However, even then an attempt was made to pull the dredger inside after offloading most of bunker, lot of heavy items etc but 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. Lot of slit was observed passing through water boxes 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 avoid major problem at the end of the job. However, in spite of such effort further 55,000m3 slit deposited in two ponds (storm water ponds for RIL) which had to be taken out. The shallow condition also prevailed while the dredger 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 was majority due to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he views of the assessee and DRP is of the view that assessee has completed about 20% of the contract during the accounting period and the assessee should have recognized 20% on the total amount received which works out to Rs.13,12,94,847/-. The reasonable percentage of profit is taken at 8% and on this basis the net profit should be Rs.1,05,03,587/-. This profit should have been included by the assessee in the closing stock of work-in-progress for computation of final profit of the completed project in the next Financial 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 the DRP and it was submitted that assessee has given detailed explanation with reference to working of loss and various case law relied on by it. The learned counsel drew our attention to the detailed objection made by 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 Standard AS-7, the orders of the Coordinate Bench in the case of Jacob Engg. India (P.) Ltd. v. ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r reply. As far as the factual position is concerned assessee has given detailed explanation for 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 completion 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 quantification 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, paragraph 35 and 36 are very clear in its guidelines: - "35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. 36. The amount of such a loss is determined irrespective of: (a) whether or not work has commenced on the contract; (b) the stage of completion of contract activity; or (c) the amount of profits expected to arise on other contracts which are not treated as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth are to be considered together. However, in the present case, the effect of valuation of WIP will automatically affect the profits of subsequent years accordingly. We, accordingly, do not find any reason for not accepting in principle assessee's claim as being allowable." Assessee also placed reliance on the decision of Thermax Babcock Wilcox Ltd.'s case (supra) wherein the ITAT had upheld the percentage completion method of Accounting followed by assessee as prescribed by AS-7. The Tribunal held that where assessee is following 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 recommended standard AS-7 prescribed by ICAI, then the said method did not violate the provisions of charging section and addition on account of provisioning is not justified. 28. Assessing Officer relied in the following case laws which are not relevant for the issue under consideration and is completely out of context: - i. In Nainital Bank Ltd.'s case (supra) 62 ITR 638 (SC), one of the patrons of the assessee had pledged certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the guidelines of AS-7 and duly debited in the audited accounts of the company is an allowable expenditure. Therefore, DRP was not correct in rejecting the same without assigning any reason. The AO is directed to allow the claim of future loss in this year. Since assessee's claim was rejected by the AO in the order and adjusted in the next assessment year, A.O. is free to pass necessary 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 allowed. 30. Ground No. 6 is with reference to quantifying additional depreciation on fixed assets arising on account of directions issued by the DRP to capitalize the amount of foreign exchange fluctuation to the cost of the assets. 31. It was the contention that eventhough the DRP directed to capitalise the amount of foreign exchange loss to certain extent and assessee has furnished details, the corresponding depreciation was not allowed on the cost of the assets to the extent of capitalization in the order finally passed. The A.O. is directed to examine this and allow depreciation as per law on the amount capitalized to assets and rework out depr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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